Why Converting Your Property into a HMO Could Increase Yields

Private Rental July 6th, 2015
Why Converting Your Property into a HMO Could Increase Yields

New research into HMO properties shows that they return a much higher mean yield than the average buy-to-let property

HMOs are a form of buy-to-let where investors turn their property into separate bedsits in order to increase the amount of tenancies available. This tends to have the effect of also increasing rental yield from the property. The members of HMOs are not all members of the same family, but can still have a common bond, such as student tenants. Whilst HMOs tend to require more work from landlords and also need planning consent from local authorities, the monetary benefits can be lucrative. The additional investments tend to be based around ‘strategically converting and refurbishing properties to  increase the size of communal areas and the number of rentable bedrooms, therefore allowing for a higher number of tenants’.

New research by Platinum Property Partners has shown that for ever £1,000 invested into HMOs in 2010 would have increased to £2,080 – over double the original investment in under 5 years. A standard buy-to-let investment would only have reached £1,770 – less than double, with a difference of £310 per £1,000 invested. HMOs presented a gross yield of almost 13%, whereas a standard property offered just 5%.

Even though they need greater initial investment to make the property HMO friendly (more bedrooms, less communal areas), they present much greater yields in the long term. However, additional planning permission needs to be taken into consideration. Strategically located HMO ‘can generate a good income now, as well as the future capital appreciation that the general market should provide’.

Where should you choose to invest in a HMO?

HMO tend to do particularly well in student areas, so if you want to appeal to the student market, then find a location close to a university. Some of the best cities for student lettings are: Birmingham, Nottingham, London, and Coventry. Make sure that the property is located in the student area, rather than any random area within the aforementioned cities.

Young professionals can also be an ideal market for a HMO. Steve Bolton’s research into the requirements of tenants has indicated that many young professionals ‘do not want to be tied down to a house, mortgage, or location.’ Therefore, a HMO is an ideal option for that market. Some of the best cities for a HMO for young professionals are: Southampton, Manchester, Nottingham, Blackpool, and Coventry.

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