Maximising returns in the UK property market: Why high-yield HMOs are the new standard

The landscape of residential investment in the UK property market has fundamentally shifted. The traditional buy-to-let model that once defined the sector is now under intense pressure, forcing investors to re-evaluate their strategies. For those looking to protect and grow their portfolios, adaptation is no longer a choice — it’s a financial imperative.

The data is clear: the HMO (house in multiple occupation) model is emerging as the most resilient and profitable path forward, offering the significantly higher yields required to thrive in this challenging new environment. For brokers looking to outperform the current UK property market, the shift to high-quality HMO properties is essential.

The great squeeze: Why traditional buy-to-let is hurting property investors

The buy-to-let sector has faced a decade of regulatory and economic headwinds, culminating in a ‘landlord squeeze’ that has hurt traditional profitability. The financial pinch driving this movement to higher-yield assets is a result of several concurrent factors:

● Tax overhaul: The introduction of Section 24 in 2020 restricts the deduction of finance costs, effectively taxing turnover rather than profit for many investors. This, combined with the earlier removal of the ‘wear and tear’ allowance, has significantly raised the tax burden.

● Acquisition and finance costs: The initial 3% stamp duty surcharge on additional properties, first introduced in 2016, immediately raised acquisition costs. Additionally, soaring interest rates (2022-2024) have dramatically increased financing costs, making low-yielding properties unviable.

● Regulatory burden: Increased compliance, including stringent minimum stress tests by the PRA (2017) and rising EPC standards (starting in 2020), requires costly upgrades, which restrict potential returns.

This convergence of higher taxes, surging finance costs, and increased compliance means that only higher-yielding assets, such as HMO properties, can now perform financially in the current UK property market.

Meeting the needs of the modern tenant: The HMO advantage

The shift in the investment market is mirrored by a significant change in tenant demands, which fundamentally supports the HMO model. The UK’s cost of living crisis is pushing more individuals – especially young professionals and graduates – into shared living as a more affordable and flexible alternative to solo rentals.

Modern professional tenants are now seeking upgraded amenities and are willing to pay a premium for:

● Dedicated working spaces: With the mass adoption of remote work, a private, uninterrupted area to work from home is no longer a luxury but a fundamental requirement for professional tenants.

● En-suite facilities: Tenant expectations have moved beyond shared bathrooms. Privacy and convenience are paramount, with en-suites now a key differentiator for high-quality shared living.

Well-executed, high-quality HMO properties, offering individual tenancy agreements, dedicated work zones, and en-suite rooms, directly address these contemporary needs. They attract a stable, professional tenant base and command higher rents, validating the model’s appeal in the UK property market.

The compelling scale of the HMO sector

The data reflects the sector’s strength, confirming that this is a mainstream, institutional-scale asset class, not a niche strategy within the UK property market:

● Market value: The sector holds a substantial market value exceeding £78 billion.
● Rental income: HMO properties generate rental income of over £6 billion annually.
● Property count: There are over 182,500 HMO properties across England and Wales, and over 15,000 in Scotland, concentrated in cities like Edinburgh, Glasgow and Dundee, reflecting its significant economic contribution and proven scale.

These figures demonstrate that the HMO market offers both scale and financial performance, validating the movement toward these higher-yield assets as the most sensible investment strategy in the current climate.

Navigating the increased regulatory requirements of HMOs

While the HMO model offers superior returns, it requires a higher degree of professionalisation due to the increased regulatory scrutiny it faces compared to standard buy-to-lets. Successful investors must fully understand and adhere to the mandatory licensing and planning requirements to ensure compliance and avoid severe penalties.

1. Licensing and management

In England and Wales, certain larger HMOs require a Mandatory HMO License from the local authority, typically applying to properties rented to five or more people forming two or more separate households. However, many local councils have also implemented Additional Licensing schemes that extend this requirement to smaller HMOs, sometimes covering just three or four tenants. Licensing covers crucial aspects such as:

● Fire safety: More rigorous fire detection, suppression, and escape route requirements.
● Property condition and facilities: Stricter standards on room sizes, kitchen, bathroom facilities and general maintenance.
● Management competency: Requiring the property manager or landlord to be deemed 'fit and proper' to hold a license.

2. Planning consent (Article 4 Directions)

A critical factor for investors is the shift in planning law. The permitted development right that allowed an investor to convert a C3 (standard residential dwelling) to a C4 (small HMO, up to six people) without full planning permission has been restricted in many high-demand areas. 

Local authorities are increasingly using Article 4 Directions to remove this permitted development right, thereby requiring full planning permission for any change of use to an HMO. This significantly increases the complexity of acquisition and development and underscores the necessity of early-stage due diligence to confirm both licensing and planning status before committing to a purchase. The increased complexity is, in effect, a barrier to entry that rewards professional investors who properly navigate the system.

The transformation pathway: Securing finance for your HMO transition

For many investors, the challenge is transforming a tired, lower-yielding property into a modern, high-yielding HMO. This often requires significant refurbishment and reconfiguration. A bridge-to-let finance product is specifically designed to fund this property transformation and secure a long-term mortgage exit.

Key features of an effective bridge-to-let solution simplify the process and give investors critical certainty:

● High funding and certainty: Loans can be funded at 75% LTV on day one, with up to 100% of the build/refurbishment costs funded (subject to LTV limits). Crucially, lenders can offer an initial commitment to also consider the loan for the buy-to-let mortgage exit, providing peace of mind.

● Streamlined process: Measures such as contributions toward valuation/legal costs and the attempt to arrange the same valuer for both the bridging and buy-to-let stages reduce cost and friction, saving both time and money.

Embrace the HMO model to outperform the UK property market

The rules of buy-to-let have been rewritten. The financial and regulatory environment in the UK property market no longer favours the status quo. The movement to high-yield properties is a necessary response, and the HMO sector stands out as the proven solution.

The changes and tightening of regulations and compliance have driven out some of the “old school” investors from the market. These vacancies present opportunities for well-priced acquisitions with significant investment potential to transform the property and bring it up to today’s modern standards that attract tenants.

By understanding the new financial realities, the demands of the modern tenant, the rigorous regulatory landscape, and by utilising smart financing tools like bridge-to-let, investors can successfully adapt, transform dated properties, and secure the long-term, high-yield financial future required to thrive in the current investment climate.