Investing in HMOs (Houses in Multiple Occupancy) is becomig increasingly popular among property investors. Whether it’s the higher rental yields or the lower risk of rental voids there are some compelling benefits to diversifying into this asset class. However, if you’ve not owned a HMO before there are a few things to know.
To help you navigate the complexities of landlord responsibilities for HMOs, we have compiled a guide to HMO requirements. This guide includes all you need to know on classifications, regulations and liscensing, and Health and safety considerations.
What is a HMO?
A House in Multiple Occupation (HMO) is a property that is rented out to multiple individuals or households who are not part of the same family or household. It is often referred to as a shared house or a multi-tenant property.
HMOs typically have three or more tenants who share common facilities such as a kitchen, bathroom, or living room. Examples of HMOs include student accommodation, boarding houses, shared flats, or houses rented out room by room.
Depending on the location, there may be specific regulations and requirements governing HMOs. These regulations are in place to ensure that the property meets certain standards and that the health, safety, and well-being of the tenants are protected. They may include requirements for fire safety measures, room sizes, sanitation facilities, and licensing of the property.
Landlords of HMOs may have additional responsibilities compared to those renting out single-occupancy properties. These responsibilities may include regular safety inspections, maintenance of shared areas, and compliance with local regulations. The specific obligations can vary depending on the jurisdiction, so it’s important for landlords to familiarize themselves with the relevant laws and regulations in their area.
Should I invest in a HMO?
Benefits of Managing a HMO property:
- HMOs often offer a greater return on investment from multiple tenants
- In prime areas tenant demand will be greater
- Rental voids have smaller impact
Things to consider:
- Property maintenance costs are often higher
- Increased legislation requirements
- Often stricter planning restrictions than a normal buy-to-let property
- Increased administration with multiple tenants
What are the financial considerations of investing in a HMO?
Investing in a House in Multiple Occupation (HMO) can have financial considerations that are different from traditional property investments. Here are some key financial considerations to keep in mind:
Purchase Costs: When acquiring a HMO property, you’ll need to consider the upfront purchase costs, including the purchase price, legal fees, survey costs, and any applicable taxes or stamp duty.
Renovation and Refurbishment: HMO properties often require modifications to meet safety and regulatory standards. In particular landlords will be required to improve EPC ratings to at least a C rating, which could require some additional investment. The cost of renovating and refurbishing the property to comply with HMO regulations and attract tenants should be factored into your financial plan.
Licensing and Compliance: Depending on the location, HMOs may require licenses or permits, which may involve additional costs. Familiarize yourself with the local regulations and licensing fees applicable to HMO properties in your area.
Ongoing Maintenance: HMO properties tend to experience more wear and tear due to multiple occupants. Regular maintenance and repairs should be anticipated as part of your budget. It’s essential to keep the property in good condition to maintain tenant satisfaction and comply with regulations.
Property Management: Managing an HMO property can be more time-consuming compared to single-occupancy properties. Consider whether you will manage the property yourself or hire a professional property management company. Property management fees, if applicable, should be factored into your financial calculations.
Rental Income: HMO properties have the potential to generate higher rental income compared to traditional properties due to multiple tenants. However, vacancies and tenant turnover can impact cash flow. Thoroughly research the rental market in the area to determine achievable rental income and occupancy rates.
Operating Expenses: Consider the ongoing expenses related to running a HMO, such as utility costs, insurance premiums, property taxes, mortgage payments (if applicable), and any service charges or ground rents.
Financing: Determine the financing options available to you. Some lenders may have specific requirements or criteria for HMO properties. Explore mortgage options and understand the terms, interest rates, and associated costs.
Do I need planning planning permission for a HMO?
Yes, in the UK, you generally need planning permission to convert a property into a House in Multiple Occupation (HMO). HMOs are properties where three or more unrelated individuals share common facilities, such as a kitchen or bathroom. The specific requirements for planning permission can vary depending on the local authority, so it’s important to check with the planning department of the relevant local council.
Planning permission requirements for HMOs in the UK can vary depending on the local planning authority and the specific area. However, there are certain general considerations and regulations to keep in mind:
Change of Use: Converting a property into an HMO often requires a change of use from its existing classification. For example, if the property is currently classified as a single-family dwelling (C3 use class), it may need to be changed to a small HMO (C4 use class) or a larger HMO (Sui Generis use class) depending on the number of occupants.
Article 4 Direction: Some local authorities have introduced an Article 4 Direction. This directive removes permitted development rights for converting a property into an HMO. It means that even if the change of use would normally be allowed without planning permission, you will still need to obtain planning permission due to the Article 4 Direction. The purpose of this directive is to control the concentration of HMOs in specific areas and maintain the balance of housing types.
