An HMO stands for ‘House in Multiple Occupation’. Although we often see the term “HMO” used in the media and on company websites, many people including landlords are actually unclear as to whether the property they own and rent out is classed as an HMO.
To help with this we have done some research for landlords and have gathered together this information on what an HMO property is and also what landlords need to ensure is happening in your property so that you are legally compliant.
What are HMO properties?
Eager to explore all your investment opportunities? Why not delve into the highly-profitable world of HMO (house in multiple occupation) property investment? To help you find out more about HMOs, we examine everything to do with HMO housing including the benefits, regulations, standards and even how they differ from other rental properties to ensure you make a well-informed investment decision.
What is HMO property? What is classified as HMO property?
So, what is a HMO property? Put simply, HMO housing refers to a property that is rented by multiple occupants from separate households. It must be rented by at least three different occupants in order to be classified as a HMO property, and it must also adhere to strict HMO regulations to be considered safe for multiple occupants. Those occupants will typically have their own private bedroom, but will have shared access to communal areas such as a kitchen, living room, dining space, and garden.
Is HMO residential or commercial?
HMOs are typically considered to be residential property investment because HMO housing provides a place for the occupants to live, not work. As a result, HMOs are a residential investment. However, if you are searching for a commercial investment opportunity, your interests may align more closely with Commercial Multiple Occupancy (CMO) investment. This process involves investing in a single building and separating the workspace so that it can be rented by various different companies.
How do HMOs differ from other rental properties?
Unlike standard buy-to-let (BTL) properties, HMOs involve managing several tenants within the same property. For this reason, managing HMOs can be both more time-consuming and costly, making them a specialised type of investment often favoured by experienced landlords. While HMOs may be more demanding than BTL properties, they can provide several benefits including greater yields and fewer rental void periods.
What are the benefits of a HMO?
As mentioned above, HMOs provide a wide range of advantages for the landlord.
Below, we take a more detailed look into why HMOs can be such a rewarding investment:
- Healthy yields
HMO properties involve several tenants renting the same dwelling – each with their own income. Unlike a standard buy-to-let where the landlord receives just one household’s income, landlords can house more tenants, allowing them to receive a higher overall rent from several working professionals than a sole family, for example.
According to research by the BVA BDRC, the average rental yield for a HMO is 7.5 per cent. That is 1.5 per cent higher than the average yield of a standard BTL tenancy. While this considerable yield is already impressive, the same source suggests that the market for HMOs is still growing. The BVA BDRC adds that between the first quarter of 2020 and the same period in 2021, the average HMO yield rose by an additional 0.6 per cent when compared to a standard let.
- Increased demand
With this growing need for HMO housing predicted to continue rising, landlords that choose to invest in HMOs can provide both flexible and affordable housing to meet this demand. By taking into consideration the rising costs of living and soaring energy bills, single tenants may view shared housing in the form of HMOs to be a more viable option than renting a property alone.
- Limits rental void periods
With several tenants occupying one property at once, it is unlikely that a HMO will be completely empty for any extended period. Unlike BTL properties that can remain empty for months, or even longer, while waiting for the right tenant, if an HMO tenant decides to move out, the landlord will still receive rent from the remaining tenants until the vacant room is occupied.
- Decreased likelihood of arrears
Following the same vein, in BTL tenancies the landlord is wholly dependent upon one tenant to receive their total income from the property. HMO landlords, on the other hand, will still receive rent from the other tenants even if one tenant falls behind on their rent, allowing them to cover costs until that tenant has paid their late rent. It’s therefore less likely that the landlord will struggle financially due to tenant arrears.
- A portion of HMO expenses are tax-deductible
When buying a property there are always additional, unavoidable costs such as Stamp Duty, survey charges and legal fees. While many of these costs are a necessary part of the process, some of these expenses can be claimed back if you choose to invest in a HMO. They cannot be set against rental income, but expenses that are incurred wholly for the property business (such as the HMO license fee) can be claimed back.
Is a HMO a good idea?
