Buy to let investment: multi-unit freehold blocks versus HMOs

Yields for HMOs and multi-unit freehold blocks are heading in divergent directions, threatening HMOs’ status as the best-performing asset class.

In the current market, buy-to-let investors are finding that the choice between MUFBs (multi-unit freehold blocks) and HMOs (houses of multiple occupation) is much less clear cut than some might think.

According to figures released by buy-to-let broker Mortgages for Business, yields for these two residential asset classes are heading in unexpected directions – undermining any notion that HMOs are the safer bet. 

But before we examine the comparative yield trends, let’s define the terminology.


A house of multiple occupation has a flexible definition, but most resemble a student flat-sharing arrangement.

To qualify as an HMO, there must be a minimum of three people with shared access to kitchen/bathroom facilities. Importantly, the group cannot be from one ‘household’ – which would mean one family sharing facilities.

A larger HMO with five or more unrelated occupants sharing facilities would probably have to be rented out under licence.

Local authorities can answer all questions about HMO licensing, and it would be wise to check this important regulatory consideration before entering into any contractual arrangements. 


A multi-unit freehold block is a common arrangement for flat complexes. Here, a larger property is divided into multiple dwellings – for instance, several separate bedsits without access to shared facilities. So each unit would include a kitchen and bathroom for the exclusive use of each tenant. 

Gross yields for landlords

The Buy-to-let index report from Mortgages for Business – which collates their mortgage transactions from 2011 – shows returns from MUFBs have now surpassed those of HMOs.

At a healthy 9.3%, MUFB figures for the fourth quarter of 2014 showed their highest-ever gross yield for UK landlords.

Rising from the 8.6% posted in the preceding quarter, this upward trend has been attributed to ‘economies of scale’ by many experts. 

HMO figures for rental returns in the fourth quarter of 2014 came in at 9%, marginally exceeding the 8.9% reported for the third quarter. However, it should be noted that both these yields are down from previous levels, with HMOs achieving as much as 9.6% in first-quarter figures for 2014. 

Giving his verdict on this unexpected surge in MUFB yields, Mortgages for Business MD David Whittaker explained: “The fact that yields on multi-units have overtaken HMOs is surprising but can be attributed to a larger proportion of transactions for larger multi-units in the quarter."

Market trends

It’s also clear from the report that HMOs are still offering investment returns one third higher than what can be achieved in the market with vanilla (standard) and semi-commercial properties, and the majority of buy-to-let (BTL) investors still believe HMOs will continue to offer the best returns. 

These updated figures reveal that vanilla BTLs appear to be retreating to performance levels recorded at the beginning of 2014. Thus, the latest gross yield for a typical vanilla/standard BTL unit is 6.3% for the final quarter, which compares with 5.9% in the preceding quarter. 

However, the performance of semi-commercial property proved to be an anomaly, with yields soaring to 9.7% during the third quarter, only to slump back to 6.4% in the final quarter. 

Prospects for HMOs

Commenting more broadly on the report, David Whittaker said: “Rental yields for HMOs and MUFBs are typically higher than those for vanilla buy to let. For a multitude of reasons – not least stagnant wage growth for half a decade – many tenants simply can’t afford an enormous flat with a spare bedroom.”

Considering the implications of this scenario for future market trends, he added: “The attraction for many of renting a room rather than a whole property will ensure that there is a steady yield-boosting demand for HMOs over 2015.”

LTV falls

There has been a reported decrease in LTV (loan to value) ratios, which has affected BTL landlords right across the board. For a vanilla buy-to-let mortgage, the fourth quarter average LTV dropped to 63%, having registered 68% in the third quarter. 

However, HMOs have been hit the hardest, returning 64% in the last quarter, down from a lofty 71% in the previous quarter. Meanwhile, MUFBs and semi-commercial properties have each recorded the same fall in average LTV – 68% in the third quarter, dropping to 64% in the final quarter. 

General outlook

Putting the results into perspective, Whittaker said: “While property prices have slowed a little in recent months, landlords have on the whole seen enormous price growth compared to the indecisive direction of property prices a few years ago.’”

Speculating about what this might mean for the future of the BTL formula, he added: “Looking ahead, this might spur some landlords to expand their existing portfolios further and diversify as a result of the high yields on non-standard properties.”

Melanie Luff

About the author

Mel wrote for all titles in the Dynamis stable including, and as well as other global industry publications.


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