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HMO investment: How to increase your rental income [2024 edition]

If you're the landlord of house or houses with multiple tenants, read on to learn how to get the best return on your investment

11 January 2024
3 minutes read
Printed technical drawing layout laying on a wooden table with a magnifying glass, a small plastic white, red and grey double storey house and a guinea piggy bank sprawled over it

Do you want to make the most of your HMO investment to maximise profits and yields while minimising stress and aggravation?

This HMO investment guide will give you some great ideas for significantly increasing your rental income and securing your financial future.

In today's post-Brexit political and economic turmoil, the times when you could rely on the government to help with your retirement are long gone. Therefore, as a nation we are on our own when it comes to saving for our retirement fund and securing our financial future.

Here’s the deal: you can significantly increase your rental yield by converting your property to an HMO (house in multiple occupation).

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What is an HMO?

A HMO, known as a "multi-let", is a rental property occupied by three or more unrelated people forming one household. Typically an HMO property will have shared kitchen, living and bathroom facilities and each bedroom is rented out separately; allowing you to significantly increase your rental yields and income.

Want to know the best part? When you want to maximise profits from your property, there is no better method than designing, planning and building an HMO investment.

Why are HMOs so popular?

As you probably already know, most successful property developers invest in HMOs in London and in the UK. For the UK’s increasingly mobile workforce, who are delaying putting down roots for longer, it makes financial sense to live in a high-quality HMO.

This method allows young professionals, students and benefit receivers to live in a high-quality home, whilst being able to save for long-term goals rather than throwing away their hard-earned money on extortionate rent on a rental property.

Also, total returns on HMOs outperformed standard buy-to-let properties by a huge 40% from 2010-2014. HMOs had an average total return of equity (ROE) of 108% over 4 years compared to 77% for buy-to-let properties.

The facts are simple: owning an HMO investment is a surefire way to significantly increase your rental yield.

Who benefits from HMO properties?

HMOs are not only the guaranteed solution to increasing your rental profits, they also succeed in fulfilling a growing social need for high-quality rental properties that are affordable for tenants. The cost of renting a room in an HMO is far lower than renting a one-bedroom flat, therefore making HMOs ideal for the mobile workforce, increasing numbers of students and young professionals. In addition, local councils are also raising standards to make sure that residents in the rented property sector live in safe and healthy homes.

Why choose HMO rather than a buy-to-let property?

When compared to standard buy-to-let rental properties, on an HMO  you should expect a minimum of 12% gross yield, and on average a likely 15% realistic gross yield. That is why an HMO investment can give you a life of luxury in retirement.

For example:
If you take a 3-bedroom house let by a family under one tenancy agreement, you may achieve £1,500 per month in rent. Now, if you rent those 3 bedrooms on an individual basis in an HMO at £650 per month, you will make £1,950 per month.

But here’s the kicker: if you then build a rear extension and loft extension to add extra three bedrooms, it will help you achieve almost £3,000 per month.

That’s 2x potential income from the same property!

Of course, this depends on the property you are looking to buy, renovate and convert into an HMO investment. Now, this is where research into your property becomes vital.

How can you convert a house into an HMO?

If you wish to convert your house into an HMO and if you don’t have permitted development rights for change of use, you must then make an HMO planning permission application to your local authority.

And, if your property is at least three storeys high or you have five or more residents sharing a household, you will need to apply for mandatory licensing. There are some circumstances where your small HMO may need additional licensing.

How can you boost your rental income?

Find the best location: Choose your location carefully. Like any rental property, if you decided to self-manage, local is always the best option. If you have a managing agent, going further afield may not be a problem, but make sure they are experienced in managing these types of tenants. Often, standard lettings agents will not be specialised enough, therefore we strongly recommend you use agents with successful experience of HMOs.

Add extra bedrooms: No matter how small your rental property is, you could potentially increase your rental return just by adding extra bedrooms. Seek the expertise of successful experienced HMO architects to help you extend your property.

Renovate the HMO property: Making improvements around the property could help improve its value and as a result, could enable you to attract professionals and raise the rent.

Get the timing right: The tenant demand in the UK surges by 64% in September, whilst available rental stock declines by 10% (compared with the normal monthly averages). Add in a well-timed break clause the next renewal point, it is normally possible to re-synchronise your tenancy dates to take advantage of higher prices and shorter voids in summer.

How Urbanist Architecture can help you?

Having completed over 700 projects, including all types of property conversions, we know from experience that the conversions often result in close to six figures of annual income and you can copy the formula of our clients to ensure the same successful results for your project.

Now this may seem daunting at first but as HMO architects and industry specialists, we are committed to help landlords and investors just like you! If you need an experienced property conversion architect who will listen to your requirements and help you make the most of your property investment, give us a call now on 020 3793 7878.

Ufuk Bahar, Founder and Managing Director of Urbanist Architecture
AUTHOR

Ufuk Bahar

Urbanist Architecture’s founder and managing director, Ufuk Bahar takes personal charge of some of our larger projects, focusing particularly on Green Belt developments, new-build flats and housing and high-end full refurbishments.

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