The major flaw with North East HMO Developments

August 27, 2026

If you spend any time in Facebook property groups, you will know exactly the type of HMO development opportunity we are talking about. Newcastle, Hartlepool, Sunderland, Middlesbrough and Durham seem to appear constantly, usually with a cheap purchase price, a glossy refurbishment package and a spreadsheet showing rental figures that make the investment look almost impossible to ignore.

We hear the same thing from investors all the time: “The numbers look really good.”

That is usually the point where we start pulling the deal apart.

We have been developing and managing HMO properties for decades, both for investors and for ourselves, and one thing becomes very obvious when you have seen enough of these deals. A spreadsheet can make almost any property look profitable if the person putting it together is optimistic enough with the rent and conservative enough with the refurbishment cost.

That is exactly what we are seeing repeatedly across parts of the North East.

The cheap house is what attracts the packagers

The fundamental attraction is obvious. Property is cheap.

That makes these areas ideal territory for newer developers and deal packagers because the starting purchase price is low enough to make almost any development appraisal look attractive. Buy a relatively inexpensive house, add a refurbishment package, project a high room rent and there is suddenly plenty of room for a sizeable developer margin or sourcing fee while the investor is still being shown what looks like an excellent yield.

There is nothing clever about it.

The issue is that the low purchase price can hide a very expensive finished product once every margin, fee and development cost has been added on.

We regularly see investors being sold the idea that they are getting an excellent deal simply because the original property is cheap. That only works if the completed HMO is genuinely worth what they are paying and can genuinely produce the income being quoted.

Quite often, that is where the wheels start coming off.

Look at the rents they are quoting

This is probably the easiest way to test one of these opportunities.

Take the room rent the developer or deal packager is using in the investment appraisal, then look at existing HMO rooms in the same area.

Not a neighbouring city. Not somewhere five miles away with a completely different tenant base. The same area.

You do not need to be an experienced property developer to work out whether the numbers make sense.

If existing rooms are renting at £450, £475 or £500 per month and somebody is telling you their new development will comfortably achieve £700 or £750, you need to ask a very simple question.

Why?

A fresh refurbishment helps. An ensuite helps. Good furniture helps. None of those things suddenly change what tenants in that area can afford to pay.

We have seen North East HMO opportunities where the projected room rents appear to be around 40% or 50% above the existing market.

That is not a small forecasting error.

That can completely change the economics of the investment.

The market does not care what was written in the brochure

This is where investors can get into real trouble.

The purchase completes. The refurbishment gets finished. The property goes onto the market at the rental figure used in the original appraisal.

The enquiries do not materialise.

The rent gets dropped.

Then it gets dropped again.

Before long, the investor discovers that the headline yield they were originally shown was based on a rent that the local market was never going to support.

We have seen investors on property forums describing exactly this situation, sometimes saying they feel they were completely misled by the developer or deal packager they bought from.

The frustrating part is that a lot of this could have been spotted before the property was even purchased.

All they had to do was check what comparable rooms were actually renting for.

Oversaturation is becoming a serious problem

The second issue is even harder to fix once you own the property.

There are simply too many people developing HMOs in some of these locations.

We have heard from investors who say there were already five or six HMO properties on the street when they purchased. By the time their own refurbishment had finished, another two or three had appeared.

That is the danger of following the crowd into cheap property areas.

Every developer has seen the same thing you have seen.

Every deal packager has found the same cheap housing stock.

Every investor has been shown a spreadsheet telling them the demand is fantastic.

Before long you end up with street after street where landlords are competing for the same group of tenants.

And they are not even competing using realistic rents.

Many of them have bought the property using rent figures a developer or deal packager told them would be achievable, sometimes at levels that appear to be around 50% above the actual local market.

Now you have several landlords on the same street, all needing inflated rents to make their investment appraisal work.

It is an absolute car crash.

Article 4 is spreading for a reason

This is why we keep talking about HMO oversaturation.

Councils do not start bringing in tighter planning restrictions because they are worried there are too few HMOs.

They do it when concentrations start becoming a problem.

Newcastle already has areas where Article 4 restrictions affect HMO conversions, and similar concerns have been spreading across other parts of the North East.

That should tell investors something.

If local authorities are becoming increasingly uncomfortable with the number of HMOs appearing in certain streets and neighbourhoods, investors should probably be asking themselves whether piling another one into the same area is really the clever investment strategy they have been sold.

Cheap houses attract developers very quickly.

