Houses in Multiple Occupation (HMO) properties are significantly more profitable than other buy-to-let investments so naturally, they are more attractive for landlords. Before making the decision to invest in them however, it's imperative to understand the requirements landlords must fulfill before taking the plunge.
What Is an HMO?
For starters, an HMO is a rented house shared by many tenants. They could range from singles, couples, or families. To be considered an HMO, a property has to be:
- Shared by more than three people;
- The primary residence of the tenants;
- Rented, as in the tenants, pay their dues by the end of each month.
For the most part, HMO properties are occupied by renters who are not related. However, some of the tenants may be related (such as family members), but it is much more common that tenants need to be unrelated to each other.
All parties within the HMO share bathroom and kitchen facilities. Likewise, the dining area and living room are shared between tenants too. The most common HMO is student accommodation, meeting the requirements of HMO properties under the Housing Act 2004.
A property where more than five tenants share facilities is considered a large HMO, while properties made up of self-contained units in which more than a third of the units are occupied by short tenancies are known as Section 257 HMOs. This type of HMO may require additional licensing.
What Type of Returns Do You Get From an HMO vs. Non-HMOs?
Generally speaking, rental yields are higher for HMO properties than traditional buy-to-let homes. Studies show that the average rental yield for an HMO property is 7.5%. This is 1.5% higher than the average buy-to-let property.
What Are the Main Advantages and Disadvantages of an HMO?
Like with any investment, prospective proprietors must carefully consider the advantages and disadvantages of investing in HMO properties to reduce risk and avoid burning money.
The Advantages of HMOs
Many landlords prefer HMOs because they provide more stable income streams. Tenants sign separate tenancy agreements, lessening the impact of void periods, payment shortfalls, and rental arrears. If one tenant moves out, others continue to pay rent while the landlord is searching for new occupants.
Unlike conventional buy-to-let properties that can fluctuate during economic change (such as during a financial crisis) the demand for shared living remains robust, making it a solid and relatively safe investment.
The Disadvantages of HMOs
By far, the complexity of ownership is the significant disadvantage of an HMO. Landlords have to meet regulations and legal requirements to qualify.
The start-up and operating costs of HMOs are more expensive than conventional buy-to-let properties. These costs include furniture, utilities, maintenance, and letting agent fees, among others.
Tenants are responsible for the maintenance of their private portion of the residence. This means that it can be difficult to establish liability if there is damage caused in shared spaces. Higher tenant turnover increases the cost of advertising and administration.
What Are the Legal Responsibilities?
The legislative requirements and regulations that apply to HMOs keep changing. To complicate matters, local councils might have additional requirements and licensing schemes. Because requirements vary, it is essential to speak to your local council before purchasing an HMO. Some of the legal requirements include:
- Prominently displaying a notice on the property identifying the property manager and contact information;
- Ensuring that the property undergoes all the required professional health and safety inspections;
- Following guidelines as to the maximum number of tenants;
- Adhering to fire safety standards and undergo the necessary fire safety assessments;
- Maintaining a clean water supply and proper drainage;
- Following all gas and electrical safety requirements;
- Maintaining cleanliness and safety in communal areas;
- Keeping the exterior and interior of the property in good order;
- Provisioning the minimum number and proper location of shared facilities in accordance with your local council's Environmental Health Department standards;
- Facilitating regular refuse disposal and completing a legionella risk assessment;
- Obtaining the appropriate HMO landlord insurance.
The Licensing Process
If your property is higher than three stories or has five or more occupants from two or more households, you will need a license to operate it. There are three steps involved in obtaining a license:
1. Determine Requirements and Assess Property
Determine whether your property meets your local council's requirements and attend to any points of non-compliance that need to be addressed.
2. Request an Application Form and Apply
Request your application form from your local council. The local authorities usually set a non-refundable fee for the application. If granted, your license will be valid for five years. The council will determine whether the property and the landlord (or management agent) is fit for an HMO. This usually involves criminal and other related background checks.
The waiting period is lengthy, so brace yourself. In fact, aim to hand in your application while making the necessary repairs or amendments to the property. In this way, time will fly!
3. Obtain Your License
You should receive your license within a few weeks of your successful application. Some landlords use HMO Licensing companies to guide them through the process.
License fees vary from council to council but expect to pay around £300 for a new HMO and £150 for a renewal.
Fines for Improper Licensing and Failing Legal Responsibilities
Do not be tempted to circumvent the licensing process or legal requirements. Failure to comply with regulations results in hefty fines as high as £5,000. On top of this, the council may revoke your license for not complying with the legal and safety requirements.
Getting a Mortgage for an HMO
Most high street lenders offer HMO mortgages. HMO mortgages typically have higher rates linked to LIBOR (London Interbank Offered Rate) and not the bank of England base rate. Additionally, lenders will usually require landlords to prove their experience and competence before granting an HMO mortgage.
Lenders will require LTV (Loan to Value) ratios of 60-75%. That means you have to be able to put a down payment of 25-40%. Consult with your mortgage broker to determine the size of the mortgage you can afford.