Houses of Multiple Occupancy

Expert Guide to Investing in HMO’s. Discover the facts about houses of multiple occupancy, rental demand, and the unique rules surrounding these properties.

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The Ultimate Cheat Sheet on Houses of Multiple Occupancy

Affordable rental properties are in high demand. Growth in the rental sector has exceeded all expectations in recent years. This means the trend in creating affordable rental solutions is likely to continue. Houses in Multiple Occupation (HMOs) offer tenants an opportunity to rent privately while still enjoying a financially-friendly option. We expect HMOs to play an increasingly important role within the rental sector for the foreseeable future.

Here, we discover what an HMO is, why HMOs are in demand and look at the planning rules surrounding these properties. If you are considering investing in this part of the rental market, this article should provide you with a good starting point for information and advice.

What is an HMO?

An HMO is a property that is shared and rented by at least three individuals (most lenders will only classify it as an HMO if there are 5+ bedrooms) who are not related to one another. Each renter will have their own private room while sharing amenities within the property with their fellow renters. These are likely to include shared parts of the house such as the kitchen and living room. Some HMOs may offer private en-suites, while others have shared use of the bathroom. A lot may depend on the age and layout of the property.

Various forms of HMOs exist, such as:

  • Shared occupancy of a house
  • A bedsit
  • A boarding house

Some larger HMOs are specifically designed and built to meet these specifications.

Who are HMOs designed to appeal to?

Anyone who wants to find an affordable place to rent, whether for the short or long term, may be interested in HMOs. Previously, students and the low paid were among the target audience for such properties. They still are, but other groups of society are now finding such properties desirable.

Stalled wages and the rising costs of private rentals have led to many others considering this type of rental property. Young professionals are now attracted to the financial advantages of renting part of an HMO. Many may consider renting a room to help them free up cash to save for a deposit on a place of their own.

Do I need an HMO licence to run this kind of rental property?

You may do. In 2006, the government introduced HMO licencing. Not all HMO properties are required to have a licence, but if you are considering buying a property for this purpose or converting an existing one, do check the rules. There are large fines in place for landlords who flout the rules and try to dodge licencing requirements.

Those properties that will require a licence will have:

  • Three or more storeys
  • Five or more occupants

Other conditions also apply. This would mean most houses and properties with fewer than five occupants would not require a licence, although this changes from council to council so do check! However, the rules on HMOs can vary between local authorities. To find out what applies in your area, contact your local authority for more information.

According to the latest information on the government website, smaller properties rented to fewer than five occupants might also fall under the remit of the licencing guidelines. This depends on the area you are in. Someone in one council area may require a licence for their HMO, whereas someone with an identical property rented to the same number of people in an adjacent council area may not need one. Never assume – always check first.

There may also be conditions attached to the issuing of a licence. Some are mandatory while others are conditional on the decision of the issuing council. For example, you would be required to send a gas safety certificate and all electrical safety certificates to the council each year. If the condition of the property is deemed to require improvement, this may be added as a condition when the licence is created.

What does an HMO licence mean?

A House in Multiple Occupation licence covers a property that is rented by several people. A licence is valid for a period lasting no longer than five years. It can be applied for online via the official gov.uk website. It is also necessary to renew the licence prior to its expiry date. If you have more than one HMO, you will require a separate licence for each property.

How much is an HMO licence?

The cost varies depending on which council issues your licence. Our research indicated current prices of around £500 to £550 per licence, but these amounts will vary. The exact amount you will pay depends on the council area, how many letting units are in the HMO, and on whether you apply for more than one licence at the same time.

Why were licences brought in?

The idea is to make sure the market does not become saturated with shared rental properties. The variations in licencing between areas have led this to become known as selective licencing.

Whether your property requires a licence or not, you must always adhere to the property management regulation standards. These cover various areas, such as:

  • Gas safety
  • Fire safety
  • Electrical safety
  • Property repairs
  • Amenity provisions

Do HMOs make a good investment?

There are significant advantages involved in investing in HMOs. The yield per property can be higher when splitting it into separate units in multiple occupancies. By renting out individual rooms rather than the entire property, it is possible to glean greater financial advantages. Research conducted by Paragon shows an average yield for a House of Multiple Occupancy of 7.8% over a 12-month period. This figure tops the chart when assessing the return on all types of rental property on the market today. This same body of research also highlights the students and young adult market as the most profitable one, offering the best returns on investment for landlords.

HMOs also provide greater stability. If you rent out a property to one person or a family, you will be left with an empty property to rent if they should move out. You can easily go from receiving rent each month to receiving nothing at all. However, if you rent out an HMO with, say, three rooms available, you will receive rent from each of those tenants. If one should move out, you will lose a third of your monthly income from that property rather than all of it. It could still happen that you might lose all three tenants at once; this would be more likely to occur if they are students. However, if you rent to young adults or workers, it would be very unlikely for you to see all the rooms vacated at once. This provides a degree of protection for you as the landlord.

Do I need an HMO mortgage?

The first thing to question when it comes to financing an HMO investment property is the mortgage. A property split into units in this way is unique in the marketplace. As such, many lenders who regularly offer buy to let mortgages may not offer mortgages for HMO properties. There is only a handful of lenders that deal with the specifics of HMO properties.

Secondly, any landlord would need to consider the insurance aspect of this type of rental accommodation. Many existing landlord insurance policies will cover HMOs if there are no more than eight tenants in an individual property.

If you are considering purchasing such a property, contact the team at The Mortgage Broker Limited today. We have access to several products that cater to the House in Multiple Occupation audience. We can also provide expert advice and information regarding HMO landlord insurance should you need it. Complete our form or call us today for further details of how we can assist you.

Houses of Multiple Occupancy

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