This question can be split into two distinct areas; whether investing in HMO is a good idea right now and whether HMO investment is the good option for you as a landlord. First, we must consider the current demand for HMOs – a sector that has grown significantly in the last 10-15 years. With this substantial increase in demand, HMOs are considered to be a great avenue of property investment to explore right now, but they’re not without their obstacles.
While they can produce much higher yields than standard BTLs, they can also lead to difficulties obtaining a mortgage (especially for first time landlords or buyers), significant start-up costs to furnish the property with suitable furniture, and decreased capital growth. This is because once you’ve purchased a property and invested time and money in the HMO conversion, the resale market will have immediately decreased owing to the limited number of landlords willing to take on a HMO.
This leads us to determining whether HMO housing is the right investment for you. To do this, it’s worth taking a closer look at the time and effort involved in owning a HMO to reveal the ideal profile of a HMO landlord.
First, an inherent part of letting a HMO is managing the multiple tenants which can be time-consuming and hard work for inexperienced landlords.
HMOs involve the management of several tenants at once which can be challenging – even if you’re a landlord with plenty of HMO experience! However, putting in the hours or hiring a letting agent to manage your tenants for you can make this aspect of investing in a HMO a more feasible option for less experienced landlords.
Ultimately, the substantial start-up costs coupled with the difficulties obtaining a mortgage and the degree of work required in managing a HMO often makes this type of property investment a good idea for more experienced landlords or investors. While purchasing a HMO can still be undertaken by landlords with no prior HMO experience, the research, funds, time and effort required can make this process much harder.
What are the regulations for HMO?
With the rules and regulations surrounding HMOs constantly changing, it’s crucial that you do your research before committing to a HMO investment. HMO properties must abide by stricter rules and regulations than standard BTLs – especially when it comes to fire safety and planning permission. As a result, you’ll also find that the penalties for not complying are more significant, too.
For example, the fire safety regulations in HMOs are much more extensive than standard BTLs. Because HMOs have more occupants from separate households (who may have minimal interaction with one another), private areas like bedrooms are more likely to have locks on the doors. In the event of a fire, these locked doors may block vital escape routes, highlighting the importance of these additional fire safety regulations.
As well as dictating the fire escape routes, these safety regulations also stipulate that a smoke alarm should be installed on every level of the house where there’s living accommodation. If you only have experience with renting out standard BTLs, you will need to thoroughly research the rules and regulations of HMOs as they differ greatly.
To rent out a HMO, you will also need to check whether you need a HMO licence. If your HMO is classified as a ‘large HMO’, you will require one. A property can be considered a ‘large HMO’ if it is rented out to five or more occupants who form more than one household, at least some of these tenants share the toilet, bathroom or kitchen facilities, and at least one pays rent. Alternatively, their employer can also pay rent on the tenant’s behalf.
What standards need to be maintained in HMOs?
To provide a good and safe standard of living in a HMO, there are certain set standards that need to be met. Firstly, there are Management Regulations which stipulate how the HMO should be managed as well as Amenity Standards that dictate the number and type of amenities that must be provided according to the size of the HMO and the number of tenants.
Finally, completed HMOs are then inspected using a risk based system referred to as HHSRS (Housing Health and Safety Rating System) to determine whether there are any hazards in the property. Ultimately, these HMO standards are put in place to ensure tenants can benefit from good living conditions, safe accommodation and access to adequate amenities.
Does HMO devalue property?
Thanks to the increased demand for HMOs, it’s likely that a HMO will be worth more than the purchase price – especially if you’ve owned a HMO for a considerable period. However, as experienced landlords searching for a HMO investment can be limited, you may be waiting longer to sell your HMO property to the right buyer. This is due to the fact that only specialised landlords with HMO experience are likely to take on such an investment, lower capital growth is therefore an important aspect to consider before investing in this sector.
Do HMOs increase in value?
With the demand for affordable housing continuing to rise, HMOs are likely to increase in value as they offer cheaper accommodation than standard BTLs. If you bought a HMO several years ago, it’s reasonable to expect that you’ll be able to sell it for a considerably higher price on account of the current housing market demand and the impressive yields it can achieve. It’s also worth noting that the demand for this affordable housing continues to remain stable even in times of economic change and uncertainty.
