Is HMO Still Worthwhile?

Short answer: yes, Houses in Multiple Occupation can still outperform standard buy‑to‑lets in 2025, but only for investors who price compliance, management and running costs accurately. Average HMO yields continue to sit towards the top of the table in many locations, while demand for affordable rooms remains resilient. The trade‑off is tighter regulation, higher operating costs for “bills‑included” models and planning constraints in many towns and cities.

This guide sets out what has changed, what to check before you buy or convert, and how insurers view HMOs in 2025.

What counts as an HMO and when is a licence mandatory?

In England, most properties occupied by five or more people forming two or more households require a mandatory HMO licence, regardless of storeys. Local authorities can also introduce “additional licensing” for smaller HMOs. Always check with your council before you purchase or reconfigure a property.

Licensing typically bakes in minimum national bedroom sizes, with many councils setting higher local standards. It is essential to confirm that your intended layout meets the size and amenity rules, including kitchen and bathroom ratios.

Many high‑demand areas operate Article 4 Directions that remove permitted development rights. In these zones, even a small C3‑to‑C4 change of use may require planning permission. If you are buying in an Article 4 area, either acquire stock that is already configured and licensed or obtain permission as a condition of purchase.

2025 policy shifts that change the numbers

Two policy developments are particularly relevant to HMO appraisals:

1. Council tax and HMOs. In England, HMOs are generally valued as a single property for council tax rather than banding rooms individually. This helps owners budget more predictably. Actual liability still depends on your local authority’s band and annual charge, so verify the figure before exchange.
2. Tenancy reform. Reforms are progressing to abolish “no‑fault” Section 21 and strengthen possession grounds alongside wider private rented sector changes. Expect a phased rollout and new guidance. HMOs will be within scope, so plan for more process around tenancy changes and evidence‑based possession.

Do HMOs still lead on yield?

Across landlord datasets and lender panels, HMOs commonly deliver the highest average gross yields compared with single‑let flats and houses. Regionally, performance is often strongest where purchase prices are lower relative to room rents, such as parts of the North and Midlands and selected Welsh markets. Local outcomes vary, so rely on up‑to‑date comparables and granular room‑rent data rather than national averages.

On the demand side, affordability continues to underpin the room‑let market. In many towns and cities, advertised room rents remain elevated compared with pre‑2020 levels. Student and young professional demand is especially consistent near universities, hospitals, logistics hubs and commuter corridors.

Bottom line: gross yields for well‑located HMOs are still compelling in 2025. The question is whether net yields hold up once you include compliance, energy, council tax and management.

Costs that bite in 2025 and how to price them

Finance. Mortgage pricing eased from 2024 peaks, but specialist HMO products tend to be priced above vanilla buy‑to‑let. Stress‑test affordability at conservative rates and include arrangement fees and valuation costs in your appraisal.

Energy and “bills‑included” risk. HMOs often include utilities. Ofgem’s price cap applies to a “typical” household, and multi‑occupancy homes frequently use more energy than the typical profile. Build in headroom for winter peaks. Smart thermostats, zoning, thermostatic radiator valves and fair‑usage clauses help, but do not replace realistic budgeting.

Council tax. If the property is assessed as one dwelling, you will pay one bill for the whole HMO rather than room‑by‑room. Use the local band and current annual charge rather than national averages when modelling.

Repairs, compliance and management. Allow for licence fees, fire doors, alarm systems, emergency lighting where required, and periodic electrical and gas safety checks. Management fees of 10–15 percent of gross rents are common for full service. Self‑managing reduces cash costs but increases workload and compliance risk.

Rents and voids. Budget for tenant turnover, marketing and light refresh costs. Non‑student HMOs can see more frequent room changes than single‑lets, so a realistic void allowance is essential.

Worked example: five‑bed HMO (illustrative, England outside London)

Assume purchase at £300,000 and £40,000 on compliance, light conversion and furnishings. Total invested: £340,000.

