What are HMOs? And how do they work?

We take a look at Houses of Multiple Occupancy and explain how they work from an investor’s perspective.

What are HMOs?

HMOs are an abbreviation for houses of multiple occupation. As an investor, you rent out each room to a separate tenant to acquire more rent than you would of by renting the property out whole.

Each tenant has their own room, and they gain collective use of the shared amenities such as the kitchen and living room. Some HMOs have individual bathrooms attached to each separate room, whilst some HMOs offer communal shower facilities.

Is my home a HMO?

Your home is probably an HMO if 3 or more unrelated adults live there and:

• There are at least two separate households
• living areas such as a kitchen and a bathroom are shared.

As an example, it could be 3 individuals living in separate rooms or 2 couples living in separate rooms. HMOs can be a:

• shared house or flat, where the sharers are not members of the same family
• bed-and-breakfast hotel that is not just for holidays
• house split into separate bedsits
• hostel

How do HMOs work?

The landlord will rent each room out separately and receive significantly more rent for doing so compared to renting out the house to an individual family.

HMO market size

At the most recent official ‘count’, in 2018, the government estimated that there were around 4.7m people within the private rented sector in England alone, and around 497,000 HMOs in England and Wales combined.

Arbuthnot Latham a private bank has stated that over the past 10 to 15 years, HMOs specifically and renting generally have proliferated. This is due to high house prices which have deterred prospective first-time buyers from getting on the housing ladder. This is because mortgage availability has been limited, and because some younger people are less keen on the prospect of home ownership compared to older generations.

Growing market

HMOs have also been rapidly growing in popularity among investors. This is because, despite more significant management overheads and growing numbers of regulations and legislation, the yields are normally high. This is very attractive to the investor.

Arbuthnot Latham explains that “Local authorities are also keen on HMOs because they are a tool through which councils can control HMO density and housing stock in a certain area. Councils can, and almost always do, require property owners to seek permission to convert a single dwelling house into a small HMO.”

As the government has not built sufficient new homes to meet housing demand HMOs perform an important function to help home many people.

legislation

In recent years there has been increased regulation for HMOs. This is to ensure that people have a minimum standard of housing.

Landlords of HMOs must make sure that:

• the property is not overcrowded
• electrics are checked every 5 years
• annual gas safety checks are carried out
• proper fire safety measures are in place, including working smoke alarms
• there are enough rubbish bins
• communal areas and shared facilities are clean and in good repair
• there are enough cooking and bathroom facilities for the number living there

UK charity Shelter advises about rights and responsibilities in an HMO.

There is legislation ensuring that room sizes meet minimum criteria. This is 6.51 meters squared for individuals and 10.22 square meters for couples.

HMO Licence

As a landlord you must get a licence from the council if both are true:

• 5 or more unrelated people are living in a shared house
• there are 2 or more separate households

Some councils also require other HMOs to be licensed. Some councils require all private landlords to get a licence. Typically licences last for 5 years then you need to reapply.

As a landlord, if you need a licence and don’t get one then you cannot evict a tenant under a section 21 notice. Furthermore, you could be issued a fine and ordered to repay 12 months’ rent to tenants. Check with your local council to find out if you need a licence.

Large HMOs

It’s widely accepted that 5 occupants are the minimum size for a large HMO as this is the point at which mandatory licensing comes into effect, but the upper limit can vary. In terms of regulation when you have a property with 7 or more occupants the class of the property will change and a full planning application will be required to create an HMO of this size.

Exclusions to Licencing

HMOs don’t need to be licensed if they are managed or owned by a:

• council
• co-operative
• health service
• housing association
• police or fire authority

What are the advantages of HMOs as an investor?

There are several advantages to investing in an HMO compared to a buy-to-let. We list the main advantages below:

Increased yield. This is very important as an investor, as the more you make the more profitable your investment is likely to be. The returns from HMOs are significantly higher. However, profitability is determined by the number of rooms your property has. The higher the number, the bigger the gain in comparison to a traditional buy-to-let property.

Void periods. Whilst your HMO is likely to have voids, it will usually be just one or two rooms at a time. This means you’re likely to always receive an income from your property. This contrasts with a typical buy-to-let where income is all or nothing.

What are the disadvantages of HMOs as an investor?

Time. HMOs, consume a lot of your time by managing the property. Alternatively, you could appropriate a management company to do this for you. But this will cost you. Typical management charges are at 10-15% of all revenue generated.

Increased maintenance costs. HMOs have a lot of communal areas and you will spend more on upkeep to maximise your return. Furniture for this type of property is a must. We suggest fully furnishing the property with beds and tables in each room. We provide some extra tips on furnishing your property to increase your returns.

Rules and regulations. There is increased regulation for HMOs. You may even need licencing. All of this increases your costs.

The Esper Approach to HMOs

At Esper Wealth we can assist you with entering the HMO market. We offer two investment solutions.

• Option 1. You can buy a property and we will convert the property for you, then you can rent your rooms out individually. We would cap the property to a maximum of six bedrooms due to the licencing rules on larger properties.

• Option 2. You can buy a property and we would then arrange for the government to rent the property directly from you. It would then be their obligation to maintain the property. This has the advantage of no maintenance costs and a guaranteed rental income.

Whatever option you decide, it is important to structure your investment to minimise tax. There could be advantages of buying property through a limited company. This is especially the case if you are a higher rate taxpayer. We also recommend reading Buy To Let Mortgages – the key details explained as this will give useful advice on funding your investment project.

Should I invest?

This depends on you as an investor. If you are looking at maximising your rental yield then HMOs can be an attractive proposition. However, there is more work involved with this property type. If you want a passive investment then purpose built student accommodation PBSA could be for you.

At Esper wealth, we take a consultative approach to investing. We offer each prospective investor a free investment review. This is our opportunity to get to know you, to understand your investment needs and your attitude to risk. This will help us in giving advice which is suitable for you. If you would like to speak with a property consultant then simply call the office and arrange a call at a time which is convenient for you.