It will surprise no one in the property market that the last few years have been a challenge for landlords.
However, while on the face of it changes to regulation, tax and higher interest rates have created roadblocks for investors, many portfolio landlords have adapted their strategies in order to diversify and thrive amid strong demand from tenants.
HMOs have for a long time been of interest to landlords, but have accelerated in popularity over the last year, with many professional landlords choosing to invest more heavily in these properties.
In fact, at Shawbrook, HMOs make up an increasing percentage of our BTL business. In both 2022 and 2023, HMOs made up just over a quarter (27%) of all Shawbrook’s BTL lending. However, as landlords place further emphasis on diversifying their portfolios, this number has already risen to more than a third (34%) in 2024.
Interestingly, while portfolio landlords — those with over four properties — are the main driver of this trend, we have also seen a rise in HMO business from non-portfolio landlords (from 17-21%).
HMOs are a sound strategy for landlords, whether just entering the market or a long-established player, particularly in more uncertain economic times.
The rise in popularity for HMOs is largely due to strong tenant demand and, therefore, the yields that they can generate for landlords. The British Landlord Association claims that average yields for HMOs stand at 7.5% compared to single-let properties, which tend to average 3.6% — thus making HMOs a much surer bet for landlords, particularly when managing rising overheads.
The high turnover of tenants in HMOs also has its benefits. Whereas a single-unit property may see a tenant remain for several years, HMOs are likely to see greater turnover. This allows landlords to raise rents to align with market pricing across the year, and with the average UK rent rising by 6.6% in the last year, according to the latest Zoopla, this could add a substantial boost to landlords’ finances, many of whom will also be contending with increases in their mortgage repayments.
Tenant demand in the rental sector is also helping to boost the popularity of HMOs among landlords. With high demand and limited supply, tenants are often looking for affordable, flexible options, and HMOs continue to be a popular choice for students and young professionals alike. By converting existing properties into HMOs or purchasing properties with the intention of refurbishing them into an HMO, landlords can help meet demand for suitable accommodation options.
With increasing numbers of landlords diversifying into HMOs, it’s important that they are aware of the challenges of managing this property type.
Indeed, managing an HMO will mean stricter regulations, higher initial setup costs and more involvement in property maintenance and tenant management compared to single-unit properties. For example, landlords with an HMO property with five or more tenants must obtain a specific HMO licence and will need to abide by regulations, such as minimum room size requirements.
Many investors earn premium rents by providing high-quality accommodation, but landlords need to plan for maintenance spend over the years to maintain this standard or risk losing their high-end position in their local market.
For those considering diversifying, doing your research into the area you plan to invest in and ensuring you are up to date with regulations will help bring plans to fruition smoothly. Building a power team with HMO experience can help ensure a landlord has good contacts around them to take advantage of new opportunities. It’s worth thinking about builders, architects and a specialist mortgage broker who understand HMOs in your area in detail.
When the expected interest rate cut does come, we expect even more appetite from landlords to invest in HMOs and have improved our criteria to enable larger maximum loan sizes to ensure we can support demand from our broker partners and their landlord customers.
