HMOs producing highest yields in buy to let, says mortgage lender

Homes in Multiple Occupation produced average yields of 8.9 per cent in 2017, the highest of all buy to let property types according to Mortgages for Business.

Even so, this is the first time that yields for this type of property have dipped below nine per cent since the company began monitoring the market in 2011.

Multi-units, such as blocks of flats, came a close second in 2017 generating yields of 8.1 per cent compared to 8.3 per cent the year before. 

By comparison ‘vanilla’ single properties produced lower yet more consistent yields averaging 5.6 per cent in 2017 - around the same as in previous years.

The average value of a vanilla buy to let property in 2017 was £305,283, a 19 per cent decrease on the average in 2016 of £375,409. 

Mortgage for Business says these results suggest that that landlords are seeking lower value properties and, anecdotally, are perhaps looking further north for their acquisitions where prices are cheaper. 

The benefits of this strategy include less stamp duty, future capital growth, and scope for rental increases which thus allow for slightly higher yields. 

Jeni Browne, sales director at Mortgages for Business, says: “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, I would suggest, 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.”

Whilst there was no change in the number of lenders operating in the buy to let sector in the final quarter of last year, product numbers continued to rise. 

In fact, there has been a 444 per cent increase in buy to let mortgage products since 2011.

“It’s widely anticipated that buy to let lending will contract this year in response to the tax and regulatory measures being imposed on the sector. I would expect product numbers to peak in Q1 2018 and we have already seen some lenders trimming their ranges, leaving a core of great products which have been designed to reflect the changing needs of landlords” adds Browne.