From Single Let to Shared Living: The Financial Case for HMOs

Investing in Houses in Multiple Occupation (HMOs) can be one of the more financially rewarding opportunities in today’s property market. If you’ve ever considered diversifying your portfolio, maximising rental income, and catering to London’s ever-growing demand for high-quality shared housing, an HMO conversion could be your next investment. With the right approach, a simple three-bedroom terraced house can be converted into a six-bedroom rental asset generating strong returns.

Why the move to HMOs?

The appeal of HMOs lies in their ability to deliver higher rental yields compared to traditional buy-to-let properties. By renting out individual rooms rather than a whole house to a single tenant, landlords can significantly increase rental income while reducing the risk associated with void periods. Unlike standard rental properties, where a vacant period means a complete loss of income, an HMO mitigates this risk by ensuring multiple tenants contribute to your earnings at any given time. With London’s rising cost of living, more professionals and students are opting for shared accommodation, making HMOs a particularly lucrative investment option.

What’s involved?

A successful conversion must navigate regulatory requirements such as Article 4 restrictions, which may require full planning permission in specific London boroughs. The presence of an Article 4 direction creates a barrier to entry for investors looking to develop an HMO portfolio. Whilst it is still possible to gain planning permission for the conversion of a property into an HMO, it can be a costly and lengthy process. In order to make the most of the opportunities offered by investing in an HMO, ideally you would purchase a property within a London Borough where an Article 4 restriction has not been introduced. Additionally, selecting the right tenant demographic—such as young professionals—can enhance rental demand and improve occupancy rates. Partnering with an experienced HMO property manager can further streamline operations and ensure compliance with safety and licensing regulations. Financing options, including bridging loans or commercial mortgages, provide flexibility during the development phase, enabling investors to optimise their capital allocation.

London Borough of Sutton Case Study

The conversion from a standard three-bedroom house to a fully operational six-bedroom HMO does require careful planning and financial consideration. We have outlined the potential costs associated with the conversion to an HMO within the London Borough of Sutton. Crucially, Sutton does not currently have an Article 4 direction in place, which means that you can convert a single family dwelling into an HMO for up to six people under permitted development rights – saving time, money and hassle compared to boroughs where full planning permission is required.

A typical three bedroom terraced house in Sutton currently sells for around £475,000 depending on proximity to key transport links like Sutton Station or Carshalton. Once, acquired, converting the property into a six bedroom HMO usually involves a mix of structural and internal work. This often includes a loft conversion or rear extension to add space, along with reconfiguring the layout to maximise rental potential.

Conversion from single let to HMO - Example floor plan

A loft conversion and or rear extension can amount to £40,000 - £65,000. Internal reconfigurations including the implementation of regulatory safety measures such as fire doors and upgraded electrics can range between £20,000 - £30,000. Additionally, communal area fit outs including decoration and furniture can cost up to £25,000 depending on the specification.

Altogether, your total investment, including purchase price and conversion would typically fall between £550,000 to £650,000.

In terms of the resulting rental income, a well designed six bedroom HMO in Sutton can achieve £850 - £1,000 per room per month depending on finish and location. This equates to a gross rental income of £5,100 to £6,000 per month or £61,200 to £72,000 per annum. This rental income can be increased if you opt to let your HMO to the Local Housing Authority where they typically pay above the market rents. Compared to standard single let properties, HMOs can generate gross yields of 9% - 11%, significantly higher than the 3-5% typically seen in buy to lets.

After factoring in running costs, management fees, maintenance, utility bills and mortgage repayments, net income can range from £35,000 to £55,000 per year. This can generate a ROI of 8% - 16% depending on your capital outlay.

The transformation of a standard property into a high-yielding HMO is both a strategic and rewarding investment. With careful planning, regulatory awareness, and effective management, an HMO can provide a robust income stream and long-term capital growth.

At Terracotta Property we have had a strong interest in the HMOs and have produced our own White Paper, which outlines both the benefits and constraints of investing within the market.