How much deposit do you need for a HMO?
According to ABC Finance, the deposit required for a HMO will depend on your landlord experience and whether you are a first-time buyer. For first-time buyers, the deposit for a HMO is substantially greater than the amount needed to purchase standard BTL properties – often around 30-35% depending on your credit rating and personal income.
Can you turn any house into a HMO?
Many standard houses cannot be turned into a HMO due to extensive HMO rules and regulations. As a result, the number of properties that can be successfully renovated into a suitable HMO is limited. For help finding the right house to renovate into a HMO, it’s worth consulting a professional property investment company with plenty of local knowledge in your chosen area.
Is Student Let considered an HMO?
This is a question we have been asked many times and have seen on discussion boards across the web. Although the answer may not be straightforward legally, in most cases it is considered to be an HMO if more than one “household” is living in rented accommodation and shares facilities. This is not our definition, this is taken from the Citizens Advice website and represents a fairly simple way of determining if you are renting an HMO.
The next obvious question is then “what is a single household”? Well again if we turn to the Citizens Advice website their definition is:
A single household is where members of the same family live together, including unmarried couples. For example, if you lived with a friend and a couple that is three households.
So in most cases renting to a group of three or more students who are sharing a kitchen, bathroom and other facilities will mean this is an HMO, even if two of the students are a couple, this is two households sharing facilities.
If a house has been converted to be a set of bedsits with communal areas this is also an HMO.
There are some other things to consider, such as is this mainly a residential property and is it the residents main or only home and that includes students on a full time course even if they go home to live elsewhere in holiday periods.
Exceptions are allowed for University Halls of Residence and properties managed by Housing Associations and Local Authorities.
Your HMO Responsibilities
Now you’ve established that you are responsible for an HMO student property you need to be aware of certain extra regulations that come into force. These are:
- Larger HMOs which have five or more occupants or are three or more stories need a local authority license.
- Extra fire safety measures are needed by way of smoke and heat detectors and safe fire exits.
- You must have good water supplies and drainage that cannot be unreasonably interrupted.
- All gas and electric appliances must be safe and have annual gas safety checks. Electrical items must be checked every five years.
- Communal spaces must be kept in a reasonable state of repair and decoration and should be generally clear of obstructions.
- There must be sufficient waste bins and disposal facilities.
- The living accommodation and any furniture supplied must be clean and in a good state of repair.
As you can see, it is not a simple matter to take on and HMO and regulations are generally being tightened in response to the actions of rogue landlords who are abusing the system.
Mistoria Group are student property investment specialists, we have many years experience in sourcing and renovating properties to create a student HMO property portfolio. Done correctly a HMO can provide an excellent return on investment. Done badly it will be a drain on your time and resources and can lead you into difficulties.
Choosing an area for HMO in North West England
When it comes to investing in property in the UK, location is everything. At present, the average property values in London and the South are falling, whereas in North West England, in cities such as Manchester, Liverpool, Salford, Bolton, and up North like Leeds and Sheffield, the rental yields are pretty impressive and certainly amongst the best in the UK.
As occupants within HMOs are typically single professionals or students, you need to consider where your target tenant may want to live and how much they are willing to pay for it. Important aspects to consider are proximity to public transport (train stations, bus routes), local amenities, and the distance from the city centre.
Typically, HMOs are a great option for both students and single professionals, so purchasing a HMO that boasts just a 10-minute commute to the city centre is always a good idea. While HMOs located in the city centre can be attractive for your target market, they tend to also be more expensive due to the prime location. Purchasing an HMO on the edge of a city will therefore make your property a more affordable option.
HMO Property Investment Services at Mistoria Group
If you require professional advice and guidance when it comes to both the different types of properties and the various types of investments you can make, we can help. At Mistoria Group, we have more than 200 years of combined property experience as well as extensive local knowledge and a dedicated team of letting professionals and chartered accountants.
Offering a wide range of property investment services including armchair investment, joint venture investment and merchant investment, we provide a wide variety of property investment packages to suit all our clients. Regardless of whether you’re an experienced property investor or a budding landlord, we provide plenty of high-yielding investment opportunities for our clients to explore.