HMOs: the evolution of the market and current hotspots

HMOs (Houses of Multiple Occupation) first came to prominence in the form of student digs: fairly tatty shared houses, where students could live in groups for a low monthly rent.

‘Professional’ HMOs really took off in the mid-2000s, when buy-to-let investors realised that if they made the effort to provide an attractive, well-maintained shared home, working adults were prepared to pay a relatively high all-inclusive rent for a private room. And although running costs were higher than if the property was let to a single household, the rent could be two to three times more.

The evolving legislation of HMOs

Legislation started to tighten up for the whole Private Rental Sector (PRS), with HMO landlords subject to additional regulation including carrying out risk assessments and installing fire safety measures (2005) and licensing brought in for HMOs housing 5 or more people (2006).

Nothing hit the HMO sector after this for around a decade. Many landlords continued to move into the ‘luxury HMO’ market, providing accommodation with a boutique hotel feel that appealed to tenants with professional jobs.

From 2018, more legislation was introduced including minimum room sizes being introduced for HMOs. Some landlords found that rooms they had been letting as single bedrooms could no longer be legally let, which instantly cut a significant amount from their profits.

Most recently, in January 2023, new fire safety regulations came into force, requiring a ‘responsible person’ to be appointed for every HMO, to ensure certain fire safety instructions and information is provided to all occupants.

All these legal changes are great in terms of improving standards and health and safety in shared houses. However, they have undoubtedly made setting up and managing HMOs more challenging.

How profitable are HMOs today?

Because rents have been increasing at a higher than usual rate over the past few years and energy costs are still high, tenants are snapping up all-inclusive room rentals. And while you must meet the legal standards for condition and health and safety, as long as your HMO is modern and well-maintained, it doesn’t have to be fancy to be profitable.

Although the relative cost of ensuring an HMO is legally compliant is higher than it was 15 years ago, rental yields are still strong. Paragon Banking Group’s PRS report for the first quarter of this year in England shows HMOs generate the best yields at 6%, versus 5.3% for houses and 5% for flats and bungalows. And their latest research shows HMO yields around the UK varying from around 6% to 9%.

What’s just starting to have an effect on the profitability of HMOs is the sharp rise in mortgage rates and of course utility bills. Those landlords who are having to remortgage in the current climate could find their monthly payment tripling, which will hit HMO landlords with high LTV mortgages particularly hard. If you already have a HMO or you’re thinking of investing, it’s never been more important to run the numbers – before you buy and then regularly once your HMO is let – so you don’t get any surprises.

Where are the current HMO hotspots?

You should be able to find a good HMO investment in most major towns and cities. But the widespread shortage of student accommodation over the last two years has created great opportunities for student HMO landlords in Manchester, Bristol, Durham and Glasgow.

Paragon’s research shows that Wales leads the way on returns, with the average HMO delivering a yield of just over 9%, followed by Yorkshire & Humber and the North West at 8.6%. The South East (7.18%) and London (6.13%) deliver the lowest yields, which is to be expected, given the high property values.

What is essential when investing or running an HMO is to work a qualified letting agent that understands the compliance minefield of an HMO and also understands the different target markets. Leaders understands the importance of making sure an HMO deal stacks up financially and meets health and safety criteria for tenants, so do contact us for help and support.