Investment in Multi-Unit Properties by Buy-to-Let Landlords

In recent years, multi-unit properties have emerged as a compelling investment opportunity for buy-to-let (BTL) landlords seeking to enhance their rental yields and diversify their portfolios. These properties, including Multi-Unit Freehold Blocks (MUFBs) and Houses in Multiple Occupation (HMOs), are attracting significant attention due to their ability to generate higher returns.

With about 5.4 million households renting in the UK and a sustained housing shortage, multi-unit properties present an attractive alternative for both investors and tenants [1].  

Understanding Multi-Unit Properties

Multi-unit properties are single buildings subdivided into multiple units, each rented out independently. This category typically encompasses:

• Multi-Unit Freehold Blocks (MUFBs): Buildings with several flats under one freehold title.

• Houses in Multiple Occupation (HMOs): Properties with individual rooms rented out, often with shared common facilities such as kitchens and bathrooms.

Multi-unit properties allow landlords to accommodate multiple tenants within a single property, making it a cost-effective and high-yield investment.  

Advantages of Investing in Multi-Unit Properties

Enhanced Rental Yields

Whereas average rental yields were estimated to be 5.6%, average HMO rental yields were estimated to be c. 10% [2]. MUFB yields are thought to be similar to HMOs.

Such data underscores the potential for higher returns when investing in multi-unit properties compared to traditional single-let investments.

Diversified Tenant Base

By renting to multiple tenants in one building, landlords can cater to a broader demographic, including:

• Families seeking affordable housing.

• Professionals needing proximity to urban centres.

• Students requiring accommodation near universities.

Such diversification reduces dependency on a single tenant type of rental property, facilitating greater financial stability for the landlord.

Cost Efficiency

Operationally, multi-unit properties consolidate costs. Maintenance and management activities are centralised, reducing the time and expense associated with managing multiple single-let properties.

Reduced Vacancy Risk

With multiple units, landlords are less exposed to vacancy risks. Income from occupied units can to some extent offset losses from vacant ones, ensuring steadier overall cash flow. This resilience is particularly valuable in uncertain economic times.  

Market Trends Supporting Multi-Unit Investments

Rising Rental Demand

The rental market is growing steadily, driven by increasing demand for affordable housing. 5.4 million households rent in the UK. Many prefer the affordability of HMOs or smaller flats within MUFBs.

Housing Shortages

The UK’s urban centres face severe housing shortages, exacerbated by a rising population. Multi-unit properties maximise space usage in high-demand areas, offering practical solutions for housing more tenants without sprawling new developments.

Investment Attractions

Institutional investors have recognized the profitability of multi-unit properties. In the six months leading up to September 2024, UK multifamily capital values increased by 0.4%, driven by a 2.5% rise in rental values. Occupancy rates remained robust, averaging 96% during this period. This stability and growth highlight the sector's resilience and attractiveness to investors [3].  

Key Considerations for Investors

While multi-unit properties offer numerous benefits, prospective landlords should also be aware of the complexities and nuances of this investment type.

Regulatory Compliance

MUFBs and HMOs are subject to stricter regulations compared to single-let properties. For instance:

• HMO Licensing: HMOs require specific licenses, often necessitating adherence to higher safety and quality standards.

• Fire Safety: Regulations mandate fire alarms, fire-proof doors, fire extinguishers and clearly marked emergency exits.

• Energy Efficiency Standards: Properties must meet Minimum Energy Efficiency Standards (MEES), a crucial consideration as the government continues to prioritise environmental sustainability.

Financing Challenges

Securing mortgages for multi-unit properties often involves navigating stricter lending criteria. Typically, only specialist lenders provide such mortgages, but investors may need:

• Larger deposits (often 25% or more).

• Proof of property management expertise.

• Detailed rental income forecasts.

Management Complexity

Managing multiple tenants across several units requires robust systems for maintenance, rent collection and tenant relations. Many landlords opt for professional property management services, which can cost 10-15% of rental income but potentially offer greater efficiency and peace of mind.

