HMO conversions yield 12.5% despite high costs

Transforming a three- or four-bedroom house into a six-bedroom house in multiple occupation (HMO) can cost around £68,000 but delivers yields peaking at 12.5% in some regions, research reveals.

According to Excellion Capital, purchasing a typical three- or four-bedroom property in England costs around £444,273, with conversion expenses averaging £11,345 per bedroom.

This brings the total investment for a six-bedroom HMO to £512,340.

Despite the hefty upfront costs, the potential rental income makes it an attractive option for investors , the specialist investment firm says.

Landlords turning to HMOs

The firm's vice president of real estate, Robert Sadler, said: "We are seeing a lot of property investors in the residential space turn their attention to the bustling HMO market, especially in the regions.

"Particularly outside of London and our other major cities, investors are snapping up relatively cheap three or four-bed terraced homes and converting them to six-bed HMOs with extraordinary results when it comes to returns and yields."

6 bed HMOs offer best returns

The firm says that a six-bedroom HMO generates an average monthly rent of £4,269, based on £711 per room.

That is a 10% gross yield, which is much higher than the typical 5-6% yield in England's standard rental market.

The North East leads with a 12.5% yield, followed by the North West at 11.5% and Yorkshire and Humber at 11%.

However, London offers the lowest returns at 6.6%, with the South East at 8.1%.

Cities for HMO investment

Major cities like Manchester, Newcastle and Birmingham also show strong returns, the research reveals.

In Manchester, a £329,163 property converted into a six-bedroom HMO yields 12.2% with £4,050 monthly rent.

Newcastle and Birmingham follow with yields of 11.9% and 10.6%, respectively.

Costs can vary based on a property’s condition with homes needing only cosmetic upgrades or minor adjustments to meet HMO safety standards being the cheapest to convert.

HMOs appeal to lenders

Mr Sadler notes that HMOs are also appealing to lenders, with bridge loans being a popular financing option due to their speed and minimal oversight.

He said: "Another advantage is that lenders provide very high leverage on HMO bridge loans - 75% against the purchase price plus 100% of costs.

"This means that the upfront equity requirement for the investor can actually be quite low compared to other investments."

He adds that it's important to choose a lender that will measure the loan against the income producing value rather than the vacant value.

Mr Sadler continued: "Finally, if the investor can buy portfolios of HMOs and get to a loan amount of £1m or above, they can usually obtain better pricing from lenders.

"Large portfolios of retained HMOs can create a lucrative long-term income for investors.”

Student HMO opportunities

Simon Thompson, the managing director of Accommodation for Students, said: "For many student landlords, HMOs present a compelling investment opportunity, particularly in university cities like Manchester, Newcastle and Birmingham, where demand for shared accommodation is high.

"The student market still offers attractive opportunities for landlords willing to take on the initial conversion costs."

He adds: "With yields soaring to 12.5% in regions like the North East, student HMOs can transform a modest property into a cash-flowing asset."