Everything you need to know about investing in HMOs from the experts

HMOs (Houses in Multiple Occupation) are a fantastic property investment strategy, with superb returns and the potential to earn a replacement income.

But that doesn’t mean they’re an investment strategy that will work for everyone.

In this blog, we’re looking at HMOs as an investment and we’re laying bare all the things you should be considering if you’re thinking about investing in shared living properties.

We’ll also look at how HMOs stack up against other property investment strategies and answer all your major questions about investing in HMOs.

What is an HMO investment property?

HMO investment properties are those purchased by investors with the sole purpose of renting the rooms to individual tenants.

Some HMOs start life as family homes and are renovated and refurbished by investors to create a suitable co-living property for housemates – the strategy our franchise partners use here at Platinum Property Partners.

While all HMO investment properties are shared by individual housemates, there are two types of HMO that can work as an investment:

1. Student HMOs

Student house shares are probably the first thing most people think of when it comes to HMOs.

While student HMOs can be a good investment, there are some potential pitfalls to consider:

• Student HMOs often suffer with serious wear and tear and can be more costly to maintain
• Some student HMO landlords can experience issues with noise, litter or parking complaints from neighbouring properties
• Competition from high-end university halls and privately-run student accommodation means finding good student tenants can be hard
• Student HMOs often suffer unavoidable void periods when tenants return home for the summer, meaning rental income is often only coming in between September and late spring

2. Professional house shares

Professional house sharing has grown in popularity over the years and with rising property prices and higher rents in the single let property sector, many professionals have opted instead for co-living.

As well as often saving tenants money, professional HMOs are also well suited to those workers who prioritise community, friendship and company over an individual space.

Professional HMOs also tend to suffer less wear and tear than student properties and are generally easier to manage for investors.

To find out more about exactly what an HMO is, check out our guide.

Are HMO properties a good investment?

HMO properties can be a fantastic investment strategy and come with generally higher rental yields than standard buy-to-lets.

As well as higher yields, HMO investors are more protected against void periods.

This is because each room is let to an individual tenant – meaning even if one tenant decides to move out, you’ll still have rental income coming in from your other tenants while you market your empty room.

While HMOs are more costly to run than buy-to-lets, high-quality HMOs, like the ones our franchise partners create, can generate twice the income as standard buy-to-lets, as this example shows:

	Three-bed buy-to-let	Six-bed HMO
Annual rent	£17,196	£52,728
Annual running costs	£15,124	£37,632
Annual gross profit	£2,072	£15,088

This example is based on a three-bedroom property let on a single tenancy for 12 months compared with a six-bedroom HMO where each room generates £732 per month for 12 months.

Annual HMO running costs in the example are based on our business model here at Platinum and include:

• Annual mortgage costs
• Annual maintenance
• Utility bills
• Platinum’s annual Management Service Fee (MSF)

Why invest in HMOs?

HMOs can be a highly profitable investment and can genuinely be life-changing.

Not only do they generate an excellent income, but it’s reliable and well protected against market forces and economic shifts – as our franchise partners’ properties showed during both the 2008 financial crisis and the Covid-19 pandemic.

Equally as importantly, HMOs can generate a replacement income for investors, opening them up to amazing lifestyle benefits that come with more financial freedom.

Is HMO investing risky?

All investment strategies come with risk and investing in HMOs is no different.

However, financially, the risks associated with HMO investments are negated firstly by protected cashflow – as a six-bedroom property produces six separate income streams.

Secondly, demand for well-run, high-quality HMOs remains high in the UK.

According to Spareroom, HMO room demand reached an all-time high in August 2022 and continues to outstrip supply.

Can I get an HMO as my first investment property?

Investing in an HMO as a first investment is not uncommon.

However, as HMOs are more complicated and subjected to more regulation than standard buy-to-lets, it’s important to understand what you’re getting into before you commit.

All of our franchise partners are mentored and trained by experienced HMO investors, renovation experts and planning professionals.

But for those going it alone and as a first investment property, HMOs can be daunting and extremely costly if you make mistakes.

What to look for when viewing an HMO investment

Viewing a potential HMO investment property can be a daunting process.

But knowing what to look for beyond the general aesthetics and condition of the property is hugely important:

1. Local and national licensing regulations

The most important thing to consider when investing in HMOs is licensing regulations regarding HMOs and also any additional rules stipulated by the local authority where you plan to invest.

A mandatory HMO licence is required for all UK HMO properties containing five or more people from at least two different households.

Individual local authorities can also extend licence requirements to include other HMOs not covered by mandatory licensing, including smaller properties with fewer tenants.

