Many prospective landlords looking to maximise their investment from their property are turning to HMO business propositions. Also known as Houses in Multiple Occupation properties, an HMO is a property whereby you house three or more people from a minimum of two individual households. These tenants will share common areas such as a kitchen or a bathroom.
Also known as a house share, an HMO can be a lucrative option for landlords because rental yields may be higher than renting your property to a single family. This is because landlords can take on more tenants (and therefore generate more rent) and are less likely to be impacted by the whims of individual tenants who may be looking to move elsewhere. However, managing an HMO requires a lot of responsibility. HMOs are a highly regulated area that may require a special licence, minimum size requirements and specific legal obligations.
To help you understand whether this is an option you should be exploring or whether a buy-to-let mortgage is more appropriate, here is an overview of everything you need to know about HMOs.
What is the legal definition of HMO in England and Wales?
HMOs are a highly regulated area. Therefore, before deciding if this is a lucrative investment opportunity, you must be well aware of the legal definition of an HMO.
“A house in multiple occupation (HMO) is a property rented out by at least 3 people who are not from 1 ‘household’ (for example a family) but share facilities like the bathroom and kitchen.”
What is the legal definition of HMO in Scotland?
The legal definition of HMO varies slightly in Scotland.
“A house in multiple occupation is a property rented out by at least 3 (unrelated) people who share the bathroom or toilet and kitchen. It can also be known as a house share.”
What is a large HMO?
If you have a larger property and rent rooms to more than five people from two or more households (and they share a kitchen and bathroom), you will be legally considered a large HMO.
You must be aware of the distinctions between an HMO and a large HMO because each has very different legal implications and responsibilities. For example, in England and Wales, large HMOs must hold a valid licence to be renewed every five years. In Scotland, you must also have a valid licence, which usually lasts for three years.
Your property is defined as a large HMO if all of the following apply:
It is rented to 5 or more people who form more than 1 household
Some or all tenants share toilet, bathroom, or kitchen facilities
At least 1 tenant pays rent (or their employer pays it for them)
Some local authorities may require that smaller HMOs hold a licence to operate. So, if you are thinking about converting your property to an HMO, you should always check the regulations with your local council. If you run an unlicenced HMO, you are putting yourself at risk of an unlimited fine.
If you intend to convert multiple properties into HMOs, you will need an individual licence for each property.
Why should you consider an HMO as a business model?
Houses in Multiple Occupations are becoming increasingly popular. As such, landlords are capitalising on the profit from renting single rooms rather than entire properties.
Many different tenants may be looking to rent a single room, such as students or professional tenants, to social housing. For example, if you own a property in a large city, you may find that some professionals are keen to rent a room, so they have a base during the week. In addition, they may find it more affordable than coping with lengthy commutes or exorbitant commuting costs. Similarly, many young people turn to HMOs because they have been forced out of the rental market. These young people may not be able to afford large deposits and spiralling living costs – especially if they have relocated to a new area to start their careers.
From a business perspective, it’s clear to see why a landlord may find an HMO an attractive proposition. After all, you will be earning more money in rent because you are letting a room to individual tenants rather than a single family. This can help you to earn significantly more – especially if you have a large property in a desirable area.
An HMO is also a model that could protect your rental income. For example, if a particular tenant decides to move out, you are not left with an empty property. Equally, if one person falls behind with their rent, you will not be left out-of-pocket. his could be advantageous if you rely on the money you generate through rent.
What are the legal responsibilities for landlords when operating an HMO?
HMOs are highly regulated. There are numerous legal obligations that you must meet as a landlord to ensure that you provide an adequate living provision for your tenants. Failure to adhere to these legal obligations could result in a hefty fine.
The legal responsibilities include:
- Displaying a prominent checklist of contact details within the HMO property. These contact details should either be yours (as the landlord) or your chosen appointed property manager.
