The average return on investments for houses in multiple occupancy (HMOs) were 8.9% in 2017. According to a BuyAssociation.co.uk article from January 2018, this makes HMOs an attractive investment for landlords who are used to receiving a lot less in rental yields on houses or flats rented to a single household, where average yields are 5.6%.
In 2016, the average yield for HMOs was 9%. The drop to 8.3% in 2017 was probably caused by the increase in the price of large houses suitable for HMO conversions.
A licence is needed for an HMO if it is rented to more than five people, is over three stories high, or tenants share toilet, bathroom or kitchen facilities. HMOs need to be licenced with the local authority, and rules are being tightened up to make it more difficult to obtain a licence. As more scrutiny and regulations come into force, this could put some landlords off purchasing HMOs or converting existing property to HMOs. There can also be additional administrative costs in dealing with multiple tenants in one building.
If converting an existing property to an HMO that is being purchased through a buy-to-let mortgage, a landlord may have to remortgage, the property as not all standard buy-to-let mortgages cover HMOs. Landlords need to discuss this with a mortgage broker, who can sort out a commercial mortgage that covers HMOs.
Despite these challenges and extra costs, many landlords are diversifying their property portfolios by purchasing HMO property in order to achieve higher rental yields.