Research reveals cost benefits to tenants of living in an HMO

Research reveals cost benefits to tenants of living in an HMO

15:02 PM, 20th October 2022, About 4 months ago 7

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Renters living in a one-bedroom flat can combat the cost of living by moving into an affordable shared house, while HMOs provide landlords with a confidence-building financial buffer against increasing portfolio expenses.

We recently conducted an analysis which revealed that renting a high-quality room in an HMO is more than 50% cheaper compared to single-tenancy letting.

  • Renting a room vs 1-bed flat could save tenants at least £3,660 a year
  • The average cost to rent a one-bedroom flat is now £708 per month
  • Average bills on minimum usage for this property size is an additional £305 per month
  • In comparison, tenants pay an average monthly room rent of £606, bills included
  • HMOs generate landlords up to four times the rental income

 This is welcome news to some tenants, and also landlords as the demand for HMO accommodation is likely to soar.

With tenants already spending 66% of their wage on rent and the recent 27% rise in energy costs, ‘bills included’ has become the most searched for term as people look for certainty in their monthly household costs.

Figures supplied by Zoopla exclusively to PPP on 1st September 2022 reveal the current cost of renting a one-bedroom flat across the UK is £708 per month on average before bills – at least £495 every region and as high as £1,651 in London.

When the average cost of minimum usage bills is factored in for this size of property – including utilities, council tax and TV licence but excluding extras such as insurance, broadband and TV subscriptions – renting a room in an HMO is more than £50% cheaper, equating to savings of more than £305 per month.

According to the latest figures from SpareRoom, HMO tenants spent an average of just £606 a month renting a room including bills.

Region Median monthly rent, 1-bedroom flat, no bills* Median monthly rent, 1-bedroom flat, plus bills** Average room rents, inclusive of bills*** % increase
London £1,651 £1,956 £650+ 200%+
South East £875 £1,180 £600-£649 97%+
East of England £800 £1,105 £550-599 101%+
South West £730 £1,035 £550-599 88%+
Wales £625 £930 £450-499 106%+
North West £600 £905 £450-499 101%+
Yorkshire & The Humber £550 £855 £450-499 90%+
West Midlands £550 £855 £450-499 90%+
Scotland £550 £855 £500-549 90%+
East Midlands £550 £855 £450-499 90%+
Northern Ireland £523 £828 £400-449 107%+
North East £495 £800 £400-449 100%+

Add in Rightmove’s forecast of an 8% rise in rents by the end of 2022, and the search is on for budget friendly rental accommodation.

Security for landlords and tenants

The ‘cost of living crisis’: it’s a phrase many of us have become accustomed to. We know bills are inevitable – and that they’re going up – with it becoming more expensive to heat our homes, shop at the supermarket and fill up our cars.

The rate at which rental costs are rising is also worrying, especially when you compare sets figures compiled less than two years apart. At the end of the 2020 financial year, the Office for National Statistics found a household with a median income in England could expect to spend 23% of their earnings on median private rent.

Fast forward to February 2022, and agent Benham & Reeves says renters in England are spending 66% of their wage on rent. A room in an HMO, however, offers tenants a fixed monthly bill with substantial savings, allowing tenants to manage their finances more effectively.

Benefits for landlords

From an investment perspective, HMOs are known for their increased running costs and for landlords offering bills included, there are energy expenses to factor in. The latest figures, however, show that handsome yields in the HMO sector are providing landlords with a confidence-building financial buffer.

The Q1 2022 Landlord Panel research from BVA BDRC showed landlords with HMOs continue to achieve the highest rental yields available, at an average of 6.8%. In addition, Paragon Bank’s latest HMO Report discovered 42% of HMO landlords achieved net yields of over 10%, with 64% enjoying yields in excess of 8%.

Encouragingly, our PPP HMOs in every UK region achieved a monthly rental in excess of those advertised on Spareroom, with many regions generating rents at least 10% above the Spareroom average. Yet the rent increases imposed by our landlords is below the national average.

HMOs are an attractive option for both tenants and landlords, not just in the current climate, but as a tenure and investment of choice.

The multiple occupancy model not only makes efficient use of the limited housing stock, but provides affordable and high-quality rooms for an increasingly mobile workforce.

Some renters don’t want to lay down roots just yet and as and when they do, having lived in an HMO would have given them the opportunity to save much more towards the ever-soaring deposit needed.

Compared to the size of one-bedroom flats, which are getting smaller and smaller, particularly with the rise in micro apartments, tenants would likely be getting more for their money too. Most rooms within the PPP network are large double rooms with en-suite bathrooms.

For landlords, HMOs continue to provide the best returns, generating up to four times the amount of rental income. And even though investors have to consider a bigger rise in running costs due to bills being included, the exceptional profit margins mean their portfolios are built to withstand rising running costs and interest rates.

For more information click on my profile and drop me a personal message.

*Zoopla, 1st September 2022

***Spareroom.co.uk between April and June 2022


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Comments

Bristol Landlord

16:26 PM, 20th October 2022, About 4 months ago

Interesting article except for one major flaw; all my rentals are HMOs except I never offer bills included. I have no control over how frugal or wasteful are the tenants. The author should have included a column of “Average room rents, exclusive of bills” as the article is only partially useful without it.

Old Mrs Landlord

17:16 PM, 20th October 2022, About 4 months ago

Reply to the comment left by Bristol Landlord at 20/10/2022 - 16:26
The authors are not objective: they have an interest in you becoming one of their franchisees so I suggest you read the post with that in mind.

Mark C

9:39 AM, 21st October 2022, About 4 months ago

Adding to my HMO portfolio is nigh on impossible in the current climate. Suitable houses for conversion to HMO (we have an en-suite model for our HMO's) are 30% more expensive than 2 years ago, conversion costs have increased, mortgage rates are prohibitive and our energy bills have trebled. All this significantly erodes the ROE.
On the flip side our tenants are insulated from these increases and are very happy.

David

12:50 PM, 21st October 2022, About 4 months ago

I wonder if Emma's middle name is Pollyanna

Emma Hayes, MD - Platinum Property Partners

14:38 PM, 24th October 2022, About 3 months ago

Reply to the comment left by Bristol Landlord at 20/10/2022 - 16:26
Hi Bristol Landlord, that's great that you're operating a non-inclusive model, how have your housemates responded to the rising costs? The majority of the HMOs in the Platinum network are bills included which has meant our landlords have needed to increase costs as they don't have control over household usage - of course we will see what happens next spring when the cap ends...! Fingers tightly crossed for some smart initiatives from Rishi!

Emma Hayes, MD - Platinum Property Partners

14:47 PM, 24th October 2022, About 3 months ago

Reply to the comment left by Old Mrs Landlord at 20/10/2022 - 17:16
Hi Old Mrs Landlord, yes we absolutely write from an HMO landlords perspective however we have used external data and sources which demonstrates the high demand of quality HMOs in spite of rising rents. Ultimately we believe in the need of a healthy and diverse housing sector with different options and rent levels available for renters. We have sight over a high number of HMOs across the UK and although some landlords are understandably very concerned about the current environment, we hope this brings spreads some positivity.

Emma Hayes, MD - Platinum Property Partners

14:49 PM, 24th October 2022, About 3 months ago

Reply to the comment left by Mark C at 21/10/2022 - 09:39
Hi Mark C, undoubtably costs have increased over the years however hopefully you have benefited from increased rents and appreciation. Who knows what the new PM will bring to the housing market however we hope your strategy is able to evolve in line with the recent changes leaving you in a position to continue growing!

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