Local Planning Policy: Each local authority sets its own planning policies and guidelines, which may have specific requirements for HMOs. These policies can include provisions related to the size of HMOs, the provision of parking spaces, the impact on the local community, and the need for additional amenities or facilities.
Consultation: When applying for planning permission for an HMO, the local authority may consult with the local community and neighboring properties to gather their opinions and assess any potential concerns. This is particularly relevant for larger HMOs.
It’s important to note that planning permission requirements and Article 4 Directions can differ between local authorities. Therefore, it’s crucial to consult with the specific local planning authority or seek professional advice to determine the precise requirements and regulations that apply to your property.
Regulations and licencing
Landlords operating a HMO must adhere to additional requirements and specific standards. The council assesses the suitability of the proposed licence holder and/or property manager, ensuring they are fit and proper individuals.
HMOs require specific property licenses, typically valid for five years. Each HMO property owned necessitates a separate license, as one license cannot cover an entire portfolio.
Given that licenses are granted on a case-by-case basis, there is no one-size-fits-all approach. Three types of licenses exist, and the appropriate one depends on individual circumstances.
The types of licenses include:
Selective licence:
Local authorities may implement selective licensing schemes that apply to privately rented housing within certain areas. Such schemes may occur determine when it can effectively address housing issues or assist in managing anti-social behaviour.
Mandatory licence:
Local authorities mandate that all large HMO’s must acquire a license. This requirement applies to properties accommodating five or more tenants, forming multiple households and sharing facilities.
Additional licence:
Local authorities have the ability to enforce licensing onto any category of HMO in its area even if it is not subject to mandatory licensing. This action can be taken if the council believes there is ineffective management and issues with a large number of these HMO’s.
For further information refer to this Government guidance.
Health and safety considerations for a HMO
Health and safety considerations for a House in Multiple Occupation (HMO) generally focus on ensuring the well-being of the tenants and maintaining a safe living environment. While specific requirements may vary by jurisdiction, here are some common health and safety considerations for HMOs:
- Room sizes must be at least 6.51m2 for single adults, and 10.22m2
for two adults, though local authorities can impose larger room
sizes - Fire doors and seals on door frames
- A smoke alarm must be installed on every level of the house
- A heat detector is required in the kitchen
- Carbon monoxide detectors must be fitted where applicable. For example, wood burning stoves, gas appliances or working open fires
- Furniture must be fire resistant
- You must instruct an annual gas safety check on each gas appliance to receive a Landlord Gas Safety Record or Gas Safety certificate
- You must have the electrics tested every five years and complete required work
- You must regularly carry out portable appliance testing (PAT)
- Adequate waste and recycling collection and disposal is arranged
- Adequate heating throughout the property
It’s important for landlords to familiarize themselves with the specific health and safety regulations and standards applicable to HMOs in their jurisdiction. Compliance with these regulations helps ensure the well-being of tenants and reduces the risk of accidents or health-related issues.
Financing a HMO purchase
Investing in an HMO property can be a lucrative venture, but securing the right financing is crucial. Whether you’re a seasoned investor or a first-timer, here are a few pointers on how to arrange finance for your HMO property:
1. Understand HMO Finance Types
Finance for HMOs are similar to regular buy to let mortgages but will be specifically for HMO properties. Options are:
HMO Mortgages: These specialized mortgages are designed for HMO properties. They allow you to borrow against the property’s value and are usually interest-only. Lenders may have minimum property value requirements.
- HMO Bridging Loans: Bridging loans provide short-term financing to bridge the gap between buying and selling. They’re useful for purchasing HMOs quickly.
2. Choose the Right Financing Option
Select the financing option that aligns with your goals:
HMO Mortgages: Ideal for purchasing an HMO property. Compare rates, fees, and terms from different lenders using a good mortgage broker. Aim for maximum value extraction and minimal fees.
Bridging Loans: Use bridging loans when speed is essential. They’re short-term and can help you secure an HMO property swiftly.
3. Meet Lender Criteria
Lenders have specific criteria for HMO financing:
Property Value: Some lenders require a minimum property value (usually £75,000 to £100,000).
Landlord Experience: If you’re new to HMOs, consider lenders who accept less experience.
- If you legally require a licence in your borough then make sure this can be evidenced.
4. Secure Financing
Once you’ve chosen your financing route, apply for the loan. As a HMO is more specialist than a standard buy to let a mortgage broker can really add value here.
Remember, HMO finance can make or break your deal. Choose wisely, and soon you’ll be on your way to a successful HMO investment.