HMO Investment Guide: What You Need To Know
A guide to HMO property for landlords
HMO, meaning 'Houses in Multiple Occupation', are an appealing prospect for many private landlords in the property sector. As a property investor, there are few opportunities more lucrative than acquiring desirable HMOs to secure high annual income. By maximising your sources of rental income, HMOs give you a greater return on investment and also provide some added protection against arrears.
If you're considering becoming an HMO landlord or investing in HMO investment properties, let's take a look at the top things you need to know to help make your decision more informed and hopefully, more successful in terms of income potential.
What is an HMO?
The exact definition of an HMO can vary. However, the term generally means a property that has three or more tenants who are not related and share key facilities such as bathrooms or kitchens.
According to GOV.UK guidance an HMO is:
- A property tenanted by at least 3 people living there full time, forming more than 1 household (where the household is defined by a single person or members of a family who live together).
- A property where the toilet, bathroom or kitchen facilities are shared by these tenants.
A 'large' HMO, which carries different regulations, is defined by:
- A property where at least 5 tenants live from more than 1 household
- Shared toilet, kitchen or bathroom facilities with other tenants.
Commonly, HMOs take the form of student or graduate flatshares - where landlords can maximise the desirability of a city-centre or university location by offering their property to multiple tenants.
Crucially, however, is the fact that a rental property converted into multiple self-contained flats is NOT an HMO. Only properties that have multiple tenants from different households who share at least one amenity are classified as an HMO and subject to their specific legal requirements.
The best way to ascertain the status of your HMO is to speak to an HMO officer. This is a local authority expert who is appointed specifically to keep landlords to local regulations with regards to HMOs - and they'll be essential for assisting with licensing for HMOs too.
What are the Legal Responsibilities Involved in HMO Properties?
As an HMO landlord, you'll be beholden to additional responsibilities compared to traditional landlord requirements. Whether your property needs an HMO license or not, you'll be expected to address key considerations such as:
- Ensuring your HMO has fire safety measures fitted throughout the property and are fully functional. Check smoke detectors and other safety appliances.
- Checking gas appliances and carrying out an annual gas safety check, and provide tenants with a gas safety certificate.
- Checking your electrical installation every 5 years
- Ensuring your property is not categorised as overcrowded as you can face hefty fines
- Providing enough cooking and bathroom facilities for the number of tenants in the property
- Keeping communal and shared facilities in good repair
- Planning for waste management - including arranging bins and recycling boxes are stored neatly near your property and providing waste collection information to tenants. Loose rubbish near bins or in forecourts indicates that landlords have not provided sufficient waste facilities.
Since an update to HMO licensing in 2018, licensing is no longer limited to rental property buildings that have 3 or more stories. Instead, you'll need to apply for a license if your HMO has 5 or more people living in it across 2 or more separate households. If you fail to apply for a license you will be committing a criminal offence. Full guidance is available on the government's own website.
Is it worth buying an HMO?
Whether an HMO is 'worth it' is all about your expectations with regard to property investments. Let's take a look at what the benefits and potential issues are...
Benefits of an HMO
HMOs are lucrative for your capital growth opportunities: you can expect rental yields roughly three times higher than a single-let. They also insulate your property against the risk of rental void periods because when one tenant moves out, others may remain in the property - so you don't lose all of your income at once.
For that same reason, you'll also be more protected in the event of arrears - where one tenant may not be able to pay their rent, others in the property can still pay. In a traditional letting, arrears mean you lose all of your income until you can resolve it.
Another compelling reason is demand: in certain areas, HMOs are more popular for tenants than single lets as they typically have lower monthly costs for each individual. As a landlord, that means you'll stand to benefit from the popularity of HMOs and building multiple income streams from your tenants.
Cons of HMOs
HMOs require more legislation and planning consideration than traditional rental homes. If you're buying a property to convert into an HMO, you'll need to consider the costs, planning process and demand in that area. If you're buying an existing one, it can be difficult for new landlords to raise mortgages or finance against an HMO. Start-up costs are higher due to needing to buy more furniture etc.
HMOs have a higher tenant turnover rate than single lets, so you'll need to account for that. In addition, you'll likely find maintenance demands are higher in an HMO than a single let as more people equates to more wear and tear.
Many HMOs are self-managed by the landlord, which is a steep time investment. If you'd rather have a property manager, be aware that some do not deal with HMOs.
How do I get started as an HMO landlord?
To get started as an HMO landlord you either need to buy an existing HMO or purchase a property for conversion to add to your property portfolio. Before you begin, it's worth contacting your local council to find out if you need a license for your HMO.
Whilst larger HMOs must have a license due to national regulations, local authorities often demand that you submit a planning application to turn a small house into an HMO even if it will only house 3 or 4 tenants.
If the property is a 'large' HMO, which means it has 5 or more people from more than 1 household with shared facilities and at least 1 rent-paying tenant, then it will be subject to mandatory licensing. An HMO license is valid for 5 years and must be renewed before it runs out. You need a separate HMO license for each property.
Before you are granted a license, the local authority will likely check your property to ensure it is suitable for multiple tenants. This includes a check of the number of amenities and your plans for maintenance of the property. They may also ask you about your history as a landlord - to see if you've got evidence of capably managing other properties.
How to Apply for an HMO Licence
Wondering how to submit your application and become a licence holder? You'll need to visit your local council's housing site - or just type 'Apply for HMO license' into Google.co.uk with location-tracking enabled. Many councils offer a digital application process or a downloadable PDF application form. You'll also likely need to pay a fee to submit your application and include documentation such as the fire safety assessment, gas safety record, property plan, electrical report and a sample tenancy agreement.