The problem is that tenant demand does not automatically grow at the same speed.

Deprivation cannot simply be ignored

There is another issue that rarely gets mentioned in the sales brochure.

Many of the areas being heavily promoted for cheap North East HMO development have high levels of deprivation.

That does not mean every street is bad, and it certainly does not mean a successful HMO cannot operate there.

It does mean you need to understand the tenant market properly.

A low house price is not some mysterious market inefficiency waiting for an investor to discover it. There is normally a reason property is cheap.

If local wages are lower, tenant affordability is lower and the area has a large amount of competing rented accommodation, there is a limit to what somebody will pay for a bedroom regardless of how nice the refurbishment is.

You cannot install a fashionable kitchen, put some grey furniture in the bedrooms and suddenly turn a £450 room market into a £700 room market.

Yet that appears to be exactly what some investment appraisals are assuming.

Then there is the refurbishment figure

This is probably the other part of these opportunities that worries us most.

We see refurbishment budgets that look far too low for the work supposedly being carried out.

A proper HMO refurbishment is expensive.

You are dealing with electrics, plumbing, heating, fire safety, alarms, emergency lighting, fire doors, bathrooms, kitchens, drainage, flooring, decoration, insulation, windows, structural work, building control, furniture and sometimes extensions or significant layout changes.

None of that suddenly becomes cheap because the property happens to be in Sunderland or Hartlepool.

Yet the refurbishment number is one of the easiest figures to manipulate in an investment appraisal.

Lower the refurbishment cost by £20,000, £30,000 or £40,000 and the headline return immediately looks better.

Then the investor buys the property and the variations start.

Extra electrical work.

Additional plumbing.

Unexpected structural problems.

More fire-safety work.

Building-control changes.

Suddenly the refurbishment that looked unbelievably cheap on the brochure is no longer cheap at all.

The investor is already committed by that point.

The developer has already made their money

This is the part investors need to think about very carefully.

If the developer or deal packager makes their money when the property is sold and the refurbishment package is agreed, their financial outcome can be very different from yours.

You are the person who has to own the HMO afterwards.

You are the person who needs the room rents to materialise.

You are the person who has to deal with voids, competition and lower-than-expected income.

You are the person left holding the asset if the local HMO market becomes oversaturated.

A developer can move onto the next property.

You cannot.

That is exactly why investors should be far more interested in what happens after the development than how attractive the initial spreadsheet looks.

Five HMOs become eight very quickly

This is what investors underestimate when they buy into a location where everybody else is developing.

You inspect a street and see four or five HMOs.

That might already make you uncomfortable.

Six months later there can be seven or eight.

Another developer has bought one.

A landlord has converted another.

A deal packager has found one around the corner.

Suddenly the supply has increased by 40% or 50% while the number of professional tenants looking for rooms has barely changed.

That is how oversaturation happens.

It does not need to take ten years.

It can happen between the day you buy the property and the day your refurbishment finishes.

We would rather pay more for the right property

This is why our own approach has never been based around finding the cheapest house we can possibly buy.

Cheap property does not excite us.

Good HMO economics do.

We want to understand exactly who is going to rent the rooms, what competing accommodation exists, what tenants are currently paying and whether the area has enough employment and professional demand to support another HMO.

We also avoid developing in areas where HMO saturation is already becoming obvious.

That sometimes means paying more for the original property.

So be it.

We would rather spend more money on the right house in the right location than save £30,000 or £40,000 buying something in an area where we are going to spend the next ten years competing with half the street.

The cheapest HMO is very rarely the cheapest HMO once you own it.

Do not buy the spreadsheet

This is the biggest lesson from the North East HMO development market.

Do not assume an investment is good because the yield looks high.

Check the rent.

Check the street.

Check the number of competing HMOs.

Check the planning position.

Check the refurbishment budget.

Then check the numbers again.

If the entire investment only works because the rooms need to achieve 50% more than comparable rooms nearby, there is your problem.

If the refurbishment cost looks impossibly cheap, there is probably another problem waiting behind it.

And if there are already six HMOs on the street while another three are being developed, you need to seriously question why you would want to become number ten.

North East property is not the issue.

The issue is the huge number of inexperienced developers and deal packagers who have flocked there because houses are cheap, margins can be attractive and investors are easily impressed by headline yields.

A cheap purchase price, an inflated rent and a lowballed refurbishment budget can make almost any HMO look fantastic on paper.

Unfortunately, you cannot collect rent from a spreadsheet.