What is an HMO and what are the benefits?

What is an HMO and what are the benefits?

HMOs can make superb investments for landlords – either as a strategy on their own, or as part of a diverse property portfolio.

But what exactly is an HMO and what are the benefits of investing in them as a landlord?

Here, we’ll explain everything you need to know about HMO investment, including the benefits and rules around letting HMOs…

 

What is an HMO property?

HMO stands for ‘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.

 

However, HMOs can also be:

  • Hostels
  • Several bedsits in a large building
  • Blocks of converted flats
  • Self-contained cluster flats

 

Essentially, an HMO is any property housing three or more tenants who make up more than one household (i.e. not related) and share toilet and kitchen facilities.

 

Are HMOs profitable?

HMOs are generally more profitable than standard buy-to-let properties.

That’s because rooms in HMOs are let separately, meaning multiple streams of income.

For example, a three-bedroom house that generates a rent of £1,400 per month could be renovated and extended to become a six-bedroom HMO.

If each room generated a monthly rent of £450, that would be a total monthly rental income of £2,700.

 

What are the pros and cons of HMOs?

As with any type of property investment, there are pros and cons of investing in HMOs that landlords need to weigh up.

But there are some clear benefits that HMO investment can bring if done right:

 

1. Higher yields

HMOs can produce higher rental yields than traditional buy-to-let properties, sometimes as much as three times higher.

 

2. High demand

The demand for shared living accommodation tends to remain robust against economic change and uncertainty, due to tenants seeking affordable rooms to rent.

 

3. Fewer void periods

When one tenant moves out, you still have several others paying their rent while you find a replacement for the vacant room.

 

However, there are also some major things to consider when it comes to HMO investment:

 

1. 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.

 

2. 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.

 

3. Higher costs up front

Because HMOs are let on a room-by-room basis, they’re almost always rented out fully furnished.

That means more funding is required up front in order to prepare an HMO for the rental market.

 

What is an HMO licence?

Any HMO that has 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, it means all HMOs in the area must be fully licensed.

 

HMO licence costs

The average cost of an HMO licence in the UK is around £600.

But the cost of licences varies from authority to authority, with some as cheap as £60 and others as costly as £1,000.

 

HMOs and planning permission

Some HMOs require planning permission, although this can depend on the size of the HMO and where it’s located.

A property that will become an HMO with seven or more tenants will always require planning permission.

Properties being turned into smaller HMOs, for three to six people, often fall under permitted development, meaning no planning permission is required.

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 compliance

As well as licensing, which is usually subject to renewal every five years, HMO landlords must also:

  • Ensure fire safety measures are in place, including operational smoke alarms on each floor
  • Have carbon monoxide detectors installed in any room with a solid fuel burning appliance
  • Have an annual gas safety check carried out
  • Have an Electrical Installation Condition Report (EICR) carried out every five years
  • Undertake Right to Rent immigration checks on any adults living in their HMO
  • Ensure the property is not overcrowded
  • Make sure there are enough cooking and bathroom facilities for the number of tenants
  • Provide enough rubbish bins
  • Ensure communal areas are clean and in good repair
  • Repair and maintain the structure and exterior of the property, water systems, gas pipes, electrics, and sanitary ware

 

How many people can live in an HMO?

While there are no direct rules as to the number of people who can live in an HMO, overcrowding is not permitted.

 

The basic rules around HMO occupation are:

  • No more than two people must sleep in any room, regardless of age
  • Rooms can only be shared if the individuals consent to doing so
  • Nobody over the age of 12 should share a room unless they are co-habiting as a couple

 

Minimum room sizes in HMOs

Any room in an HMO that is used as sleeping accommodation must be:

  • No less than 6.51 square metres if the person sleeping in it is aged over 10
  • No less than 10.22 square metres if two people aged over 10 are sleeping in it
  • No less than 4.64 square metres for one person aged under 10

 

Any room with a floor space of less than 4.64 square metres must not be used as sleeping accommodation.

 

How many bathrooms should an HMO have?

Health and safety guidance for HMOs states that landlords should provide one bathroom for every four tenants who live in the property.

Many HMO rooms come with en-suites and landlords should always ensure those living in their HMOs have usable, adequate bathing facilities.

 

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, and these include:

  • Development loans for build and construction
  • Refurbishment loans
  • Mortgages and re-mortgages for new and existing HMOs

 

HMO council tax rules

In some cases, HMO landlords will pay the council tax on their properties, whereas in standard buy-to-lets, the tenant is usually responsible.

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.

 

Further reading…