The best buy-to-let property yields in 2017 came from houses in multiple occupation (HMOs) with an average return on investment of 8.9%, making it an attractive option for landlords looking to diversify their portfolios.

Landlords who rent out properties by the room, where three or more unrelated tenants live in the home but share bathroom and kitchen facilities, can expect to see the highest yield level of all housing types, according to the latest research from Mortgages for Business. HMOs saw yields of 8.9% in 2017, followed by multi-unit properties with average yields of 8.3%.

However, the results show that the figure has contracted since the previous year, and is the first time HMO profits have been below 9%. Traditional buy-to-lets – involving less than three unrelated tenants, or families, for example – brought in an average of 5.6%, although Mortgages for Business said this figure was more on a par with what’s been seen previously.

Mortgages for Business sales director Jeni Browne said: “The attractiveness of HMOs as a buy-to-let investment has increased in recent years, not only because of the higher yields on offer but because serious investors are keener to diversify their portfolios.

“With more landlords vying for these properties, prices have been pushed up more quickly than the rents, which is one of the main reasons we are seeing their yields drop, although I suspect that the granting of fewer new HMO licences is also having an impact.”

Weighing up HMOs

New rules for HMOs are expected to take effect this year, along with stricter licensing requirements, and it is predicted that the number of HMOs in operation that will need a licence will go up from 60,000 to 175,000 – which could put some landlords off.

Investors who are considering purchasing an HMO, or converting an existing property into one, need to be aware of the potential pitfalls of the sector, including the increased level of regulations and scrutiny imposed on the property type, as well as the greater difficulty that may be faced in accessing mortgaged finance.

However, as the latest figures show, landlords can achieve strong monthly rental yields, and the demand for such properties tends to be high in locations where there’s a lack of affordable housing, so it is an important sector for many investors.