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Are HMO Properties a Good Investment?
Houses in Multiple Occupation (HMOS) can be a great investment, offering higher rental yields than standard buy-to-lets. However, they come with increased management demands. This means a more hands-on approach, increased maintenance, and stricter regulations.
With demand for housing in the UK remaining high, more investors are considering HMO investments. But are HMO properties a good investment?
Continue reading to learn more about what HMOs are exactly, the pros and cons, and the type of investors they’re best suited for.
What is an HMO Property?
An HMO property is a house or flat rented to at least three unrelated individuals who live together and share communal facilities, such as a kitchen and bathroom.
Small HMOs usually have up to three tenants living together, while large HMOs have five or more. The rules depend on the property size, with larger HMOs generally requiring mandatory licensing.
Common HMO property types include converted terraces and student blocks, with the typical tenant profile fitting young students or professionals. HMOs can be beneficial for both tenants and landlords, offering more affordable housing and higher rental yields in certain areas.
What Returns Can You Expect?
It’s easy to get excited about HMOs and the potentially high rental yields they offer. However, there’s a big difference between gross and net yield, and the two numbers can look quite different:
- Gross Yield – The return before any costs are deducted.
- Net Yield – The number that matters the most, showing the amount you actually make after any costs are deducted.
Let’s take a look at an example.
You’re an investor with a £250,000 five-bedroom HMO in North England, and you’re renting each bedroom out to tenants for £500 per month:
- Rental Income – £30,000
- Gross Yield – 12%
- Estimated Operating Costs – £12,000
Your actual earnings (depending on mortgage interest, taxes, and how well you run your HMO) would look something like this:
- Net Income – £18,000
- Net Yield – 7.2%
The Pros and Cons of Investing in HMO Properties
If you’re an investor debating whether or not HMO property investment is worth it, consider the pros and cons to help with your decision.
HMOs generally offer many potential benefits:
- Higher Rental Income – Renting multiple rooms out at once generates significantly more income compared to single tenancy.
- Growing Demand – Rising rental prices and the general cost of living may encourage more tenants to consider HMOs.
- Low Void Risk – If multiple tenants are living in your HMO at once, rental income continues even if one individual leaves.
- Taxes – Most HMO running costs are classified as revenue expenditure, meaning they’re tax-deductible.
- Portfolio Diversification – Running HMOs adds to your property investment portfolio, which helps spread risk if anything happens to your single-let investments.
However, with the benefits of HMOs come some potential, but often manageable, drawbacks:
- Increased Management – HMOs require increased management due to the higher number of tenants.
- Higher Start-Up Costs – You’ll need to buy more furniture, safety certificates, licensing fees, and consider things like management fees.
- Licensing and Regulations – HMOs can sometimes require mandatory licensing, fire safety compliance, and potential Article 4 restrictions.
- Mortgage Requirements – Some HMO mortgages can be more difficult to secure, typically with higher interest rates compared to other mortgage products.
HMO Licensing and Legal Requirements in the UK
When running an HMO in the UK, landlords must meet several licensing and regulatory obligations.
Mandatory HMO Licensing
Under the Housing Act 2004 in England and Wales, large HMOs that house five or more unrelated tenants usually require a mandatory HMO licence from the local council. The licence lasts for up to five years, but must be renewed. If you fail to get a mandatory licence, you could be issued unlimited fines and rent repayment orders.
Additional and Selective Licensing
Local councils in England and Wales also use additional licensing for small HMOs that don’t meet the five-person mandatory threshold. Selective licensing extends to certain geographic areas rather than the type of household. But, if a property already has a Mandatory or Additional HMO licence, then they’re usually exempt from needing a Selective licence too.
Article 4 Directions
Some local authorities have imposed Article 4 directions, which remove permitted development rights for change of use to HMOs in the UK. Essentially, this means that if you plan on converting a normal house to a small HMO, you may now need to get planning permission, even if planning wasn’t required beforehand.
Health, Safety and Fire Regulations
HMOs must comply with the Housing Health and Safety Rating System (HHSRS) and the Regulatory Reform (Fire Safety) Order 2005. This includes certain requirements, such as a written fire-risk assessment, smoke and heat alarms, fire-safe furniture, clear escape routes, and secure gas installations throughout the property.
HMO Investment Costs to Consider
When setting up an HMO, you must factor in upfront and ongoing costs.
Upfront costs include:
- Property purchase
- Potential conversion and renovation costs
- Furniture and appliances
- HMO licence fee
- Safety certificates to ensure compliance (gas, electrical, and fire risk assessments)
Ongoing payments include:
- Mortgage repayments
- Insurance
- Utility bills
- Council tax (and other tax payments)
- Maintenance and repairs
- Property management costs
Are HMO Properties a Good Investment in 2026?
HMOs in the UK are likely to remain highly profitable in 2026 for landlords who are focused on high cash flow.
A recently published annual HMO market report 2026 shows:
- Rental demand for shared accommodation remains stronger than supply in most major cities
- 8.4% average gross yield
- +11% HMO landlord registrations YoY
At Peninsular Property, we work closely with investors by offering a hands-off property sourcing and investment service, including sourcing, vetting opportunities, and ongoing tenant management.
To find out more about our services for HMO investment properties, please contact our team today.
FAQs
Who are HMO properties best suited for?
HMO properties are best suited for landlords seeking higher rental income and who are comfortable with a more hands-on approach to management. They’re also a better fit for investors who understand compliance rules and important licensing requirements.
Is an HMO better than a standard buy-to-let?
An HMO can be better than standard buy-to-lets if your main priority is a stronger rental yield and lower void risk. However, it depends on your overall goals, budget, and experience.
Where is a good place for an HMO property investment?
Good HMO property investment locations usually have a strong tenant demand, transport links, and employment or education hubs, such as city centres. While obvious locations for HMOs include cities like London, you will find more affordable investments up North in places such as Liverpool and Manchester.
What should I look for in a good HMO property?
When investing in an HMO property, you should ensure the area has strong rental demand, good transport links, enough bedrooms to house multiple tenants, and space for shared living.