- The property must be well maintained, with accurate records kept. Your local council will conduct a Housing Health and Safety Rating System (HHSRS) risk assessment on your HMO. Communal areas (kitchens, bathrooms, toilets, gardens, and hallways) must be kept tidy.
- Your property must not be overcrowded. There is legislation in place which confirms the minimum bedroom sizes required. In addition, you must adhere to the minimum number of shared bathrooms and kitchens needed by your local council’s Environmental Health department.
- Fire safety standards must be a priority. As well as providing fire alarms in all kitchens, you must have clear fire escapes. You will need to conduct regular fire risk assessments which meet the standards set out by The Regulatory Reform (Fire Safety) Order 2005. You must hold accurate records; else, you could be held liable to face criminal prosecution if a tenant is injured or killed as a result of a fire.
- You must provide an accurate electricity or gas safety record to your local council. This is a condition of your licence to operate as an HMO. You may also need to have safety certificates for any electrical items if requested by your council.
- You will need to have a Legionella risk assessment for each HMO property. A copy of this risk assessment may need to be provided to your local council.
You will also need to have the correct landlord insurance to operate as an HMO. Many policies will require specific terms and conditions. At Mortgagemove, our team of landlord insurance specialists can identify what you need and ensure that you have the right cover in place.
How can you get started with an HMO?
Running an HMO takes considerably more management than a typical buy-to-let. However, as we’ve discussed, the financial rewards can be far greater.
If you think this is the best investment opportunity for your property, you must undertake due diligence. For example, you should consider how many HMOs are available near you, what your local council requires and whether you plan to run your HMO yourself or employ a dedicated property manager.
A helpful tip is to speak to a housing officer at your local authority. They may have a dedicated HMO officer who will be a beacon of knowledge and information. This person will confirm what the council will require and verify if you need to apply for an HMO licence.
How to select the best location for your HMO
A properly run HMO can be an excellent investment. But as with any rental property, your success will depend on supply and demand.
Before you begin, you should research to see the rental demand for HMOs in your local area. Some locations (such as big cities) will be considerably more popular (and therefore more lucrative) than smaller, rural locations. You may want to consider your proximity to local public transport or employment opportunities. If there are plenty of options for your tenants, you may be more desirable. Sites such as Zoopla will help you to assess the potential rental income on properties in different areas. You can use this information to decide whether a property is worth investing in (if you do not already own your property).
Another key consideration is the demographics of the local area. As we mentioned, HMOs are increasingly popular with students or those starting their careers. With this in mind, you may wish to invest in a property in a location that has a younger, more vibrant demographic. You may struggle to succeed if your HMO is predominantly in a retirement village!
Finally, as part of your research, you should find out if there are any specific planning covenants from local councils. Some cities (such as Manchester) are increasingly restricting planning permission for new HMOs or refusing permission for residential properties to be converted into HMOs. In these instances, you could look at options in the nearby towns or cities. However, you should be mindful that other HMO investors will have the same idea. This could create artificial demand in these locations.
Securing a mortgage on an intended HMO
At Mortgagemove, we can work with investors to find the best mortgage option for your intended HMO property. However, as with any rental investment, you will need to provide our mortgage brokers will full details of how you intend to repay your mortgage capital.
Lenders will likely want to see evidence of the following:
- Your experience as a landlord, including details of when you have worked with different types of tenant
- A projected rental income based on your local area research. You may also want to display your annual rental yields in relation to the property value
- How many rooms do you plan to let within the property?
- Whether you will be managing the HMO yourself or employing a dedicated property manager
- Details of the type of tenant you plan to attract (e.g., students, professionals, social housing)
- Confirmation of how you plan to repay any capital if your mortgage is provided on an interest-only basis
With so much to consider, it’s beneficial to speak to a member of our team. Not only can our experienced brokers help to establish the right mortgage option for your HMO, but we can help you to source the correct landlord insurance.
To find out more about how we work, please get in touch. Or text ADVICE to 82228.
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