The HMO sector remains one of the most dynamic parts of the private rented market, with recent data showing it’s both a significant asset class in its own right and a growth area for professional landlords.
New research from HMO management platform, COHO, based on Office for National Statistics (ONS) data, estimates the HMO market across England and Wales is now worth £78 billion and generates over £6.3 billion in annual rental income from around 182,554 properties.
Of these, 74% are classified as ‘small’ HMOs – shared by three to four tenants –while 26% are ‘large’, housing five or more occupants. The average HMO is worth just under £300k, but in London that figure more than doubles to over £660k, representing a combined stock value of more than £40 billion. The South East commands the highest per-property rental income at over £46k a year, and in London that number is still a healthy £40k.
This is not just a large market, but one that can produce superior yields compared to single-let properties. Recent figures put the average HMO yield at around 7.5%, against 3.6% for standard buy to let, and while the higher running costs of multi-occupancy mean margins are tighter for some, the sector continues to deliver for well-run operations.
PORTFOLIO PROFITS
In fact, the latest Pegasus Insight Landlord Trends research, taken on behalf of Foundation Home Loans, shows 87% of landlords across the wider private rental sector (PRS) are making a profit, with portfolio landlords – the group most likely to hold HMOs – often leading the pack.
Pegasus’ research highlights how central HMOs have become to larger landlord strategies – 29% of portfolio borrowers have HMOs in their holdings. These are not accidental landlords – they are experienced investors with an eye on portfolio diversification, higher-yield assets and long-term income.
The same research shows these landlords are far more likely to operate through a limited company. Some 63% of landlords are planning their next purchase via a corporate structure, and no landlord who already owns in a limited company intends to revert to a personal name for their next deal.
This matters for brokers because limited company lending is not always straightforward, particularly when you add in the variables that come with HMOs.
COMPLICATIONS
Higher refurbishment and maintenance costs, stricter licensing and planning controls, and more stringent fire and safety rules all mean lenders need to take a flexible, case-by-case view. The Pegasus data shows nearly half of HMO landlords spend more than 20% of their gross rental income on running costs, compared to just over a third for non-HMO landlords. That’s a big gap, and it needs to be factored into affordability and stress testing.
Looking ahead, brokers should expect demand for HMOs to remain strong.Economic pressures and the cost of living mean more tenants are choosing shared living, and in many markets the demand for quality, well-managed HMOs outstrips supply.
Licensing data shows local authorities are widening the net, with smaller HMOs requiring licensing and more localities restricting conversions, which may restrict supply further. At the same time, tenant expectations are rising, with more seeking ensuite rooms, high-speed internet connectivity and well-finished (and furnished) communal spaces. For landlords, meeting those expectations is an investment decision; for brokers, it’s a financing challenge and an opportunity.
Mortgage market conditions are also shifting. Rates remain slightly elevated compared to the ultra-low environment of a few years ago, and HMO products typically carry a premium over standard buy to let.
That said, product choice remains strong, and certainly as a lender, we are absolutely committed to the HMO sector and landlords’ wants and needs within it.
THE BROKER OPPORTUNITY
For brokers, there are a few clear takeaways. First, portfolio borrowers with HMOs are far more likely to need refinancing – the Pegasus landlord research shows 53% of those with four-plus buy to let mortgages intend to refinance in the next year.
Second, this is a segment where a manual underwriting approach and flexibility on criteria can make the difference between a decline and a successful completion.Third, with so much activity channelled through limited companies, brokers need to be confident in structuring these applications.
At Foundation Home Loans, our HMO range is designed with these realities in mind. We cater for both small and large licensed HMOs, accept first-time landlords, support expat borrowers, and have no cap on portfolio size. We also work with day-one limited companies and underwrite manually, which means we look at the merits of the case as a whole, not just whether it fits a rigid set of criteria.
The future of the HMO sector is likely to be shaped by regulation, tenant demand and the wider economy, but one thing is clear – HMOs are not going away.
For brokers, they represent an ongoing opportunity to work with professional landlords who value expertise and who are looking for finance partners that can keep pace with a more complex, higher-yielding asset class. The brokers who understand that, who know how to navigate the specialist market and partner with specialist lenders like ourselves, will be the ones who continue to grow their share of this valuable segment.
