While the average cost of converting a property into a house in multiple occupation (HMO) dwelling can cost around £68,000, the average yield can be as high as 12.5%, an advice firm has said.
Excellion Capital researched the cost of converting a three- or four-bedroom property into an HMO with six bedrooms.
It found the average sold price for such a property in England was £444,273, and the cost of the conversion would work out at an average of £11,345 for each bedroom. This would bring the total conversion cost to £68,067.
When accounting for the purchase and conversion price together, investors would need to pay £512,340 upfront.
Excellion Capital said this investment would pay off, however, as the average HMO in England attracted a monthly rent of £711 per room, and with six occupants, it would total a monthly income of £4,269.
The firm determined that the average gross yield for a six-bed HMO in England was around 10%, higher than the average rental yield of between 5% and 6%.
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The return on an HMO can be even higher in some parts of the country such as the North East, where this can be as high as 12.5% for a three- or four-bedroom home that has been turned into a six-bed HMO.
In the North West, the average yield is 11%, and in Yorkshire and the Humber, it is 11%.
The lowest yield is in London, at an average of 6.6%, while in the South East, it is 8.1%.
The benefits of HMO investment
Other major cities in England can also achieve higher yields, such as 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, while the yield stands at 12.2%.
Robert Sadler, vice president of real estate at Excellion Capital, said: “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.”
Sadler added: “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. 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, with the 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.”