• Rent: 5 rooms at £650 per month each = £3,250 per month or £39,000 per year gross.
• Operating costs (annual, indicative):
  Energy £2,600; water/sewer £700; broadband/TV £500; council tax £2,300; licence amortisation £240; management at 12% of gross £4,680; insurance £800; routine maintenance £1,500; voids/arrears at 5% of gross £1,950.
  Total operating costs: £15,270.
• Net operating income (pre‑finance, pre‑tax): £39,000 − £15,270 = £23,730.
• Gross yield on £340,000: 11.5%.
• Net yield (pre‑finance) on £340,000: about 7.0%.

If you finance 75% of the purchase price (£225,000) at, say, 5% interest‑only, annual interest is £11,250. Cash flow before tax is roughly £12,480 per year (about £1,040 per month).

These numbers are illustrative only. Your figures will vary with actual rents, energy usage, council tax band, lender pricing and the scope of works.

Where HMOs still work best

• Enduring demand pools. University towns, hospital clusters, logistics hubs and commuter belts with constrained affordability. Student HMOs remain meaningfully cheaper than purpose‑built student accommodation in many locations, preserving demand.
• Article 4 savvy. In controlled areas, either buy stock already configured and licensed or secure planning permission as part of your deal.
• Efficient layouts. Choose properties that hit room‑size minima with compliant escape routes and sufficient kitchen and bathroom capacity.

Common pitfalls in 2025

• Planning and licensing assumptions. Converting without checking Article 4 coverage or local licensing schemes can derail timelines and cash flow.
• Under‑pricing energy and council tax. The price cap is a benchmark for a typical household, not a six‑person HMO. Budget for higher usage and regional price differences.
• Tenancy reform blind spots. With Section 21 being abolished and a new redress landscape, you will rely more on strengthened possession grounds and evidence. Update processes now.
• Fire safety gaps. Many licences reference enhanced alarm categories, FD30 doors and protected escape routes. Battery alarms alone will not suffice.

What insurers look for on HMO risks

Specialist HMO landlord insurance is widely available, but underwriters typically want to see:

• Correct occupancy and licensing declared, with evidence the layout meets licence and national standards.
• Fire protection to a suitable standard for the building type and storeys: interlinked detection, appropriate alarm category, FD30 doors where specified and a documented fire‑risk assessment.
• Up‑to‑date safety documentation: EICR, Gas Safety Record and smoke/CO alarm checks in line with current regulations.
• Sensible management controls: vetted tenants, thumb‑turns to escape doors, clear responsibilities for cleaning and waste (often a licensing condition).

Getting these right improves insurability and can support more favourable terms. Under‑declaring occupancy, operating without a licence or ignoring improvement notices are red flags and can prejudice cover.

Decision checklist: is an HMO still worthwhile for you?

1. Demand: Do local room‑rent comparables support your target rents and occupancy?
2. Planning: Is the property in an Article 4 zone? If yes, do you have permission or a compliant fallback?
3. Compliance fit: Will the layout meet room‑size minima and fire standards without expensive structural work?
4. Numbers: Have you modelled energy, council tax and management with conservative assumptions and stress‑tested mortgage costs?
5. Tenancy reform: Are your processes ready for a Section‑21‑free system and a strengthened redress regime?
6. Insurance: Can you evidence fire strategy, safety checks and licence compliance to underwriters?

Verdict

HMOs are still worthwhile in 2025 for professional investors who buy the right property in the right area and run it to a high compliance standard. Yields remain superior on average, room‑let demand is robust in many markets, and council‑tax aggregation removes a long‑running uncertainty. HMOs are not passive investments, however. They demand rigorous management, realistic energy and tax budgeting, and close attention to licensing and fire safety.

How Goldcrest Insurance can help

• Pre‑purchase review: We flag planning, licensing and safety issues that affect insurability and operating costs.
• Right cover, right wording: We source HMO‑appropriate property owners’ liability, loss of rent, malicious damage by tenants and legal expenses cover.
• Compliance companion: We align policy conditions with your licence obligations and help you evidence fire, gas, electrical and alarm maintenance.

Get in Touch Today!

Disclaimer: This article is for general information only and does not constitute financial, tax, legal, planning or insurance advice. It is not a recommendation to invest. Always seek guidance from an FCA‑authorised financial adviser and a qualified tax professional. Insurance is subject to underwriting, policy terms, conditions and exclusions.