The average HMO yield could hit 12.5% in some locations, new research suggests.
Excellion Capital looked at the cost of converting a three or four bedroom property into an HMO with six bedrooms and what kind of yield investors can expect from their efforts.
The research shows that the average sold price for a three or four bedroom house in England currently stands at £444,273. Meanwhile, the cost of converting a property into an HMO works out at an average of £11,345 per bedroom. This means that the cost of converting a three or four-bed house into a six-bed HMO comes to an estimated average of £68,067.
Therefore, the total upfront investment when accounting for purchase and conversion comes to £512,340.
The average HMO in England commands a monthly rent of £711 per room which, when accounting for six occupants, comes to a total monthly income of £4,269. As a result, the average gross yield delivered from a six-bed HMO in the current market sits at 10%. This is significantly higher than the wider average rental yield in England which usually sits between 5% and 6%.
HMO yields are even higher in some 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 are found in London where expensive property prices mean the average HMO yield sits at 6.6%, while in the South East it sits at 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 stands at 11.9%, and in Birmingham it’s 10.6%.
Investors should, however, bear in mind that HMO conversion costs are going to vary depending on the existing condition of the property. If it is of a good standard and simply needs cosmetic upgrades along with those that bring it within the required HMO standards the costs will be significantly lower than if the property is in need to major upgrades, such as damp and mould remediation.
An Excellion Capital spokesperson comments: “We are seeing a lot of 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.
“HMOs, with a few exceptions, are very popular with lenders. Because the required conversion works tend to be relatively light, investors can usually fund both the acquisition and the works with a bridge loan. This is ideal as bridge loans complete much faster than development loans and require much less oversight by the lender.
“Another advantage is that lenders provide very 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 actually be quite low compared to other investments. It is important here to choose a lender that will measure the loan against the income producing value rather than the vacant value as this can make a big difference to the final loan amount. Once the conversion is complete, the investor can repay the loan with very favourable investment finance (best rates below 6% fixed).
“Finally, if the investor can buy portfolios of HMOs and get to a loan amount of £1m or above, they can usually obtain better pricing from lenders. Large portfolios of retained HMOs can create a lucrative long-term income for investors.”
