Why Private Equity is Turning to HMOs

Introduction

Private equity (PE) firms are increasingly shifting their focus to Houses in Multiple Occupation (HMOs) as a lucrative asset class. Traditionally, PE firms have invested in large-scale commercial real estate, multi-family housing, and institutional rental portfolios. However, HMOs are proving to be a high-yield alternative that aligns with current market trends, particularly as housing affordability declines and demand for quality rental accommodation surges.

The Attraction of HMOs for Private Equity

1. Higher Rental Yields Compared to Traditional Buy-to-Let

HMOs consistently generate superior rental yields compared to single-unit buy-to-let properties. While traditional rental properties yield an average of 4-5%, HMOs can achieve 9-10% or more, making them highly attractive for PE firms seeking strong cash flow returns.

2. Increasing Demand for Shared Housing

Rising property prices and a cost-of-living crisis have pushed more professionals and young renters towards high-quality shared accommodations. The demand for well-designed HMOs, particularly those offering en-suite rooms, smart home technology, and communal living spaces, is growing. PE investors see an opportunity to institutionalise and standardise the fragmented HMO market.

3. Scalability Through Portfolio Aggregation

Historically, HMOs have been dominated by small, independent landlords. Private equity firms are now stepping in to consolidate portfolios, acquiring multiple properties at scale and introducing professional management strategies to enhance operational efficiencies.

4. Attractive Tax and Financing Structures

HMOs can be structured within tax-efficient investment vehicles such as Real Estate Investment Trusts (REITs) or specialised property funds. Private equity firms are leveraging structured debt financing, refinancing options, and tax benefits (such as 0% corporation tax on rental income for REITs) to optimise returns.

5. Capital Recycling for Continuous Growth

The ability to refinance properties at a lower interest rate post-development allows PE firms to extract capital and reinvest in additional acquisitions. By using a mix of senior secured debt (e.g., 9% for acquisitions) and long-term institutional debt (e.g., 5% for refinancing), private equity players can efficiently scale their HMO portfolios.

Key Investment Strategies for PE in the HMO Sector

1. Technology-Driven Property Sourcing

PE firms are using proprietary technology to identify undervalued properties, predict planning approvals, and streamline acquisitions. Automated valuation models and AI-driven data analysis allow them to source and underwrite deals at an unprecedented scale.

2. Optimised Development & Conversion Processes

Efficient construction and refurbishment workflows are reducing turnaround times for HMO projects. Simultaneous planning and construction strategies enable faster delivery of rental-ready units, minimising vacancy periods and maximising rental income.

3. Institutionalising HMO Management

By introducing centralised property management platforms, standardised tenant screening, and smart home automation, private equity firms are professionalizing the historically fragmented HMO sector. This institutional approach ensures higher occupancy rates, reduced maintenance costs, and improved tenant retention.

4. Exit Strategies for Private Equity

PE firms investing in HMOs typically consider one of three exit strategies:

• REIT Conversion – Aggregating portfolios into a tax-efficient REIT structure.

• Institutional Sale – Selling stabilised HMO portfolios to pension funds and large property investors.

• Public Market Listing – Launching an HMO-focused property fund on public exchanges.

The Future of HMOs in Private Equity

With growing rental demand and strong yields, HMOs are becoming a mainstream asset class for private equity investors. As firms continue to scale their operations, implement efficiencies, and institutionalise management, the HMO market will likely see increased capital inflows and a shift towards professional, standardised investment models.

Conclusion

Private equity’s move into the HMO sector signals a significant shift in real estate investment. With higher yields, strong demand, and scalable investment opportunities, HMOs present a compelling alternative to traditional rental markets. As PE firms continue to drive innovation, efficiency, and institutional-grade management into this sector, HMOs are poised to become a major force in the evolving real estate landscape.