Understanding HMO Yields Compared to AST Returns

Understanding HMO Yields Compared to AST Returns HMO Yields: Higher Income Potential An HMO is a property rented out to multiple tenants who share communal areas like the kitchen or bathroom. Common examples include student housing or shared accommodation for young professionals. HMOs generally have higher rental income because: For example, a five-bedroom HMO in […]

February 3rd, 2025

Understanding HMO Yields Compared to AST Returns

HMO or AST Where Is The Better Rental Yield

When investing in rental properties, landlords often wonder which option to choose. Should they opt for a House in Multiple Occupation (HMO) or a standard Assured Shorthold Tenancy (AST)?

Each option has its benefits and challenges, but the ultimate decision often boils down to one key factor: yield.

In this article, we explore whether an HMO can deliver better returns than a standard AST. We also examine the considerations investors should weigh up.

HMO Yields: Higher Income Potential

An HMO is a property rented out to multiple tenants who share communal areas like the kitchen or bathroom.

Common examples include student housing or shared accommodation for young professionals. HMOs generally have higher rental income because:

Multiple Rent Streams: Each room is rented out individually. These rates often add up to more than a single tenancy would.
Demand in Key Areas: In areas with a strong demand for affordable shared housing, HMOs can command higher occupancy rates.

For example, a five-bedroom HMO in a city center could generate monthly rents from five tenants. This could potentially double or triple the income of a standard AST for a similar property size.

AST Yields: Simpler, but Often Lower

A standard AST is the most common rental agreement in the UK. In this arrangement, a single tenant or family rents the entire property.

While ASTs typically offer lower yields compared to HMOs, they come with advantages:

Lower Management Complexity: Managing one tenant or household is simpler than coordinating multiple individual agreements.
Fewer Legal Requirements: HMOs face more regulations. These include mandatory licensing in many areas. They must comply with fire safety and specific room size standards.
Lower Turnover: Tenants in ASTs often stay longer, reducing void periods and re-letting costs.
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Key Considerations When Comparing Yields

Upfront Costs: HMOs often require more initial investment for conversions, licensing, and furnishing individual rooms.
Ongoing Costs: HMOs typically have higher operating expenses due to utilities (often included in rent), maintenance, and property management fees.
Void Periods: HMOs can mitigate income loss by having multiple tenants. However, voids in one or two rooms can still impact profitability.
Regulations: HMO regulations are stricter and vary by location. Compliance is critical and can add to operating costs.
Management Effort: HMOs demand more hands-on management or higher property management fees, whereas ASTs are often more passive.

HMOs come with more regulatory requirements. They require greater focus. As a result, many lenders will want a landlord to have experience on letting a standard AST property. This experience is necessary before borrowing for an HMO purchase. It is the same reason why HMO mortgages tend to be slightly higher cost compared to a standard AST let.

HMOs tend to outperform ASTs in terms of yield in areas with:

High tenant demand, such as university towns or major cities.
Affordability challenges, where tenants prefer cost-effective shared accommodation.
Experienced landlords or property managers who can handle the complexity.

When ASTs Make More Sense

A standard AST might be more suitable for:

Properties in suburban or family-oriented areas where demand for shared housing is low.
Investors looking for a more passive income stream.
Those who prefer lower regulatory and management burdens.

Conclusion

While HMOs often deliver higher yields than standard ASTs, they require more effort, investment, and risk management.

The yield on both AST and HMO can vary massively depending on where the property is. This means the decision on which way to go depends on many factors.

If maximising yield is your primary objective, an HMO could be a lucrative choice. You must be prepared to navigate the challenges. However, if you prefer simplicity and steady, hands-off returns, a standard AST might be a better fit.

There are financing solutions for either a standard buy to let. There are also options for an HMO. We are happy to talk through both of these solutions.

LET’S TALK HMO OR AST BORROWING

David Farmer

Over 30 years finance experience. Former credit underwriter, founder of Lime Finance Solutions in 2012. Multi Award winning business, featured in Sunday Telegraph, Parliamentary Review, Sky TV and others. Regular contributor to press and business associations. FCA Authorised, ALIBF Qualified. Specialist in Commercial Mortgages, Business Lending, Property and Development Finance.