What to know before managing an HMO
Houses in multiple occupation (HMOs), also called multi-lets, have proved lucrative for some landlords, but despite the potentially impressive yields, other considerations such as additional regulations, licensing schemes and extra administrative work mean that HMOs aren’t for everyone. With the recent launch of the NLA's HMO course selling out in it's first week, we take an in-depth look at HMOs and who should invest in them.
What is an HMO?
At its basic level, an HMO is a property which houses three or more people in two or more households, who share some basic facilities e.g. kitchen or bathroom. There are slightly different definitions if there is an owner-occupier living in the property. You can find full details in our Online Library.
Why would I want to be an HMO landlord?
The benefits of being an HMO landlord are considerable, and include high demand, a lower risk of void periods and higher yields.
The benefits of HMOs:
The exposure to void periods becomes less in a multi-let, as if one tenant moves out the impact isn’t as great as in a single-let property where you have to find tenants for the whole property.
Tenant demand for multi-let properties is also growing as demographics change. 32.6% of private renters are aged 25-34*, and according to our landlords survey, this is the most likely age bracket to rent an HMO. Multi-lets also appeal to students (who make up 54% of the HMO market), and blue-collar workers (at 25% of the market)** who need more flexibility and lower rental rates.
Traditionally, landlords managing HMOs enjoy higher returns than those letting other property types, and NLA research shows that HMO landlords receive average yields of 6.9% compared with non-HMO landlords with average yields of 5.6%**.
What do I need to know before I take on an HMO?
HMOs incur greater start-up and management costs, and the capital growth of your property may suffer.
The risks of HMOs:
Licensing fees, which are fixed by local authorities, vary significantly across the UK from £300 in Suffolk to £1100 in Ealing. In England and Wales, there are mandatory licences for ‘large HMOs’, and schemes for smaller HMOs can be introduced in an area after you buy a property. Whilst consultation periods take into account the views of local landlords and tenants, you could face hefty licence fees if another property licensing scheme is introduced. In Scotland, all HMOs require a licence.
Capital growth can be lower on HMOs, because the resale market for a property converted to an HMO consists almost exclusively of specialised landlords. Inversely, however, if you do own an HMO in a restricted area, its capital value may also rise significantly with the advantage to retain the shared usage.
HMO management regulations apply to all HMOs, regardless of whether or not they have to be licensed (except for Section 257 HMOs). This means that there must be a named manager of the HMO, and there are a number of duties, for example providing contact information to tenants and additional safety measures, as well as maintenance requirements. It’s an offence not to comply with the regulations, and local authorities can issue civil penalties of up to £30,000 or seek prosecution.
Planning regulations can apply to HMOs, and you may have to seek permission for a change in use. This depends on the size of the HMO and/or the local regulations – if there is an Article 4 direction in place in the area, any change will need permission. It’s important to be clear about the planning conditions before you purchase any property.
Caution: in October 2018 the Government extended the scope of mandatory HMO licensing in England. Previously it only applied to properties of at least three storeys with five people from two or more households. But now it covers all properties that house five or more people from two or more households, whatever the building size. It is estimated that the new rules will bring 177,000 new properties into mandatory licensing, affecting thousands of landlords. The three storey requirement remains in Wales.
What are my next steps?
Talk to an expert. There are many things to consider before investing in HMOs, and only experts will be able to help you decide whether it’s right for you. NLA members can call the NLA Telephone Advice Line on 020 7840 8939, and non-members can see their options for joining here.
Talk to your local housing officer. Before you make any investment it’s critical to know the planning regulations and licensing requirements of the area in which you plan to invest. Not all local authorities follow the same rules, an it’s important to check as requirements change from borough to borough.
Once you’ve talked to the right people, take time to do your own research as well. Read widely on HMOs and licensing. A good place to start would be the NLA’s Online Library (free to members), which offers a wealth of knowledge and case studies, or to attend the NLA’s one-day HMO course.
Recruit tenants well. Understand the personalities and lifestyles of your tenants and try to attract other tenants with similar ideals to maintain harmony within the home. The fewer inter-tenant disputes there are, the longer tenants will stay.
Keep up the maintenance of the property in order to keep tenants happy and avoid any bigger issues down the line. Consider employing a regular cleaner and gardener to maintain the general cleanliness of the property and the outside space
Get adequate and specialised insurance. HMO insurance differs from that of single property insurance in that it supports landlords who let their property to three or more unrelated occupants who share communal facilities such as the kitchen and bathroom. You need to ensure you are fully protected with a comprehensive HMO insurance policy should the worst happen. NLA Property Insurance say that “Whilst some insurers are averse to protecting HMO properties due to greater perceived risks, we recognise that some of these risks are really no greater than they would be for a single occupancy property. We also appreciate that not all HMOs are the same and as a result we have tailored our rates dependent on how the facilities are shared to fully support your specific HMO insurance requirements.”
*English Housing Survey: Private Rented Sector Report 2016/17
** NLA Quarterly Landlord Survey Q4 2018
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