Diversifying your property portfolio in 2020: the pros and cons of HMOs


There are many reasons why diversifying your property portfolio is a good idea, and many ways to do it. Are HMOs the ideal addition to your investments?

When choosing where to invest your hard-earned cash, it’s always wise to try not to put all your eggs in one basket. Even if you want to stick with the property sector, within this there are many different options to keep your portfolio as diverse as possible and manage your risk levels.

Like any market, property values will fluctuate over time, with different cycles representing different levels of risk. Because the balance between demand and supply is relatively stable across the housing market as a whole, investors can enjoy a level of protection against any vast volatility – unless you make a very ill-advised purchase – but there are ways of hedging your bets.

How can you diversify within property?

Clearly, if you can invest in more than one property, your risk levels are generally reduced. If something goes wrong with one property, you still have another to fall back on. This is further enhanced if you can invest in different locations. You can achieve top rental yields in places like Liverpool and Manchester right now, but if you had invested in London a few years ago you might have made big capital appreciation gains, too. Various parts of the UK are subject to peaks and troughs in supply and demand, and it’s the key to achieving the best returns.

Choosing different property types is another way of diversifying your portfolio. From traditional buy-to-let, to off-plan new-builds, to student rentals and houses in multiple occupation (HMOs), you can ride the waves of change within the housing market by having a good selection across the board.

The benefits of investing in an HMO

Where a rental property is occupied by three or more people forming more than one ‘household’ (a household being a single person or members of the same family), with shared toilet, bathroom or kitchen facilities, this is classed as an HMO. A ‘large HMO’ is where there are five or more occupants forming more than one household with shared facilities. There are numerous benefits to choosing an HMO for your next property investment.

Better yields: You can generally expect to achieve better rental yields with an HMO. In recent research it was found that the average UK HMO reaps a 6.3% yield, compared to 5.5% for a standard rental. This is most pronounced in the north-west, with Manchester, Liverpool, Preston and Bolton all offering top rental returns.

Reducing void periods: The more tenants you have, the more reliable your income. HMOs are occupied by three or more people who are not related, meaning they all have separate tenancy agreements. When one tenant leaves, while you lose the rent for that room, you still have income from the other tenants, so void periods have much less impact.

Less impact from arrears: Like with void periods, if one tenant gets into arrears, having multiple tenants means the effect of this will be less. By contrast, in a traditional buy-to-let there is only one rental payment, so if that falls behind then that could mean your entire income from that property is lost.

Growing tenant demand: It goes without saying that without demand, your property investment is likely to fall flat. HMOs are seeing a revival in popularity as the UK’s housing market and the way people live changes, with more young professionals wanting to live together in more affordable accommodation for longer. If you choose the right area, demand for rooms in an HMO will be high.

Type of tenant: HMOs tend to attract young professional tenants who are looking for good value, sociable homes close to places of employment and transport options. This tenant type is sometimes considered one of the most desirable, as they tend to be hassle-free, with less demands than families or older tenants. Because they are often recently graduated, they are likely to have parents acting as guarantors, which can add an extra layer of security.

Things to consider

While there are major advantages to investing in an HMO, there are some important factors to take into account before you take the plunge.

Higher initial cost: Buying a larger property with more bedrooms, particularly one that already functions as an HMO, can be more costly, although the returns will offset this for most investors. It is possible to get specialist mortgages for this type of property, and many investors opt to use a broker to secure the most competitive rates.

Getting a licence: If you have a large HMO (with five or more unrelated tenants), you must now obtain a licence to operate legally. The cost of this will depend on where the property is. Some areas are also subject to additional or selective licensing schemes which means that even smaller HMO owners must hold a licence. As councils regularly review various areas for licensing, it is important to keep an eye on whether or not this applies to you.

Bedroom sizes: Not every property can work as an HMO. Since October 2018, bedrooms in an HMO must be at least 6.51 square metres for an adult, 10.22 square metres for two adults, and 4.64 square metres for children under 10. These required room sizes can be altered by councils if they see fit, so check what the rules are in your local area.

Property management: While you might manage to operate your traditional buy-to-let yourself as a sideline, keeping on top of an HMO presents extra challenges. Having separate contracts for each tenant, as well as finding tenants and dealing with individual issues, can be more time consuming. Management companies can deal with this side of things, so investors should factor this into their bottom lines.

The way forward in 2020

As we move into 2020, most industry experts expect the property market to begin to pick up from the lag of 2019. Keeping an eye on changing trends and moves within the housing sector, including location and property type, can help you maximise your investments, and HMOs can be a great way of diversifying your assets.

At BuyAssociation, we offer a range of property investment opportunities, including HMOs and off-plan developments. Browse our investments page to see a selection of the products we have available, or sign up for free to access more opportunities.

Highgrove Mews

High Net Yield Freehold Houses

  • Commutable to London (27 mins to central Paddington station)
  • Rental demand extremely strong with large industry presence in Reading
  • Freehold with 4% net yield

£284,955 - £457,000

St Petersgate – Stockport Manchester

New Launch - Stockport Manchester, apartments from £160,000

  • Discounted launch prices from £160,000
  • Excellent transport links with 3 trains per hour to London Euston and only 9 mins journey to Manchester Piccadilly
  • Experienced development team

Assured Rent Housing Association Leases

Assured Rent Housing Association Leases

  • Assured rent & no rental voids
  • Tenant damage cover & newly refurbished inline with requirements of a corporate sitting tenant
  • Free property and lettings management

From £62,000

Emerging Birmingham Commuter Town With Properties From Just £104,000

The emerging Birmingham commuter town where properties are selling in an average of just 24 days

  • A collection of 62 two bedroom apartments and 28 one bedroom apartments.
  • DE14 is one of the fastest selling postcodes in the West Midlands.
  • 23 minute train journey into Birmingham New Street Station.

Properties from £104,000

Mill, Stockport

The Northwest's emerging property hotspot

  • Discounted off-plan 2-bed prices from £162,000
  • Completion date - Q4 2021
  • Rental yields - 6% plus

Discounted off-plan 2-bed prices from £162,000

South Central – Birmingham City Centre Apartments

Highly anticipated 28 storey launch in Birmingham City Centre with an impressive roof garden and communal facilities.

  • 154 units across 28 storeys
  • Residential multi-media community room, gym, roof garden and sky cinema
  • Excellent future connectivity via the metro system to other key transport hubs and locations around the city

from £205,800


Talk to us

Speak to our UK property experts today: 

+44 (0) 333 123 0320

Open from 9am-6pm GMT

+852 9865 4446

Open from 9am-6pm HKT

Stamp Duty Calculator


Unlock members only investment opportunities and full development details. Join now – it’s free, quick and easy.


Not a member? Sign up for free

tenants buying

Diversifying your property portfolio in 2020: the pros and cons of HMOs


By submitting your details via this online form you agree to be contacted via email/phone/SMS by Direct Marketplace Ltd t/a BuyAssociation in relation to property investment and property developments . We do not share your personal details with third parties.  To view our full Privacy Policy click here.