Can I rent out multiple units within one building?
If you own part of a large building with multiple rental units or property types, you can either convert some into an HMO or let each unit as a single let. Remember that any HMO must meet certain minimum room size requirements (see section 6 to learn more) and will require adequate amenities. Often landlords will choose to either rent units as single lets in one building or create a large HMO throughout the whole structure to minimise complexity.
HMO Minimum Room Sizes
HMOs must conform to some clear housing authority and planning authority regulations with regards to minimum room sizes:
- You are obligated to notify the local housing authority of any room in the HMO with a floor area of less than 4.64 square metres.
- You must ensure that the floor area of any room in the HMO used as sleeping accommodation by one person aged over 10 years is not less than 6.51 square metres.
- You must also ensure that the floor area of any room in the HMO used as sleeping accommodation by two persons aged over 10 years is not less than 10.22 square metres.
- Similarly, the floor area of any room in the HMO used as sleeping accommodation by one person aged under 10 years should not be less than 4.64 square metres.
- Ensure that any room in the HMO with a floor area of less than 4.64 square metres is not used as sleeping accommodation.
In addition, you must be aware of these overcrowding rules:
- Where any room in the HMO is used as sleeping accommodation by persons aged over 10 years only, it is not used as such by more than the maximum number of persons aged over 10 years specified in the licence.
- Where any room in the HMO is used as sleeping accommodation by persons aged under 10 years only, it is not used as such by more than the maximum number of persons aged under 10 years specified in the licence.
- Where any room in the HMO is used as sleeping accommodation by persons aged over 10 years and persons aged under 10 years, it is not used as such by more than the maximum number of persons aged over 10 years specified in the licence and the maximum number of persons aged under 10 years so specified.
How to convert a property into an HMO
When you want to convert a property into an HMO, whether you buy it or already own it, you must bear in mind that there's a degree of complexity involved in the financing and legislation of an HMO conversion.
Converting a property you already own is more common than buying a pre-converted HMO. If you already own the building, conversion is a matter of doing the work to ensure there are adequate room sizes and amenities for tenants, then seeking assistance around HMO licensing.
Remember that converting isn't just about ticking a legal box. For your HMO to be desirable, you need it to be comfortable for all tenants to live in. Consider things like outdoor space, facilities, furniture and appliances - all of which may be worth investing more in if it leads to longer tenancy agreements and higher rental yields over time.
For significant conversions such as changing a spare room into a bathroom for use in your HMO, you may need to consult a planning officer. Many HMOs will involve a garage conversion into a bedroom, which almost always requires planning permission.
An HMO property conversion must also include safety considerations such as well-maintained fire alarms, and minimum fire safety standards gas and electrical safety, locks for room doors, pest control etc. Each local authority has different requirements when it comes to HMO safety measures, so check with them before converting.
What is an HMO Tenancy Agreement?
Every property is different, but landlords must include as much information as they can on their HMO rental agreements so that they don't fall foul of the law. Provided you do not live in the same building as your tenants, you would create an Assured Shorthold Tenancy (AST) agreement for your HMO. Each household in an HMO should receive a separate tenancy agreement.
If you're wondering what to include in your HMO tenancy agreement, consider these tenancy guidelines by GOV.UK.
What is different about insurance for HMO properties?
HMO insurances are different to standard landlord insurance policies. This is all down the fact a HMO property must be registered as one and therefore necessitates a different policy that accounts for the number of people inhabiting the property and the higher risk that comes with an increased amount of tenants compared to single-lets. HMO insurance requires premises to be used as the occupant's main place or residence or by students during term-time, which means you have no protection in place whilst your HMO is empty.
Tax benefits of HMO property
Some HMOs can provide tax benefits compared to traditional lettings due to tax relief options. The best way to take advantage of this is to speak to an accountant who is well-versed in the housing market. Capital allowances and minimising tax on conversion work should be the primary focus for most property accountants.
Is there a demand for HMO properties?
To put it simply, yes. The demand for HMOs is on the increase - especially in the form of student accommodation in popular cities. However, HMOs are also growing in popularity with migrant workers and young professionals. They are more affordable for the tenants and offer more convenience thanks to most HMO's including furniture, bills etc.
According to Spareroom data, only 31% of UK adults who live in shared accommodation could afford to live on their own. Despite this, national housing demands continue to rise and housebuilding cannot keep up. As more people seek affordable ways to live, HMO's present an opportunity for landlords to offer quality accommodation to tenants at a smaller fee than single-lets.
Is buying a HMO for sale worth it?
An HMO for sale is a pre-converted HMO that should already meet the standards outlined in our conversion section. However, you should always rigorously inspect the listing and property and ensure you are buying a legal HMO. HMO licenses are not transferable so when you buy an HMO for sale, your new property will be unlicensed from the day of completion until you are granted a new licence.
You should also consider any existing tenants, their tenancy agreements and their deposits. Each must be carefully weighed between risk and reward.
Should you use HMO management?
Making a choice over whether you want to maintain your HMO yourself or hand it to a specialised management company is generally a matter of budget and time. If you have the time and desire to do so, managing your own HMO can be rewarding and net higher yield. For most landlords, however, having a dedicated HMO management team in place protects your investment and simplifies your investment.
As you may be able to tell from this article, investing in an HMO is a great opportunity for landlords who are willing to do the additional work required in managing one. While the turnover of tenants, potential property damage and increased legal requirements for HMOs may be offputting, the benefits of HMOs are many and can be a very lucrative form of income that taps into the growing demand for affordable living for students, professionals and tenants who cannot afford standard homes.
Need help securing investment for an HMO conversion or investment in an existing HMO? Get in touch to find out how we can help.