Investing in HMOs
June 14, 2019
Should I invest in an HMO?
A House of Multiple Occupation (HMO) is a property where rooms are rented out individually to un-related people, rather than renting out a dwelling on a single tenancy, such as to a family or couple.
HMO tenants rent their room and share communal spaces such as the kitchen and sometimes the bathroom and lounge. They pay an “all inclusive” rent that includes utilities and council tax.
HMOs appeared in popular culture in the 1970’s in the TV programme “Rising Damp” where live-in landlord, Rupert Rigsby, provided rooms of dubious quality for a random group of people.
However, the current market demands that HMOs attain a much higher standard and they often feature designer interiors and lifestyle extras to cater to discerning professional tenants of all ages who like to pay an “all inclusive” rent while enjoying the social aspects of house shares.
Landlords are attracted to HMOs because they typically deliver significantly higher yields than a property rented out as a whole dwelling.
However, as with any investment, with higher rewards comes higher risk, and for this reason HMOs are typically the domain of more experienced landlords who are aware of the much stricter compliance issues, and who are also skilled at tenant management and being more “hands on” in that regards.
Some of the main considerations around HMOs
- Finance: If you don’t have much experience of being a landlord, it will be much harder to get HMO finance. Lenders like to see some level of previous experience of property and tenant management.
- Costs: Attractive gross yields are possible - up to three times greater than a single occupancy BTL property - but these are countered by higher costs (usually higher maintenance & repairs and tenant turnover) and more time intensive/“hands-on” management. HMOs are not generally recommended for first timer or amateur landlords for these reasons.
Attractive gross yields are possible - up to three times greater than a single occupancy BTL property - but these are countered by higher costs
- Licensing and stricter regulations, particularly around safety, including fire and escape routes.
- Valuation: lenders look to bricks & mortar to anchor their valuations but yields usually imply a higher value; similarly there’s often a valuation gap between buyers - closer to bricks & mortar - and sellers - looking for a greater yield premium.
- Tenant vetting: Landlords need to be careful about tenant selection to ensure that harmonious households are created. One “bad apple” tenant can upset an entire HMO and result in other tenants leaving.
- Parking: HMOs can be unpopular with local residents and can cause parking issues if all 5 tenants own a car.
- If it is a licensable HMO, there will be significant costs associated with getting the property up to standard and licensed.
- Many areas are bringing in what is known as Article 4 to reduce the number of HMOs.
Stay savvy with our property investor newsletter
Get insightful content to your inbox with recent buy-to-let investment opportunities, articles and industry news!
Do I need planning permission?
Whilst you generally need planning permission to carry out development, for which you apply to the local planning authority, Parliament has legislated to state that for many types of minor development planning permission is not required.
For example, currently a change of use from a single dwelling house (use class C3) to a small HMO shared by three to six unrelated residents (use class C4) does not require planning permission.
Planning permission will always be required when changing a single dwelling house to a larger HMO as this falls into a separate ‘sui-generis’ use class.
However, if the local planning authority believes that in their area, or part of it, there is robust evidence to justify the withdrawal of this permitted development right, they can use an Article 4 direction under the Town and Country Planning (General Permitted Development) (England) Order 2015 to do so.
Find our more here.
Some other considerations
Increasingly, local authorities are starting to introduce individual council tax banding (ICTB) for each room if it has an ensuite. This can significantly increase the costs to landlords as they offer an “all bills included” rent, and ICTB can decrease their profit margin.
The fines for non-compliance are very significant, so landlords have to ensure that they remain up to date with all the latest regulation and legislation.
There are concerns of over-saturation of HMOs in some cities and some lenders will not lend in certain postcodes due to fears of over-exposure. If there is a large number of HMOs in a town or city, it may mean landlords are competing for tenants and may struggle to fill their rooms.
Reducing the risk
One way to reduce the risks associated with HMOs is to purchase one that is already tenanted.
This will mean that you are earning income from day one of ownership and you know the tenant demographic and actual monthly income from the property. Another way to reduce risk is to have your HMO fully managed by an agent who specialises in this type of property management.
At Vesta, we have both single HMOs for sale along with HMO portfolios. Check out our highest yielding properties here.
Very often, a managing agent will already be in place, giving you additional peace of mind that the property can be transferred to your ownership with tenants and agent in place who already have an existing relationship. You simply take over ownership and the existing arrangement, having already had the chance to meet the tenants and managing agent as part of your due diligence.
To summarise, while there are a number of challenges surrounding HMOs, those landlords who overcome them can enjoy higher than average yields.
There are many landlords who make a success of HMOs, and perhaps their one uniting trait is that they enjoy the extra tenant interaction and management that HMOs demand, many becoming friendly with their tenants and providing them with long term accommodation.
Pro tip: to search for HMOs on our site, you can filter the results using the “above average yield” function and this will present all the HMO stock we have for sale on our marketplace (or click here).
Check out our HMO properties
Blackpool, FY1 5DF