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HMO stands for House in Multiple Occupation. It’s when a property is rented out to multiple households, rather than a single family unit.
It’s a strategy that interests many investors, as the returns are higher than Buy to Let. However, those returns don't come for free! There’s a lot of extra work involved and you must be clued up on the applicable laws. Thankfully for you, I’ve written this handy guide!
When investors think of HMOs, they might think of a large house in a student town. Each room rented individually. Traditionally, such a house would earn far more rent, compared to buy to let. In recent years, the laws around HMOs have been tightened, and much smaller properties get classified as HMOs.
In the article, I talk about the advantages and disadvantages of HMOs. I also talk about the different rules you must follow to have a legal HMO. These rules include licensing and article 4 directions.
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According to the UK Government, an HMO is defined as follows.
“A house in multiple occupation (HMO) is a property rented out by at least 3 people who are not from 1 ‘household’ (for example a family) but share facilities like the bathroom and kitchen. It’s sometimes called a ‘house share’.”
So a two bed flat, rented to 3 people, could be classified as an HMO.
Your property is defined as a large HMO if all of the following apply:
- “it is rented to 5 or more people who form more than 1 household”
- “some or all tenants share toilet, bathroom or kitchen facilities”
“at least 1 tenant pays rent (or their employer pays it for them)”
A large HMO must have a licence. A small HMO may or may not require a license – it depends on the individual council.
The heyday for HMO investors was just after the great recession in 2008. Large HMOs would be rented out room by room, and could earn 3x as much rent. Since then, rules have been tightened up, with licensing, article 4 directions and other restrictions. It’s still possible to make good returns with HMOs, but more work is involved.
There’s one advantage with an HMO, more rent!
Consider a 3 bedroom house. If you rent it out to an individual family, you might get £1,000 per month.
What if you converted the property to an HMO and rented out each room separately? Well, you might be able to convert the living room into two separate bedrooms. So your 3 bed house becomes a 5 bed HMO. If you rent out each room for £400 per month, then your property now gets £2,000 per month in rent. You’ve doubled your rent – you can see why so many property investors aspire to do HMOs!
HMO investments tend to work very well near hospitals and universities. Students, nurses and other lower paid staff provide high demand for rooms.
There are a number of disadvantages with HMO investments
- HMOs might need a licence
- Article 4 directions mean you can’t do HMOs in many areas
- HMO mortgages are more expensive than Buy to Let mortgages
- Higher turnover over tenants
- You need to renovate your property to become an HMO
- More expensive to manage your property
- There are often issues with tenants falling out
If you want to make yourself unpopular at a dinner party, start talking about article 4 directions! I couldn’t imagine a more boring phrase. However, these three words are integral to HMO investors.
Article 4 directions are made by local councils. Essentially, they place restrictions on certain types of property developments. The most popular type of article 4 direction, is related to HMOs. The Government allows developers to convert a property to an HMO, under permitted development rules. An article 4 direction suspends that right in the local area. Most local councils in London have article 4 directions in relation to HMOs.
While it’s not impossible to do an HMO in article 4 area, many councils are heavily resistant. HMO landlords are viewed by many as slumlords (unfairly in my view). Also, local councils don’t want to lose family housing units to HMOs. If you do plan on doing an HMO investment, you must check for article 4 directions.
As an aside, I think that the reputation of HMOs as slums is unfair. They have an important role to provide smaller and cheaper accomodation to those that need it.
As mentioned above, a large HMO must have a licence. A large HMO being rented to 5 or more people, from 2 or more households. Property licensing is designed (in theory) to improve standards in the private rented sector. You provide your details to the local authority and they check the quality of your accomodation. In reality, it’s become a tool to extract more money from landlords. Property licences are chargeable – the cheapest I’ve ever paid is £400. They normally last for 5 years.
Smaller HMOs may require a license – it depends on the local authority. And guess what?! Most councils now require smaller HMOs to have a license too! You will need to check with the local council.
If the sole motivation of councils was to improve property standards, then they wouldn’t charge so much for licenses. The reality is that most ‘slumlords’ don’t apply for a licence and fall under the radar. While property licensing started as a good idea, it’s just become another tax on property investors.
It’s also worth noting that Buy To Let properties might also need to be licensed. It depends on the local authority.
Another important consideration is that you’ll need a specialist mortgage product for your HMO. Your buy to let mortgage won’t allow you to use your property as an HMO.
An HMO mortgage will have a higher rate than your buy to let mortgage. It’s a specialist area, and there aren’t lots of lenders offering HMO mortgages.
You’ll need to find a specialist letting agent to manage your HMO. This is very important. Most estate agents don’t manage HMOs, and those that do, charge more for their services.
It’s very important to have a good HMO manager, as there’s a lot of work to do. If you have a 5 bed HMO in a student town, then there might be 10 tenancies in a year. There’ll be a lot of work to draw up the tenancies, sort out maintenance and do viewings. Don’t expect to pay 12% + VAT!
HMO investment is something that piques the interest of many property investors. So what are HMOs? As investors search for higher returns than Buy To Let, HMOs are the obvious choice. However, there are some additional considerations with this type of investment.
There are additional rules, and you must get the right professionals to help you.
If you want to find out more about property strategies in the UK, you’ve come to the right place! Check out these articles below: