The percentage of tenants looking to rent HMOs is on the increase, making them a popular choice among property investors. Houses of multiple occupancy are in great demand, according to surveys, with landlords flocking to take advantage of the current market.
The average gross yield of an HMO property is higher than that of a standard buy-to-let, being between 12% and 15%. This has increased from 9.6% in 2019. The gross yield of a standard buy-to-let property is around 8% in comparison.
According to a survey of UK landlords by Paragon Bank, 31% have expressed an interest in investing in HMOs during the next 12 months. The previous survey, three months earlier, had revealed only 12% of landlords were planning to buy HMOs, suggesting the market is rapidly becoming more buoyant.
Converting into HMOs
Landlords are also choosing to renovate their existing properties from standard buy-to-let houses into HMOs to increase their income.
The UK law states any property occupied by five or more tenants, who live in two or more different households with a shared amenity, requires a mandatory HMO licence. The fee for obtaining an HMO licence is managed by the local council and varies, depending on which part of the country you live in.
The Ministry of Housing also introduced minimum bedroom sizes, as the government wanted to ensure the HMO conversions were of a suitable size and did not leave tenants disadvantaged in terms of their living space.
While the initial conversion costs of the HMO, plus the licence fee, can represent significant expenditure, many landlords feel it is worth it, considering the higher yields they can make in the longer term.
Calculate the yield on your rental property by dividing the annual rental income by the property’s price. Then, multiply this by 100. For example, if you bought a property for £200,000 and the rent is £10,000 per year, your rental yield will be 5%.
Why do tenants want HMOs?
The Office for National Statistics suggests the ongoing population rise in the UK is leading to a general shortage of affordable housing. England’s population alone has grown by 0.6% since 2019. More people are looking for affordable accommodation due to a downturn in the post-Covid economic market, with HMOs providing a viable solution.
Accommodating more than 4.5 million people; there are an estimated 497,000 HMOs in England and Wales at present, according to government data. With average incomes lower than house prices, more young professionals are renting HMOs while they save money for a property deposit, especially in cities such as London, where house prices are higher.
A survey by Spareroom found only 31% of UK adults living in shared accommodation would be able to afford to rent on their own. Only 12% of renters can afford to buy their own property.
With the rent on an average buy-to-let property taking around 50% of the tenants’ income in city locations, paying lower rent in HMO accommodation is an attractive option. More than half (57%) of tenants say they share for financial reasons, while 37% share for a mixture of financial and social reasons.
People are staying single for longer in their 20s and 30s, so the trend is to live in an HMO to be social, mobile and have more money. While more young professions are looking to rent HMOs while saving for a mortgage, they still attract the traditional tenants in a low-income bracket.
In addition, 3% of tenants choose HMOs for purely social reasons – they don’t want to live alone and enjoy the community aspect of the shared areas, such as the kitchen or lounge. HMOs are also popular in student areas, clustered around a university.
What do tenants want?
When you’re a landlord operating an HMO, it’s crucial to consider what tenants are looking for. The main attractions include the furniture, facilities and local amenities. Although providing HMO furniture isn’t a legal requirement, landlords are generally expected to furnish their properties.
Other features might make the property more appealing to prospective tenants, such as including bills within the overall rent price, for example. Living in an area with a fast broadband speed and reliable WiFi is also a consideration for many, especially those who work from home.
Do your research into the popular areas for HMOs, as they tend to be in clusters, especially in districts with a high student population. Some types of property, such as older Victorian houses, lend themselves to becoming an HMO more easily than modern properties.
Other attractions, in terms of amenities, include being close to public transport links, such as on a bus route; having shops nearby; being close to a town centre or retail park; and having leisure attractions nearby, such as a pub or places to dine out.
Most popular types of HMO
The modern trend for HMOs is veering towards providing large double rooms. In years gone by, you might simply cram as many single rooms as possible into the HMO. However, this has declined, partly because of the legislation governing the minimum room size, but also due to the changing tenant demographic.
Providing large double rooms will appeal to long-term professional tenants. This can involve altering the layout of the available space, perhaps adding or removing walls, or repositioning walkways and staircases. Seek professional advice and apply for the relevant planning permission if you need to make major structural changes.
Tenants prefer modern en-suite bathrooms when this doesn’t impact too much on the overall bedroom size. Some existing HMOs have shared bathrooms. Today, purpose-built HMOs tend to have en-suites.
Furniture for HMOs
Fully furnished rooms are attractive to tenants who can’t afford to buy their own furniture, such as those just leaving university, or leaving home for the first time. They also appeal to people who need to move quickly from a furnished property in another area, such as for a new job, who don’t want to spend time sourcing furniture.
The standard furniture for any HMO includes a 4 ft bed (or standard double), a wardrobe, a chest of drawers and a bedside table in each individual room. You could provide extras such as artwork, bedside lamps, a desk and chair, a wardrobe mirror or anything else that might make the property more desirable. Furnishing the communal living room and kitchen will increase the potential rental return further.
It is usual to provide a fridge/freezer, washing machine, tumble dryer, oven and hob and microwave oven. Having a large kitchen, especially one with a dining table and chairs where tenants can gather at mealtimes, is popular, particularly in the student market.
Keep your HMO furniture desirable yet functional. From an aesthetic perspective, it needs to enhance the property, but it must also be durable and hard-wearing. Many landlords choose furniture packs from a specialist supplier, whether they’re furnishing an HMO or furnishing student accommodation. Not only can it save money, but it also reduces the hassle of having to shop around and have individual furniture items delivered.
As the landlord, you may feel it can be expensive initially to convert and furnish your property into an HMO, but in the longer term, you’re likely to recuperate the expenditure through being able to charge higher rent – and you’ll have more tenants living under one roof!