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HMO yields surge ahead of the pack
One of the most discussed areas within the current BTL market is the ongoing value attached to HMO’s, the yields being generated, and the costs attached to these.
Many professional landlords have incorporated such a property type into their portfolios in recent times and are reaping the rewards through rising tenant demand.
However, considerations do remain over this property type through additional time and expenditure pressures in the form of tenant management, higher operating costs plus stronger compliance and legal obligations. And that’s on top of any conversion work which may be required.
This is where strict due diligence and robust calculations are key for landlords but, as ever, the power of these higher yields are the main driving force for an HMO sector which continues to go from strength to strength in many areas of the UK.
The potency of these returns was evident in the Q3 2023 Landlord Panel research from BVA BDRC – in conjunction with Foundation Home Loans – which saw HMO lettings generate significantly higher average rental yields when compared to other property types (6.3%). This denoted a rise of 0.3% compared to Q2 figures when HMOs shared the top spot with MUBs at 6%.
In the latest iteration of the report, MUBs maintained their 6.0% average. The next largest yield generator in the report was reported to be bungalows at 5.7% followed by semi-detached houses at 5.5%, terraced houses at 5.4%, detached houses at 5.3% and finally individual flats which came in with a 5.2% average rental yield.
Focusing on costs, the proportion of gross rental income spent on upkeep for non-HMOs softened slightly this quarter, whilst increasing for HMOs (+3% vs. Q2) (slide 25) Property upkeep continues to be the most substantial expenditure for non-HMOs representing just over a quarter of total costs (26%). Service charge (12%), property management and letting fees (12%) and property improvements to comply with energy standards (10%) followed closely behind.
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Similarly, a considerable proportion of landlord expenditure on HMOs continues to go towards property upkeep (18%). Albeit this is a lower proportion of their total expenditure (18% vs. 26%) compared to non-HMOs. Although unsurprisingly. HMO owners are still spending a greater proportion on utilities (16% vs. 3%) and council tax (9% vs. 4%) compared to non-HMO owners.
This cost/yield balance is nothing new for experienced landlords, but it’s certainly something to remain fully aware of going forward.
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