Should I invest in an HMO?

Many landlords will consider purchasing an HMO as part of their investment strategy – but are they a good idea? And what exactly are they? Many investors will ask the question, should I invest in an HMO?

What is an HMO?

An HMO is a House in Multiple Occupation, it is simply a house or property which is occupied by multiple tenants each with a separate tenancy agreement. With a House of Multiple Occupation as a landlord, you typically rent out separate rooms or spaces in the same property rather than the whole property.

In order to be considered an HMO, a property needs to let to at least 3 separate tenants who are not part of the same household. The tenants share communal facilities such as bathrooms, kitchens, and community space.

How do HMO’s Work?

The biggest difference between an HMO and a traditional buy-to-let investment is that the landlord rents individual rooms rather than the property as a whole. The reason landlords do this is because it makes the rental cheaper for individual tenants and makes the rent for the landlord higher than what they would receive for the property as a whole.

empty room PropTech Pioneer

In addition, to renting rooms separately most HMOs typically charge rental as an ‘all-in cost’ and includes utilities, council tax, and broadband, so tenants only have one specific charge to worry about. Additionally, tenants do not need to worry about fluctuating costs such as energy use or have to negotiate with other tenants for the collection of expenses.

Should I invest in an HMO? Are they a Good Investment?

For most investors that is probably not the right question. HMOs have a number of advantages as well as disadvantages that investors need to consider before investing in an HMO.

Advantages of HMO’s

There are several reasons which make HMO’s a more advantageous investment, which include:

Higher gross yields

HMOs generally tend to generate higher yields this is because the gross rental which the property can generate with multiple tenants is generally higher than what an individual occupier or household can afford to pay for the whole property by themselves.

However, how much you get to keep of the gross rental income depends to a large extent on how effectively you can manage the property and your expenses. Tenants tend to have a lot more services included in the rent which adds more cost to landlords.

Less exposure to rental arrears

Because HMOs by their very nature have multiple tenants and there is less likelihood of all of your tenants being late with paying rent at the same time. As a landlord, you have less exposure to a complete loss of rental income. Even if one tenant does fail to pay the rent, it is likely the other tenants will be paying in full, reducing the impact on your cashflow.

High demand and larger tenant pool

Because of their very nature, HMO’s are likely to offer the cheapest rental option for potential tenants which means the pool of potential tenants for your property could be bigger. This means that you are likely to have fewer periods of vacancy. However, given the shortage of rental stock, this is unlikely to be a major issue for most landlords.

Opportunities to add-value

For most landlords with traditional buy-to-let properties, it can be challenging to add value to their properties which increases rental income. This is not the case with HMO’s as there are relatively minor changes that can have an immediate impact on rental income, these are likely to be the following:

  • Adding additional rooms – if there is space many landlords can add additional rooms to their HMO which has an immediate impact on the rent which can be generated.
  • Minor amendments and upgrades – minor changes to properties don’t generally increase the rent with normal rental properties, however, relatively minor upgrades such as new appliances, painting, etc can have a meaningful impact on the rent you can collect.
HMO

Disadvantages of HMOs

As a general rule, HMOs are far more complex, and there are many things investors need to consider before they buy one:

Financing

It is typically far more difficult for landlords to finance HMOs, it is possible to get specific mortgages however, they tend to be more expensive and lenders require landlords to have larger deposits. This is because banks consider HMOs to be more risky assets.

Management and operational costs

HMOs are more expensive to manage and operate than a traditional buy-to-let investment, these additional costs include:

  • Licensing costs
  • Additional finance costs
  • Landlords pay utility bills
  • Landlords pay council tax
  • Increased maintenance costs

Although many of these costs are ultimately passed on to the tenants, periods of vacancy as well as high energy usage can exacerbate these costs.

Rules and legislation around HMO management

HMOs are subject to more legislation than standard buy-to-let properties, while there are also additional planning and licencing regulations in place. Many local authority areas with lots of HMOs also have rules on the number of further co-living properties they’ll licence.

Investors managing HMOs need to be aware of the following:

HMO licensing

HMOs which have five or more tenants are required to be licensed by the local authority. However, there are some local authorities that require all HMOs to be licenced.

Planning permission

In addition to having an HMO licence some HMOs also require planning permission from the local authority. HMOs which have between 3 and 6 unrelated individuals as their only or main residence who share basic amenities are classified as a C4 Planning Use Class. These properties will only require planning permission in specific locations which are locations that have what are called Article 4 directions.

However, a HMO with seven or more occupiers requires specific planning permission to operate the property as an HMO.

Minimum room sizes

HMOs must meet specific guidelines which set minimum room sizes, these set a minimum bedroom size of

  • One adult – 70 square feet
  • Two adults – 110 square feet
  • Children’s bedrooms cannot be smaller than 50 square feet

Fire safety rules

HMOs have additional fire safety rules which include the provision of the following: 

  • Self-closing fire doors (30 minutes)
  • An unobstructed fire escape window
  • Clear and unobstructed escape routes
  • Signs and notices highlighting exit points
  • Mains powered smoke alarms in common areas
  • Heat detectors in kitchens
  • Emergency lighting
  • Fire blankets and fire extinguishers

Overcrowding and minimum facilities

Landlords must make sure that their HMO does not become overcrowded. Overcrowding is a serious offence, and you can be issued with an overcrowding notice if the council believes your HMO is or is likely to become overcrowded.

A HMO will be overcrowded if a person who is 13 or older must sleep in the same room as

  • Any person of the opposite sex who is also 13 or older or
  • A couple