HMOs lead rental yields as economic and regulatory pressures rise

Houses in multiple occupation (HMOs) prove to be most profitable for landlords as economic pressures mount, according to a new survey.

Data by Pegasus Insight reveals HMOs continue to outperform, delivering the highest rental yields in the private rented sector at 7.3%.

The firm says some landlords are beginning to feel the strain as regulatory pressures increase.

Margin for error is narrowing

According to the findings, 85% of landlords continue to report their lettings activity as profitable, a slight decrease of 4% compared with the previous quarter.

Meanwhile, the proportion reporting a financial loss rose by 2% in Q4, and average achieved rental yields slipped to 6.4%, easing back from the average of 6.6% recorded in Q3.

HMOs remained the most profitable, with rental yields of 7.3%, but landlords with standard property portfolios are more exposed as costs continue to rise.

Profits are weakened

Mark Long, managing director and founder of Pegasus Insight, said: “The key takeaway from Q4 is not that profitability has weakened significantly, but that it is becoming more uneven. Overall returns remain close to recent highs, but the margin for error is narrowing for a growing proportion of landlords.

“We’re seeing a clearer separation between business models. Higher-yielding, more intensively managed portfolios, particularly HMOs, continue to provide a degree of insulation, while more traditional portfolios have less flexibility as costs and complexity remain challenging.

“The risk to buy-to-let landlords is not a sudden deterioration in performance, but a more gradual erosion of resilience. In an environment where yields are no longer rising, the ability to absorb further regulatory, operational or economic pressures will increasingly depend on the strength of landlords’ financial structures and the scale and mix of their property portfolios.”

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