HMOs are often seen as the best type of investment a landlord can make to increase rental income. Allowing multiple people to pay rent in the same house. But what are the pros and cons of this method and how easy is it to manage a property like this?
HMOs have their own set of rules and regulations and an interesting history behind them. In this article, all will be talked about regarding this specific type of home so you are able to potentially set one up yourself as a landlord.
What is an HMO property?
An HMO stands for a home of multiple occupancies where the people living in the same house aren’t from the same household. In order to qualify, three or more people must be living in the HMO, they must be all living in the same household and a landlord must follow special regulations set out for homes in this category.
If a tenant is sub-letting a property or a landlord is bringing in lodgers to a property and there are three or more people as a result, this moves into being classed as an HMO and the landlord must ensure there are the right regulations in place to house this number of tenants under an assured tenancy.
How do I know if my property is an HMO?
The biggest clue of if a property is HMO or not is the number of people living in the property. If there are three or more people living in the same household under assured tenancies who aren’t related to each other, it is quite likely this would be classed as an HMO.
Another big indicator is if these people living in the house have individual private spaces but are required to share facilities such as a bathroom or a kitchen.
Nonetheless, the landlord of the house is responsible for making sure the property has the correct licensing. This is the real deciding factor as to whether a property is an HMO or not. In order to obtain this licence to rent out the property, rules surrounding the relevant room sizes, safety regulations and only bringing in the right types of tenants must all be obeyed.
If you live in an HMO, do you have to share it with two other people?
As a tenant living in an HMO, chances are you will have to share the property with at least two other people. If there are fewer than two people in the house this property would then be classed as a house a with lodger or a joint tenancy where one person pays the rent but they both can be held responsible for any shortcoming in rental payment.
This is why it is important for tenants to understand the disadvantages of renting a house outside of an assured tenancy with people they may or may not know in this way. The failure to understand the law could leave them liable to pay the rent of someone who decided to leave the property if they are in a joint tenancy agreement.
Do you have to share living areas in an HMO
Most HMOs will have areas of the house that tenants share such as the kitchen or bathroom but this is not actually necessary. Landlords usually do it this way because designing the house for tenants to share areas of the property allows them to maximise the space in the house to fit in more bedrooms.
For example, an HMO can be a self-contained flat within a bigger house with its own kitchen bathroom and bedroom. In other words, the tenant will not have to ever leave their privately owned space of theirs in order to use all of the facilities of the HMO.
Some landlords, despite this needing extra room for additional bedrooms, prefer this self-contained set-up. The reason for this is that tenants tend to take better care of the properties when they view the entirety of the building as their own. This results in the overall management cost of the property being reduced and the quality of tenants also going up with fewer complaints and longer tenancies.
What is the history of HMOs?
In 1985 under the housing act, the first introduction of the term HMO was passed in legislation. Regulations like these have changed over time. For example, DSS tenancies have been scrapped. However, the term ‘House of Multiple Occupancy’ is still in legislation and wasn’t officially coined until later on in the Housing Act of 1996.
The housing act in general was passed by the government to increase building safety in homes. The government wanted to increase the number of lettable homes in the UK but still maintain safety standards in the properties where living space was shared and people from multiple households could live as a unit.
This is why all HMOs are subject to licensing because an HMO licence protects tenants who are within these homes from being exploited and prevents them from living in unsanitary, inhumane living quarters. However, not all HMOs strictly follow these rules, this can result in up to a £20,000 fine.
What are the requirements for an HMO?
In general, an HMO can be seen as having a lot of requirements. However, the below list shows a simplified version of what you need as a landlord to comply with regulations.
Failure to comply with these regulations will leave you unlikely to get approval for an HMO licence. However, the regulations differ depending on what council the house is in in the UK. To find out what the exact regulations look like depending on the location of the property you can take a look here.
- Everyone in the house is not from the same household
- There are more than three people living in the accommodation
- The house has a suitable manager or agent
- Regulations are followed to suit the number of people in the HMO
- Provide safety checks such as smoke alarms, electrical safety certificates, gas certificated and energy performance certificates as and when required
What do you need to know about HMO licences?
Ultimately, the rules around whether you need an HMO licence or not are quite vague and very much depend on the borough you’re living in. You can find your local council to see if you are required to have an HMO licence here.
Having said this, as a general rule, you will need an HMO licence if your building is seen as passing a standard test, a converted building test or a self-contained flat test. The exact meaning of these terms is talked about in detail here in section 254 of the housing act 2004.
How are HMO properties different to rental properties?
You may have done your research on what an HMO is and thought they really are similar to rental properties – in which case you would be correct. An HMO is a type of rental property.
They are also similar in the sense you can buy an HMO using a buy-to-let mortgage just like you would an average rental property. In addition, you also need to comply with the rules around evicting tenants from HMOs like section 8 and section 21.
