"It’s important to choose a lender that will measure the loan against the income producing value rather than the vacant value, as this can make a difference to the final loan amount."
- Robert Sadler, vice-president of real estate at Excellion Capital
While the average HMO conversion costs £68k, it could still prove a worthwhile long-term investment, reports Excellion Capital. HMO yield can be as high as 12.5%, far exceeding yields achieved in the standard rental market.
On average, three or four-bedroom houses in England currently sell for £444,273. Meanwhile, the cost of converting a property into an HMO costs approximately £11,345 per room. This means that the cost of converting a three or four-bedroom house into a six-bed HMO comes to an estimated £68,067.
In England, HMOs command an average monthly rent of £711 per room (when accounting for six occupants), which totals £4,269p.m. Therefore, the average gross yield delivered from a six-bed HMO sits at 10% - this is significantly higher than the rental yield, which usually comes in at 5-6%.
HMO yields are even higher in certain regions of England, led by the North East, where the average investor can expect a yield of 12.5% after converting a three or four-bed property into a six-bed HMO.
In the North West, the average yield stands at 11.5%, while in Yorkshire & Humber, it’s 11%. The lowest yields were found in London, with the average HMO yield sitting at 6.6%, while in the South East it’s 8.1%.
However, some of England’s other major cities provide much higher yields for an HMO conversion. In Manchester, where the average three or four-bed property sells for £329,163 and the average rental income from a six-bed HMO is £4,050, the yield stands at 12.2%.
Meanwhile, the average six-bed HMO yield in Newcastle is 11.9%, and in Birmingham it’s 10.6%.
“We’re seeing 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,” explained Robert Sadler, vice-president of real estate at Excellion Capital.
He said: “HMOs, with a few exceptions, are popular with lenders. Since the required conversion works tend to be relatively light, investors can usually fund both the acquisition and the works with a bridge loan.
“Another advantage is that lenders provide 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 be quite low compared to other investments.
“It’s important to choose a lender that will measure the loan against the income producing value rather than the vacant value, as this can make a difference to the final loan amount. Once the conversion is complete, the investor can repay the loan with favourable investment finance,” Robert added.