2. Renovation potential and room size rules

In order to get the most from an HMO renovation, it’s important to understand both the existing space available and any potential for extension.

The more rooms you can produce from any refurbishment and re-organisation of the space, the more income your property is likely to generate.

However, it’s also critical that you abide from strict rules on minimum room sizes in HMOs, too.

3. Financials and timelines

Making sure your numbers stack up is crucial to the success and profitability of any HMO investment.

Overspending on your purchase price or renovation will immediately hit your profit margin from rental income.

Renovation project delays can also mean more time paying your mortgage with no rental income to cover it.

4. Competition and demand

While demand for HMO rooms is high across the UK, some areas have more demand than others – and some areas have more competition than others, too.

Getting an understanding of both the competition and demand in the area you plan to invest in is as important as knowing local authority rules and regulations.

A purchase in an area with either low demand or high competition could be a hugely costly mistake.

5. Long-term growth potential

While HMOs can generate an excellent income, they should also be part of a long-term investment plan – and that means looking at the potential for capital growth in a property when buying.

Remember…

Essentially, almost any property can be turned into an HMO – but not all properties should be turned into HMOs.

That’s why all our franchise partners spend an initial two days with an experienced buying mentor viewing potential properties and analysing each before they commit to any purchase.

They’re also given an initial planning report for the area they are thinking of investing in, highlighting local regulations and potential problems with planning permissions and licensing before they invest.

Where to invest in HMOs

Location is absolutely key when considering HMO investment.

As well as looking closely at an area’s demand, yield potential and competition, it’s also crucial to understand local authority rules when it comes to co-living properties.

For example, Article 4 directions issued by local planning authorities can mean planning permission is required simply to change a property’s use class from a C3 standard family home to a C4 HMO.

Throw into the mix any additional licensing requirements and buying in the wrong area can be a costly mistake.

How HMOs compare with other property investments

If you’re considering investing in HMOs, you may also be looking into other property investment opportunities or strategies.

So, how do HMO’s stack up against other investments?

Is serviced accommodation a good investment or HMOs?

Serviced accommodation and HMOs are a common comparison when looking into property investment strategies.

Indeed, some of our franchise partners here at Platinum also have some serviced accommodation investments on top of their HMO portfolios.

The first thing to consider with serviced accommodation is occupancy rates – which will almost certainly be lower than if you invested in an HMO.

A standard serviced accommodation occupancy rate is 70%, whereas our franchise partners generally achieve a 94%-97% occupancy rate in their HMOs.

Serviced accommodation is generally used by people on short breaks or those working in another town or city who don’t want to be in a hotel.

It’s also more work to run a serviced accommodation property, as you’ll need to regularly have the property cleaned, as you would if you were running a hotel.

Should I invest in commercial property or HMOs?

Commercial property is generally not advised if you’re investing for the first time.

It’s more complicated than residential property investment and the pitfalls and potential mistakes are hugely costly.

Commercial property also comes with a much higher entry cost and you’ll need a large amount of capital to get your first investment off the ground.

Many of our franchise partners are commercial property investors, but they graduated into it after many years spent learning and growing their knowledge in the residential HMO sector.

Should you invest in an HMO or PBSA?

Purpose Built Student Accommodation (PBSA) is another property investment strategy that has become more popular in recent years.

While PBSA returns can be substantial, they require a huge management commitment simply due to the numbers of students a single property can house.

As well as being a complex investment strategy, there is also a financial barrier to entry, with most PBSA projects being a cash-only investment, without the option for mortgage finance.

Is it good to invest in student HMOs?

While student HMOs can be a good option as an investment, the costs are often higher compared with professional HMOs.

And due to the shorter academic year, the majority of student HMOs experience longer void periods during the summer months when most students return home.

Professional HMOs, such as the ones our franchise partners create, however, experience far fewer void periods and maintenance costs are also generally lower in comparison to student properties.

So, is it worth investing in HMOs?

It’s absolutely worth investing in HMOs – if you take the time to really understand the strategy and learn about the potential pitfalls.

HMO properties have arguably never been in more demand and although regulations are also tighter than they’ve ever been, this has improved standards in the sector and forced out the minority of landlords who gave the sector a bad name.

Great places to rent at an affordable price and with a sense of community will always be in demand – particularly from young professionals in towns and cities – and that’s what HMOs provide.

But as we’ve mentioned previously, HMOs can be complex with expensive mistakes far from uncommon.

That’s where our role lies – helping investors to navigate the pitfalls, avoid those mistakes and squeeze the most from their investments, so they can enjoy both financial and lifestyle freedom.

Get in touch to find out more about how we could help you on your own HMO investment journey.

01202 652100 - info@platinumpropertypartners.co.uk