Houses in Multiple Occupancy (HMOs) can provide lucrative investment opportunities for landlords. But there are some drawbacks to consider, too. We explain all you need to know.
What is a HMO?
A HMO (House in Multiple Occupancy) is a property that’s rented out by multiple individual tenants. Student accommodation (where a property is let to multiple students who each have their own tenancy agreement) is a common example of this.
In the world of HMOs, each tenant or related group of people in a property is classed as its own ‘household’. For example, in a HMO flatshare where two couples rent a room each, each couple is classed as a ‘household’ within the property.
What are the benefits of becoming an HMO landlord?
There are some really appealing benefits of investing in HMO property, including:
- Higher rental yield: You can generally make more rental income from an HMO than a standard property. (The total rent from all the tenancies usually comes to more than the rate you’d be able to charge for a single household.)
- Strong demand: Demand is currently very high for HMOs – whether for student accommodation in University towns, or flat/house shares in cosmopolitan cities.
- Greater economies of scale: HMO properties generally get higher rental yields, and you only need to invest in one of each core appliance – for example, a single washing machine for the whole house.
- Fewer void periods and arrears: With multiple tenancies, you’re less likely to experience void periods or rental arrears. Even if one tenant moves out or falls behind on rent, your property still earns rent from its other tenants.
HMO landlord responsibilities
HMO landlords have extra responsibilities compared to landlords of standard properties. This is because HMO tenants face a different set of risks than those living alone or solely with family. For example, a property that’s let to multiple individual tenants is at a greater risk of a fire breaking out. For this reason, there are certain rules and regulations in place to keep HMO tenants safe.
HMO rules and regulations
If your property is let to five or more ‘households’ where some communal appliances are shared, you’ll need an HMO licence. It’s likely you’ll need one for less households than this, too – depending on what your local authority says. So it’s important to check with them before making any commitments. Read on for more information on how to get an HMO licence.
Health and safety
As well as the usual landlord health and safety requirements around gas, fire and electricity, HMO landlords have some additional responsibilities. These can differ depending on the area’s local authority. But it’s likely you’ll need to do things like:
To ensure you are meeting Health and Safety rules for a HMO you must comply with the Management of Houses in Multiple Occupation (England) Regulations 2006. This means that you will have to:
- Ensure that any fire precautions are maintained and remove any obstructions to ensure tenants are safe.
- Electrical installations and appliances must have checks such as PAT testing to make sure that they are safe.
- Maintain, repair and keep clean all shared installations and areas including making sure that they have adequate lighting.
- As a HMO owner, you need to send a copy of your Gas Safety Certificate to the local authority every year and if requested.
- Install specific door handle and lock types.
- Make sure there’s a lock on each bedroom door.
- Supply adequate fire and CO2 alarms depending on the size of your HMO.
HMO licencing rules were updated in 2018 to help prevent overcrowding in shared properties.
The new rules state that the floor area of any sleeping accommodation used by one person over 10 years old is at least 6.51 square metres, and 4.64 square metres for one person under 10 years old.
Each type of HMO licence also has its own specific rules around how many people can sleep in a room.
HMO challenges for landlords
Investing in HMO properties can be a great property investment strategy in itself, or as part of a wider portfolio. But it’s important to consider the challenges of being an HMO landlord before making any decisions. Let’s take a look:
Getting a HMO licence
Getting a HMO licence can be complicated and time consuming, as the local council will need to consider lots of different angles to make sure the property is suitable for multiple occupancies.
This can take a few months and there can be costs involved too; how much will depend on the local council.
There’s no guarantee that you’ll be given an HMO licence – so there’s that to bear in mind, too.
However, if you’re willing to do the initial legwork, obtaining an HMO licence helps show prospective tenants you take their welfare seriously, and can lead to financial gains that make the process worthwhile.
It’s also easier to get an HMO mortgage when you have a licence than when you don’t.
The extra rules and regulations
Adhering to the extra rules and regulations involved in being an HMO landlord can be time consuming.
In a nutshell: there’s quite a bit more compliance involved with HMO properties, and there’s more action needed from you as a landlord than with standard properties. Whether you’re willing to take this on will depend on whether you think the financial gains are worth it.
Managing your finances
There’s more financial admin involved with renting out HMO properties than standard lets. Having multiple tenancies within one property means you’ll have to manage profit & loss (P&L) statements and income & expenses for each ‘household’ within the property. And collecting rent from each individual ‘household’ can also present more work.
The good news is – there’s tech available to help with this. For example, Hammock gives you separate P&L statements for each household within your HMO. And you also get a full breakdown of each household as if it were its own separate property. So you can reconcile payments and manage expenses for individual rooms with minimal fuss.
We’ve designed our platform this way (built for landlords by landlords, by the way 😌) because we know how complex property finances can get. This may be even truer of HMO properties – but it doesn’t have to be when you’re armed with the right tools.
It can be trickier to secure a mortgage for a HMO property than for a standard Buy to let property. Many lenders will want to see that you’ve got a proven track record as a single occupancy landlord, for example. Mortgage interest rates tend to be higher for HMOs than standard properties, too, and you’ll likely need a bigger deposit.
Higher set-up costs
Investing in a HMO property often means outlying more money at the start of your investment journey. This is because you’ll need to make various adjustments to the property to make sure it complies with the local authority’s HMO regulations.
Managing multiple tenants/households
There are some downsides to renting to multiple households within one property. Wear and tear is usually higher, for example, meaning it’s likely there’ll be more maintenance to carry out.
HMO tenancies may be shorter than tenancies for, say, a settled family in a single occupancy property. So tenancy turnover might be higher in an HMO. But the higher rental yield you get from a HMO could outweigh these issues.
How to become an HMO landlord
To become an HMO landlord you’ll need to find a property that you think is suitable and determine whether you’ll need an HMO licence. You can do this by contacting the local authority of the area the property’s located.
You’ll then need to make the appropriate renovations and changes to the property to make it HMO-compliant.
How much is an HMO licence?
The cost of HMO licences varies depending on the local authority. They can range from about £400 to around £1200.
How to convert a property into an HMO
To convert a property into an HMO you may need to:
- Move or construct walls to make sure rooms fit minimum size requirements
- Install fire doors and fire safety equipment
- Install locks on bedroom doors
- Have one or more additional toilets or bathrooms fitted to make sure there are enough for the amount of tenants
You may also think about converting certain spaces into rentable bedrooms – for example, the property’s current living room or garage. But it’s important to note some tenants might not find the prospect of renting a property with no living space appealing.
Manage your HMO property finances with Hammock
If you’re thinking of investing in an HMO property – remember, Hammock will help you stay on top of the additional complexities of managing an HMO, from monitoring payments to keeping track of expiring documents. Our platform fully streamlines the process of managing individual tenancies’ P&L statements and income and expenses, and allows you to view a full financial breakdown of each household within your HMO.