"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"
- Jonathan Samuels - Octane Capital
Specialist property lending experts, Octane Capital looked at the cost of converting a four-bedroom property into an HMO, what investors can expect as an average yield, and how this compares to a regular rental property.
The research shows that the average house price across England currently stands at £309,616. The full cost of converting a single room to an HMO currently averages £10,267, meaning fully converting a four-bedroom investment property into an HMO would set you back £41,067.
This means the full cost of purchasing and converting a property into a four-bed HMO comes in at an estimated £350.683 across England. However, while this may seem like a steep upfront investment, the figures from Octane Capital suggest it’s a worthwhile endeavour in the long run.
The average HMO commands a monthly rent of £593 per room or £2,372 per month if converted for four occupants. As a result, the average yield delivered from a four-bedroom HMO in the current market sits at 8.1%, far higher than the average general yield of 4.4% secured on a regular rental property.
In fact, HMOs provide a stronger yield in all regions of England, with the North East topping the table. Across the North East, the average HMO brings a yield of 11.2%, the highest HMO yield of all regions. It’s also some 6.3% higher than the average yield of 4.9% via a regular rental property in the region.
In Yorkshire and the Humber, the average yield secured via an HMO comes in 5% higher than a regular rental property, while in the East Midlands, HMO returns are 4.7% higher than the regular market.
Even in London where this gap is at its smallest, the average HMO is estimated to return a yield some 2.4% higher than the regular rental market.
CEO of Octane Capital, Jonathan Samuels, commented: “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.
"Of course, 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.
"However, for those who can successfully negotiate these potential pitfalls, HMO investment is sure to provide a far stronger return than they may otherwise find with a regular rental investment.”