The aim of this study was to investigate the effectiveness of specialized hospital treatment vs. outreach treatment of patients with mental retardation and serious mental illness. A total of 50 patients were randomly assigned to either the hospital treatment (n = 25) or the outreach treatment group (n = 25). The outcome measures included psychiatric symptoms, family burden, costs and hospital admissions. At most observation points (up to 28 weeks) and at all endpoints the two groups were equivalent with regard to psychiatric symptoms. The burden on carers did not increase significantly during the outreach treatment. Treatment costs were lower for the outreach treatment. Of the 25 patients who received outreach treatment, four had to be admitted to the specialized hospital. Aggressive behaviour, social competence and number of previous psychiatric hospitalizations were found to be predictors of treatment outcome. It is concluded that outreach treatment represents an effective and efficient alternative to hospital treatment for patients with mental retardation and psychiatric disorders.