When it comes to investing in rental properties, one of the key metrics that property investors consider is rental yield. Rental yield is a crucial measure of profitability, as it indicates the return on investment a landlord can expect from their property.
Recent data reveals that Houses in Multiple Occupation (HMOs) generate an average rental yield of 7%, compared to the 6.4% average yield across all property types. While this may seem like a modest difference, over time, it can have a significant impact on an investor’s returns. But what makes HMOs more profitable than standard buy-to-let properties? Let’s explore the key factors.
1. Higher Rental Income from Multiple Tenants
Unlike traditional buy-to-let properties, which are typically rented out to a single household, HMOs accommodate multiple tenants who rent individual rooms. This setup allows landlords to charge per room, often resulting in higher overall rental income compared to letting the property as a single unit. The ability to maximise rental income from a single property is a major driver of the higher average rental yield for HMOs.
2. Demand for Affordable Housing
The rising cost of living and increasing rental prices have led to greater demand for affordable accommodation, particularly among young professionals, students and key workers. HMOs offer tenants a cost-effective living arrangement, often including bills within the rent, making them an attractive option. With sustained high demand, landlords can maintain strong occupancy rates, ensuring steady rental income.
3. Diversified Income Streams
With a standard buy-to-let property, landlords face a complete loss of rental income when the property is vacant. In contrast, HMOs have multiple tenants, reducing the financial impact of individual vacancies. Even if one room remains unoccupied, income from the other tenants continues to flow, making HMOs a more resilient investment in times of market uncertainty.
4. More Opportunities in Undersupplied Markets
In many UK cities and university towns, the supply of high-quality, well-managed HMOs remains lower than demand. This presents an opportunity for investors to secure strong rental yields, particularly in areas where young professionals and students are seeking shared accommodation.
5. Potential for Capital Growth and Refinancing
While HMOs typically offer stronger rental yields, they also provide opportunities for capital growth. Investors who add value through property improvements, such as refurbishments or conversions, may be able to refinance their HMO at a higher valuation, unlocking additional capital to reinvest in further property purchases.
Financing an HMO Investment
Securing finance for an HMO differs from obtaining a standard buy-to-let mortgage. Lenders often require specialist HMO mortgages, considering factors such as the property’s layout, licensing requirements and rental income potential. At ADD Property Finance, we specialise in helping both new and experienced investors secure the right HMO mortgage solutions. With access to a broad range of lenders, we can guide you through the process to ensure you get the best financing options for your investment strategy.
Final Thoughts
While investing in HMOs comes with additional responsibilities, including licensing, compliance and management, the potential for higher rental yields makes them an attractive option for property investors. The key to success lies in choosing the right location, understanding local demand and securing the right financial product to maximise returns.
If you’re considering investing in an HMO and need expert guidance on financing options, contact ADD Property Finance today. We are here to help you unlock the full potential of your property investment.