Real-World Examples: Success in Multi-Unit Investments

To illustrate the potential of multi-unit investments, consider these examples:

Example 1: A Multi-Unit Freehold Block in Manchester

A landlord purchased a Victorian property in Manchester for £800,000 and converted it into six flats under one freehold title. With each flat generating £800 monthly rent, the landlord secured a gross rental income of £57,600 annually, achieving a gross rental yield of 7.2%.

Example 2: HMO in Birmingham

In Birmingham, an investor purchased a five-bedroom property for £300,000 and converted it into an HMO. Renting rooms individually at £500 each generated £2,500 monthly rental income, totalling £30,000 annually and achieving a 10% gross yield.

Both cases highlight the significant returns possible with strategic investments in multi-unit properties.  

Recent Developments in the UK Multi-Unit Property Market

The landscape of multi-unit property investments continues to evolve, with several key trends emerging:

• Corporate Dominance in Buy-to-Let: The Financial Times reports that limited companies now account for a significant portion of buy-to-let purchases, as landlords leverage tax efficiencies associated with corporate ownership.

• Recovery Post-COVID: The UK property market is recovering faster than many European counterparts, driven by strong rental demand and resilient house prices, as noted by the Financial Times.

These developments underscore the resilience and profitability of multi-unit investments, even in the face of broader economic uncertainty.  

A Strategic Move for Savvy Landlords

Multi-unit properties present an attractive opportunity for UK landlords looking to maximise returns and mitigate risks. With their higher yields, diversified tenant bases and cost efficiencies, these properties align well with current market demands and rental trends.

However, successful investment requires careful planning. Landlords must navigate the demanding regulatory landscape, secure specialist financing and consider professional management to maximise returns. By taking a strategic, informed approach, investors can position themselves for success in this evolving market.

Whether you are a seasoned investor or new to property, multi-unit investments could be the key to unlocking higher yields and greater resilience in today’s competitive rental market.  

FAQs:

1. What are multi-unit properties and how do they differ from traditional single-let properties?

Multi-unit properties are buildings subdivided into multiple self-contained units, or individual rooms with certain shared common facilities such as kitchens and bathrooms. The former are referred to as Multi-Unit Freehold Blocks (MUFBs) and the latter as Houses in Multiple Occupation (HMOs). Unlike single-let properties rented to a single tenant or household, multi-unit properties cater to multiple tenants under one roof, offering higher rental yields and diversified income streams.

2. What are the advantages of investing in multi-unit properties compared to single-let properties?

Multi-unit properties often deliver:

• Higher rental yields: HMOs can achieve yields of 10%, compared to 5.6% for standard buy-to-lets.

• Diversified tenant base: Tenants include families, professionals and students.

• Cost efficiency: Maintenance and management are centralised, reducing operational expenses.

• Lower vacancy risk: Income from occupied units offsets losses from vacant ones, ensuring steadier overall cash flow.

3. What trends in the UK rental market make multi-unit properties an attractive investment?

The growing demand for affordable rental housing and housing shortages create high demand for multi-unit properties. In addition:

• Institutional investors are increasingly investing in this asset class due to its stability.

• UK multifamily capital values increased by 0.4% in six months to September 2024, with occupancy rates averaging 96%.

4. What challenges should landlords consider when investing in multi-unit properties?

Key challenges include:

• Regulatory compliance: HMOs require specific licensing, and adherence to strict fire safety, energy efficiency and other building regulations and standards.

• Financing hurdles: Mortgages for multi-unit properties often demand higher deposits and detailed rental forecasts.

• Management complexities: Coordinating multiple tenants requires robust systems or professional property management services.

5. How can landlords finance multi-unit property investments?

Financing options for multi-unit properties typically involve:

• Approaching specialist lenders familiar with MUFBs or HMOs.

• Meeting higher deposit requirements (often 25% or more).

• Demonstrating experience in property management and providing detailed income projections.