If you are new to property, HMO is likely another acronym to learn and understand. HMOs receive much attention from property investors who are attracted by the potentially lucrative rewards. Here we shall give you a broad introduction to HMOs, to help you understand what an HMO is property and the considerations to weigh up.
What is a HMO property?
HMO simply means a House of Multiple Occupancy. It defines a specific type of tenanted residential dwelling, however it is a large enough subject to be covered as a strategy in its own right. HMOs are defined as either small or large HMOs.
A small HMO property must have at least 3 tenants living in it from more than 1 household, who share facilities such as toilets, bathrooms and a kitchen. A large HMO must have at least 5 tenants in residence. In essence an HMO is a property in which private tenants rent individual rooms and share a host of communal areas with other tenants.
HMO properties attract predominantly young professionals and students. The cost of renting can be lower when compared to renting an entire house or apartment by yourself. Another attraction can be the prospect of communal living and being around a similar demographic of people within the same building.
What is the big attraction for landlords?
The main attraction involves earning the highest revenue from a single property. Consider a 3 or 4 bedroom family home. In most cases the rent achievable from letting out 3 or 4 bedrooms individually will be higher than letting out the property as a whole. This means that higher returns can be gained over investing an equivalent amount in 2 or 3 small buy-to-let properties. And that’s not all.
Having multiple tenancy agreements within one property can provide the landlord with a certain amount of added security. If one tenant leaves, the landlord will still have 2 or more tenants paying their rent, thus securing some income until a new tenant is found.
HMO properties can be bought already purposed and good-to-go for the landlord to begin letting out immediately. However, with a bit of creative thinking and clever use of space, the most lucrative HMOs will be found in large family homes, ex-B&Bs or small hotels. Tighter legislation around HMOs will require a more complex set of hoops to jump through, so it is important to know what you are getting into, as failure to meet the regulations can have serious consequences.
Legislation in a nutshell
HMO legislation sets out to safeguard the health, welfare and quality of living for the tenants. The tenant’s private rooms must be above a certain size and the communal areas must be representative of the amount of tenants living within the building. It will be the landlord’s responsibility to ensure there is no overcrowding and no more than 2 tenants can stay in any single room.
Similar to buy-to-let properties, there are a host of safety measures that must be included. These range from smoke, heat and carbon monoxide detectors to fire doors, gas certificates and electrical safety certificates. When taking on any HMO, whether converting or purchasing an existing one, the responsibility will fall on the landlord to ensure full compliance. Do your own due diligence and never take the word of the seller.
It will be essential to know whether or not you need to obtain an HMO licence. Licensing requirements are often under review and will be dependent on the local authority for the property. Some areas within a local council may have restrictions on HMO licensing, called Article 4 directions, so always seek advice from the local authority when researching an area for HMOs.
To achieve the high yields of HMOs will require a few additional costs along the way. The obvious costs will be around converting a property to an HMO, adding extra bathrooms and such, plus the requirement to meet the various health and safety measures. So what other costs should you expect?
To begin with, expect to pay higher insurance premiums, internet, utility bills and council tax. Yes, for HMOs the landlord will be responsible for paying council tax for the entire building. Given the tenant demographics, often the property will need to be furnished and fitted out to a high standard. Bear in mind the property will attract the calibre of tenants it deserves.
More tenants will require more management. If overseeing the property yourself to reduce paying management fees, this will mean multiple tenancy agreements and handling any disputes that may occur. Disputes may arise from the social dynamics within the property or not taking responsibility for cleaning and general housekeeping for example.
As a brief introduction we have touched on how HMO properties differ from other rental strategies, why they can give high returns on investment and shown the potential in large buildings like family homes. There are cases where just 1 or 2 HMOs have provided financial freedom for investors.
There are additional costs, considerations and responsibilities involved with HMOs that must be understood before venturing down this route. Targeting the right areas will be fundamental for the success of an HMO, so extensive research will be required, including speaking to the local authorities. For these reasons HMOs are viewed as a step-up from firstly gaining experience through smaller buy-to-lets.
If at this point your tail is wagging at the thought of HMO investments and you want to learn more, we host a dedicated HMO Advanced Course that will give you all the required knowledge. Taught by trainers who have real-world success with HMOs, you will learn how to safely and ethically become an HMO landlord. In addition you will have the support from our amazing community, mentors and coaches to not only offer advice but also give you the motivation to make HMOs your own huge success story.