HMO Investments Showcase Potential for Hefty Yields, Despite Conversion Costs

Recent findings by property lending experts Octane Capital suggest that investors might find the £41,000 typical cost for converting a property into an HMO (House in Multiple Occupation) worthwhile, given the superior yields they can offer compared to traditional rental properties. Currently, the average HMO yield stands at an impressive 8.1%, significantly outpacing the regular rental yield average of 4.4%.

Octane Capital’s investigation centred on the expenses and potential returns associated with transforming a four-bedroom property into an HMO. Their data indicated the average house price across England to be £309,616. With an HMO conversion for a single room averaging £10,267, a full four-bedroom HMO conversion is pegged at about £41,067. This places the cumulative cost for both purchase and conversion at approximately £350,683. However, the prospective returns seem to justify this outlay.

An HMO, on average, fetches a monthly rent of £593 per room, translating to £2,372 for a four-bedroom conversion. This robust rental inflow pushes the typical yield for such a property to 8.1%. When viewed regionally, the North East delivers the most impressive numbers, with HMOs producing an 11.2% yield – a stark contrast to the 4.9% average for standard rentals in the area.

In Yorkshire and the Humber, HMOs offer yields 5% superior to regular rental properties, while the East Midlands sees a 4.7% edge in favour of HMOs. Even London, which has the slimmest yield difference, sees HMOs delivering a yield 2.4% higher than conventional rentals.

Octane Capital’s CEO, Jonathan Samuels, remarked on the potential of HMOs: “HMOs can make a very worthwhile investment for those with the capacity to take one on. Not only are yields generally higher due to increased rental income, but you also benefit from higher demand from tenants, as well as tenant diversification.”

However, he also added a note of caution, stating, “they aren’t all plain sailing and not only will an HMO conversion require additional upfront costs, but they tend to come with higher operating costs, as well as a raft of additional compliance and legal obligations.” He emphasised that for those adept at navigating these challenges, “HMO investment is sure to provide a far stronger return than they may otherwise find with a regular rental investment.”