Investing in HMOs: A Guide for Property Investors
The UK property market offers various avenues for investment, each with its own set of risks and rewards. One option that has been gaining traction is HMO’s, or ‘Houses in Multiple Occupation’. This type of property investment can provide substantial returns, but it also comes with additional responsibilities and regulations. Sit back, grab a coffee and let us take you through all you need to know. We'll explore what HMOs are, why they're appealing to investors, and the key things you need to know before diving in.
What is an HMO?
An HMO is a property rented out by at least three tenants who are not from the same household (i.e., not family members), but who share facilities like the kitchen, bathroom, and living spaces. These types of properties are commonly used by students, young professionals, or lower-income tenants who seek affordable shared living.
The main types of HMOs include:
Small HMOs: A property rented by three or more tenants from different households.
Large HMOs: Properties rented by five or more tenants. These properties require additional licensing from the local council due to more stringent regulations.
Why Invest in an HMO?
There are several reasons why HMOs have become an attractive proposition for property investors:
1. Higher Rental Yields: One of the primary advantages of an HMO is the potential for higher rental yields. Since you're renting out rooms individually, the combined rental income from multiple tenants often surpasses what you could earn from renting the property to a single household.
2. Demand for Affordable Housing: In many urban areas, there is a significant demand for affordable housing, especially among students, young professionals, and lower-income workers. HMOs cater perfectly to this demographic, providing a cost-effective living arrangement in expensive cities.
3. Reduced Risk of Vacancy: If one tenant vacates a room, the property still generates income from the remaining tenants. This reduces the impact of tenant turnover on your overall rental income.
4. Diversification: Having multiple tenants from different professions or backgrounds means your income is less reliant on a single person’s ability to pay rent, diversifying your risk as a landlord.
Key Considerations for HMO Investors
While HMOs can offer lucrative returns, they could also come with additional things to consider compared to traditional buy-to-let investments. Here are some key factors to keep in mind:
1. Licensing and Regulation:
Mandatory Licensing: For properties with five or more tenants forming more than one household, you will require a mandatory HMO license. Licensing requirements vary depending on the local council, so it’s crucial to check the specific regulations in the area you're investing in.
Fire Safety: HMOs require higher safety standards, including smoke alarms, fire extinguishers, and sometimes fire doors. You’ll need to ensure the property complies with all fire safety regulations.
Minimum Room Sizes: The government has set minimum room size standards for HMOs, particularly for bedrooms. For instance, rooms occupied by one adult must be at least 6.51 square meters. Check out the requirements for room sizes on the Government website. https://www.gov.uk/private-renting/houses-in-multiple-occupation.
2. Management Intensive: Managing a HMO can be more complex than managing a single tenancy. With multiple tenants, you may face more frequent tenant turnover, maintenance issues, and disputes between tenants. Hiring a letting agent with HMO experience can help ease this burden, but it will reduce your overall profit.
3. Financing an HMO: Not all mortgage lenders offer products for HMOs, and those that do may have stricter criteria, such as a higher deposit or interest rates. It’s essential to work with a broker who understands HMO financing. However, there are a number who of mortgage lenders who specialise in HMO’s.
4. Location Matters: The success of your HMO investment largely depends on the location. Areas with a large student population, strong rental demand, and limited housing supply tend to be ideal for HMO properties. Research the local market and tenant demand before committing to a purchase.
5. Council Tax Considerations: In some cases, each room in an HMO may be liable for council tax, depending on how the property is set up. If the property is a self-contained flat or if rooms are let separately on exclusive tenancy agreements, you could face higher council tax liabilities.
6. Article 4: Some areas may in the UK, usually around major cities have implemented Article 4 regulations. If a property you wish to purchase falls under these areas, you will not be able to covert them to HMO’s (if not already done so) without planning permission. This could add a real blocker to any project. To over come this, ensure you research the area before purchasing. They are a number of useful maps on the internet to aid you with this. For example a good online tool to use is the Article 4 Map which allows you to search for article 4 directions across the UK quickly. https://article4map.com
Steps to Setting Up a HMO
If you’ve decided that an HMO is the right investment for you, follow these steps to get started:
1. Research Your Market: Understand the tenant demand in your target area. Are there universities, hospitals, or large companies nearby that attract transient populations?
2. Ensure Compliance: Before purchasing, ensure the property meets or can be easily adapted to meet HMO licensing and safety standards.
3. Obtain a License: Contact the local council to apply for an HMO license, which can take several weeks or months depending on the authority.
4. Adapt the Property: Make any necessary changes to the property, such as adding fire doors, ensuring adequate kitchen and bathroom facilities, and adhering to minimum room sizes.
5. Find Tenants: Once everything is in place, you can market your property to potential tenants. Using a lettings agent who specialises in HMOs can help ensure you're targeting the right audience and managing the property effectively.
Final Thoughts
Investing in HMOs can be a highly profitable venture if done correctly. However, the increased management and regulatory responsibilities mean that it may not be for everyone. Before you jump into the world of HMO investments, make sure you’ve done your research, understand the risks, and have a solid plan for property management. With the right approach, HMOs can be a lucrative addition to your property portfolio, offering higher rental yields and a diversified income stream.
