HMO stands for a House in Multiple Occupation. Most HMOs are houses or flats shared by several different tenants, who all rent their rooms and the property’s communal space on an individual basis.
A good rule of thumb is a property which is occupied by three or more tenants, who form more than one household and share facilities such as a bathroom, toilet, or kitchen, could be deemed an HMO.
Features that determine if a property is deemed an HMO:
- Occupants are a single household.
- Occupants must be using the property as their only or main residence.
- The accommodation is used solely for residential purposes.
- One or more of the occupants must be paying rent.
The above conditions must be in place for a property to be legally classed as an HMO. (Unless an HMO declaration has been made by the local authority.)
So, are HMOs profitable for landlords?
Generally speaking, HMOs are more profitable than standard buy-to-let properties because rooms in HMOs are let separately, providing multiple streams of income. So, HMOs can produce higher rental yields than traditional buy-to-let properties, sometimes as much as three times higher.
What’s more the demand for shared living accommodation tends to remain robust against economic change and uncertainty, due to tenants seeking affordable rooms to rent. And when one tenant moves out, you still have several others paying their rent while you find a replacement for the vacant room.
Major factors to consider with HMO investment:
HMO landlords need to keep on top of the following health and safety issues in order to remain compliant and avoid problems with their local authority.
- Gas safety
- Electrical safety
- Fire safety
- Rubbish disposal facilities provided.
- Adequate cooking, cleaning, and washing facilities provided and maintained.
- Communal areas to be kept clear and clean.
- Managing overcrowding issues.
Mortgages and finance.
HMO investors often purchase regular family homes and convert them into co-living properties.
That means an HMO mortgage is not possible until the property is converted, so HMO investors usually have to consider other forms of bridging finance.
Tighter legislation.
HMOs are subjected to more regulations than standard buy-to-let properties.
The biggest difference is that many HMOs require a licence to be legally let out, while some may require planning permission.
Higher upfront costs.
Because HMOs are let on a room-by-room basis, they’re almost always rented out fully furnished. That means more funding is needed upfront when preparing an HMO for the rental market.
An HMO licence.
An HMO with five or more individual tenants requires a mandatory licence. A smaller HMO with fewer than five tenants doesn’t require a mandatory licence, but as many local authorities operate additional licensing, all HMOs in the area must be fully licensed.
The average cost of an HMO licence in the UK is around £600, but this varies from authority to authority.
HMOs and planning permission.
Some HMOs require planning permission which can depend on the size of the HMO and its location.
Properties turned into smaller HMOs, for three to six people, often fall under permitted development, so no planning permission is needed.
However, if the local authority has an Article 4 direction in place, restricting permitted development rights, an HMO will always require planning permission – regardless of its size.
HMO mortgages.
HMO mortgages differ from standard buy-to-let mortgages in that they allow the letting of multiple rooms to multiple people, which normal buy-to-let mortgages don’t allow.
There are a whole host of HMO mortgages available, depending on which stage the HMO property is at, including:
- Development loans for build and construction
- Refurbishment loans
- Mortgages and re-mortgages for new and existing HMOs
HMOs and council tax.
In some cases, HMO landlords will pay the council tax on their properties, whereas in standard buy-to-lets, the tenant is usually responsible. Then again, Council tax for HMOs let out on a single tenancy per room basis may be paid by the landlord, whereas an HMO where a group of friends have moved in under one agreement may have to cover the council tax themselves.
As with any form of investment, HMO comes with its own share of pros and cons, and anyone considering such an investment should become fully conversant with the possible pitfalls as well as the benefits.
If you’re considering investing in an HMO or any other property, get in touch with the experts at Louis Taylor who will be able to support and advise on how to get the most return from your property portfolio. Get in touch on info@louis-taylor.co.uk or give the team a call on 01782 622 677.
Ian Cotterill, Director
T: 01785 339922
M: 07894 752306
E: ian.cotterill@louis-taylor.co.uk