What Landlords Need to Know When Investing in HMOs

Shared houses or HMOs are often thought of as being a very lucrative type of property investment. Here's what you must know before investing in an HMO or converting your existing property into one.


What is an HMO?

An HMO (house in multiple occupation) is a property where the rooms are let individually to different people. Tenants have their own bedroom and may share communal amenities like bathrooms and kitchens.

In law, a property let to three or more people forming more than one household is usually considered to be an HMO.


The advantages of HMOs

  • Higher rent potential. An HMO will usually earn a higher total rent than a property let out to one individual or family.
  • Strong demand in many areas. The rising cost of living has encouraged more people to consider house shares.
  • HMOs reduce the risk of void periods. If one room is empty, chances are the others will be let.
  • Higher yield potential. The return on your money should be higher than a standard buy-to-let.

Lendlord data suggests that the average UK HMO yield is a healthy 10.4%. In some places it is as high as 15.4%. *

Lendlord suggests an HMO's average annual rental income is just over £28,000. In some places it is as high as £46,000. *

(Rents and yields vary between areas and properties. They may be higher or lower. It is essential to do your own calculations.)

The disadvantages of HMOs

  • The cost. You'll likely need to buy a larger property and spend money on converting it.
  • Mortgage finance can be more difficult. The deposit required and interest rate may be higher.

(Take expert financial advice if you are considering investing in an HMO.)

  • Running costs will be higher. There will usually be more maintenance. HMO landlords usually include utility bills in the rent. There may be HMO licence fees to pay (typically £500-£1,000 per property).
  • HMOs need more day-to-day management.
  • As more tenants mean more waste, you may have to pay for additional bins and waste disposal.
  • There are more rules and regulations to follow. You will need to adhere to the legal standards which apply to HMOs.

HMO licensing

If an HMO is rented to five or more people who form more than one household and who share some amenities, it is what is known as a large HMO. Large HMOs always need an HMO licence from the relevant local authority.

Smaller HMOs do not need a licence unless the local authority has designated the area as an additional or selective licensing area.

In Scotland and Wales, all landlords, of any kind of property, require a licence. In Scotland all HMOs require a licence.

What you should consider before investing in an HMO

What's demand like?

HMO accommodation is popular with students, so demand is often strong in university towns and cities.

However, not all HMOs serve the student market. There are also HMOs for professional workers, contractors and benefits claimants.

Do your research, check demand and ask local agents about the market.

Do you need planning permission?

In some (but not all) areas, you will need planning permission to turn a house into an HMO. This is where the local authority has introduced planning controls known as an Article 4 direction.

Is the property suitable?

The law sets down minimum amenity standards for licensed HMO properties.

These include, amongst others, that bedrooms must be at least 6.51 sq.m. in size (10.22 sq.m. for a double room).

Rooms without natural light and ventilation can't be bedrooms.

You'll typically need at least one bathroom and WC for every four or five residents.

You'll need fire precautions including smoke detectors, fire alarms and means of escape from fire.

(Licensing requirements, planning permission and amenity standards vary between areas. Always double-check them with the relevant local authority.)

Speaking to LandlordZone, Jeni Browne of mortgage brokers MFB said: "Higher mortgage costs are squeezing cashflow, meaning landlords are shifting their focus to higher-yielding assets, of which HMOs are a strong option."

She pointed out that not only are the yields generally better than standard rental properties, but multiple rents from the same property mitigate the risk of rental voids.

"That said, you shouldn't underestimate the challenges of this more complex property investment type.”

If you'd like to know how our property letting and management services can help make your landlord life easier, please call or message us.

We hope you've found this article interesting. Please feel free to share it.

* Source: Lendlord Q4 2024 HMO Statistics

Popular posts like this