However, where an HMO is different is the additional licensing and the additional safety regulations that must be obeyed when building an HMO. This is what sets them apart and actually deters a lot of landlords away from the investment.
Are HMOs good investments?
In general, most landlords look at HMOs as an investment opportunity first and foremost. This is due to the additional potential for increasing the rental yields of a property through the addition of bedrooms in the property.
As an example, a single-let property with three bedrooms but only rented out to one tenant for £1,500 per month could be split into three bedrooms and the landlord could then rent each room in the property for £800 per month. This would bring in a total rental income of £2,400, increasing rental income by over 60%!
This is important for landlords because the hardest part of investing is finding the right property. So, when a landlord eventually finds a property they are happy with, in a good location, they are able to capitalise on the opportunity and produce the same amount of cash flow multiple single lets would provide with far fewer HMOs.
The controversial side of HMO investments
HMOs are seen as controversial because they are often seen as a way for landlords to cram as many people into a building as possible in order to make the most profit and not care about the welfare of tenants.
On top of this, there is also an increased fire risk from living in an HMO property. Studies show that despite just 5.4% of people in the UK living in an HMO, they account for 34.8% of all fire deaths. This is a shocking figure and something the government is actively working against by introducing things like the building safety fund which hopes to reduce the amount of dangerous cladding in rental properties throughout the UK.
What is the best way to finance an HMO investment?
Financing an HMO property isn’t that much different from a traditional rental property. Most landlords use a traditional buy-to-let mortgage. However, it does get complicated when a landlord plans to add value to the house in order to gain approval for a new mortgage. Or gain approval for new mortgages by top-slicing their property portfolio.
Top slicing is where a landlord will use the income from other properties to allow them to borrow more money by adding spare income from other properties to the mortgage deal. As they now would be approved for more equity, they can use this additional money to add value to the property and create an extra room or two.
In this way, an experienced landlord can take a simple single let and convert it into an HMO that produces a lot more cash flow than a normal single let. To put things into perspective, a normal single-let property usually would yield somewhere around 5% – 7% whereas an HMO should yield more in the region of 15% – 20%.
This additional rental yield would allow the landlord to take out a mortgage with an even smaller deposit because the rental income from the property is so large.
What if a landlord doesn’t have an HMO licence?
It is common for a tenant to move into a property and later down the line realise that the landlord could be letting the property to them illegally. As a tenant, you would have a right to be concerned with your living situation and request to see a licence as soon as you can.
If the landlord isn’t able to provide this licence, this would give you the right to go to the local authority and report the landlord. Especially if you think the property is unsafe as a result.
Can a landlord use section 21 without a valid licence
The simple answer is No. If you can prove that a landlord isn’t following the rules of a tenancy agreement in which they are providing you, as a tenant with a safe home by following the regulations of HMO and obtaining a licence, you have the right to report them to the local authority who will protect you from eviction for 6 months.
This works because the landlord then has to make amendments to the property under demands from the local authority. Even if they do these amendments straight away, the landlord still cannot evict you (regardless of if a tenancy agreement has come to an end) within 6 months.
However, if you believe the house you’re living in is critically unsafe, it may be a good idea to move out anyway for your own safety and find somewhere else to live while the landlord gains the correct licensing.
What should you do to complain about a landlord?
The exact procedure for reporting and complaining about landlords who do not meet the correct HMO requirements depends on the borough. Sometimes it is the case of sending an email or making a phone call. For example, here is how the London borough of Haringey processes their complaints.
Regardless of the borough or where you are in the UK, make sure you have the correct evidence to report your landlord such as their details, what regulations you think are being broken and any picture evidence necessary to support your case.
It may be the case that if your landlord is breaking the terms of a tenancy agreement by claiming to have an HMO when they don’t, this could escalate and eventually you may need to see the landlord in court. This is why it is important to have as much evidence as you can.
What are the pros and cons of HMOs?
In the UK, as we know, HMOs can be a lucrative investment. But what are all the advantages and disadvantages so you can make the best decision?
Pros of HMO investments
Overall, there are quite a few advantages to the type of rental property HMOs:
- High rental yields make HMOs a good investment
- If done correctly there will always be strong demand
- Void periods aren’t that significant (due to multiple tenancies)
- Low relative maintenance cost
Cons of HMO investments
There are disadvantages too, and being aware of them will allow you to be prepared as a landlord:
- If letting to students there will be void periods in the summer months
- More difficult to get a mortgage for the first investment in an HMO
- The need to invest more into the property at the beginning adds greater risk
- Requires more knowledge around regulation to set it up correctly
HMOs are a type of property investment landlords who know what they’re doing to their advantage. As a landlord becomes settled and accomplished in their property investment journey, they typically find a type of HMO investment they like the best or they may choose to avoid HMOs altogether.
Either way, if you do choose to go this route as a landlord, being sure to know the regulations in detail before you make any big decision is the best way to move forward to prevent mistakes or poor financial decisions.