The evolution of the HMO market and current hotspots

The Evolution of the HMO Market and Current Hotspots

HMOs (House of Multiple Occupation) first gained popularity as student accommodations – often basic, shared houses where students could live together at an affordable monthly rent. However, as the law began to focus more on the safety and condition of privately rented properties, it became evident that some landlords were taking advantage of tenants who couldn’t afford better options and were hesitant to voice their concerns for fear of eviction.

In the mid-2000s, the concept of “professional” HMOs emerged. Investors in the buy-to-let market realised that by providing attractive and well-maintained shared homes, they could attract working adults who were willing to pay higher all-inclusive rents for private rooms. Despite the higher running costs compared to single households, the profit margin was significantly higher, sometimes two to three times more.

During a period when mortgage interest rates were reaching record lows, HMO investors were presented with an incredible opportunity to achieve high-profit margins. This favourable situation allowed them to easily qualify for and comfortably manage the repayments on high loan-to-value mortgages. In addition, the requirement for lower percentage deposits enabled them to diversify their capital across multiple HMO investments, resulting in even greater rental profits. It’s important to note that these financial advantages were significant factors contributing to the success of HMO landlords during this time.

During this time, legislation began tightening for the entire Private Rental Sector (PRS), including additional regulations for HMO landlords:

  • 2005: HMO landlords were required to conduct risk assessments and install fire safety measures such as fire doors, alarms, extinguishers, and blankets.
  • 2006: Licensing was introduced for HMOs housing five or more individuals, but it only applied to properties with three or more storeys. Consequently, many investors stuck to two-storey houses to avoid the licensing requirement.

The HMO market experienced relative stability and continued growth for around a decade. Many landlords ventured into the “luxury HMO” market, offering accommodations with a boutique hotel feel that appealed to professionals unable to rent an entire property or prefer this lifestyle.

  • 2018: Significant changes impacted the HMO sector. The “three or more storeys” criteria was removed from the licensing requirement, necessitating more HMO landlords to obtain licenses. Additionally, minimum room sizes were introduced, leading some landlords to discover that they previously rented rooms as single bedrooms no longer met legal requirements. Unfortunately, this led to a decrease in their profits.
  • 2023: In January of this year, new fire safety regulations required appointing a “responsible person” for every HMO. This responsibility includes ensuring the provision of fire safety instructions and information to all occupants.

While these legal changes have undoubtedly improved the standards and safety of shared houses, they have also made setting up and managing HMOs more challenging.

How profitable are HMOs today?
Now, let’s discuss the profitability of HMOs in today’s market. With rental rates increasing at a higher-than-usual pace in recent years and energy costs remaining high, tenants are increasingly seeking all-inclusive room rentals. As long as your HMO meets the legal standards for condition health and safety, it doesn’t have to be fancy to be profitable; ensuring it is modern and well-maintained is a solid foundation.

According to Paragon Banking Group’s PRS report for the first quarter of this year in England, HMOs generate the best yields at 6%, compared to 5.3% for houses and 5% for flats and bungalows. Additionally, their research shows that HMO yields vary across the UK, ranging from approximately 6% to 9%. So, there is still significant potential for strong rental returns in the HMO market.

The sharp rise in mortgage rates and utility bills is now starting to affect the profitability of HMOs. Those landlords who are having to remortgage in the current climate could find their monthly payment tripling, which will hit HMO landlords with high LTV mortgages particularly hard. So if you already have an HMO or are considering investing, it’s never been more important to run the numbers – before you buy and then regularly once your HMO is let, so you don’t get any surprises.

Where are the current HMO hotspots?
Generally speaking, you should be able to find a good HMO investment in most major towns and cities. Looking at the UK regions, Paragon’s research shows that Wales leads the way on returns, with the average HMO delivering a yield of just over 9%, followed by Yorkshire & Humber and the North West at 8.6%.

The South East (7.18%) and London (6.13%) deliver the lowest yields, which is to be expected, given the high property values. All these are gross yield figures, so the higher running costs of HMOs have to be taken into account, but if you run the figures for any individual HMO versus a comparable single-let property, you should still see much higher rental returns.

Kent has some fantastic investment areas for working professionals, such as Maidstone, Medway and Ashford.

Secure expert, local help when investing or running an HMO

To ensure your HMO investment meets tenants’ financial health and safety criteria, having an expert letting agent on your side is vital. At Rooms in Kent, our qualified agents understand the complex compliance requirements of HMOs and the diverse target markets they serve. We offer professional and personable advice to give you the confidence that you’re making informed choices about your investment. We’re thrilled to help you navigate the world of investing or managing an HMO, and we’re here to support and guide you every step of the way.

To learn more about HMOs and how they’re an untapped market, contact us today on 01233 367 367 and let us help you unlock the potential of the HMO market.