Can the yield from an HMO justify the cost of conversion?

Can the yield from an HMO justify the cost of conversion?

Research suggests that while the average cost of a house in multiple occupation (HMO) conversion is as much as £41,000, the average HMO yield currently stands at 8.1% – far higher than the average rental yield for a regular rental property.

A study by property lenders Octane Capital found the average house price across England currently is £309,616, and 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, according to the study, the full cost of purchasing and converting a property into a four-bed HMO comes in at an estimated average of £350.683.

The research also found 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, according to Octane Capital. 

In fact, the lender found HMOs provide a stronger yield in all regions of England. Across the North East the average HMO brings a yield of 11.2% – the highest HMO yield of all regions – and 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. In London where the gap is at its smallest, the average HMO is estimated to return a yield some 2.4% higher than the regular rental market.

“HMOs can make a very worthwhile investment for those with the capacity to take one on,” said Jonathan Samuels, CEO of Octane Capital. “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,” he added.

“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.”