Genius Guide to “Houses of Multiple Occupation” (HMOs)

The UK housing economy's been through significant changes over the recent few decades. With the rising cost of housing and more people renting single rooms rather than a whole home, the government has bought in rules to regulate the activities of landlords. Legislation such as the Housing Act 2004 and additional licensing requirements have been key to ensuring positive outcomes for both landlords and tenants.

HMOs are an important aspect of the rental market as rising demand for single room tenancies increases, in this guide we are going to learn about all the basics and important topics surrounding HMO's. Let’s check out some questions which are likely to come up!

What is a “House of Multiple Occupation?”

HMOs can vary in definition depending on if it is a lender, a local authority or even the government who is running it. It’s important you understand the difference, however for the purpose of this guide we'll be using the government definitions which are the most widely known.

Note that a "household" is understood to be either a single person or members of the same family who live together.

A family includes people who are:

- married or living together

- including people in same-sex relationships

- relatives or half relatives, for example grandparents, aunts, uncles, siblings

- stepparents and step-children

Standard HMO

- at least 3 tenants live there, forming more than 1 household.

- you share toilet, bathroom, or kitchen facilities with other tenants.

Large HMO

- at least 5 tenants live there, forming more than 1 household.

- you share toilet, bathroom, or kitchen facilities with other tenants.

It is essential to follow the very strict guidelines that the government have put in place for HMO landlords and doing so is only possible if you know the government definitions.

Local authorities can also their own definitions so always double check with your local authority.

Lenders can also have varying definitions however this will be your mortgage advisor’s concern so there's no need to brush up on their definitions for the terminology!

Nearly all large HMOs require licensing and if the correct licensing isn’t in place or local authority guidance’s aren’t followed you can risk being fined or worse.

What’s licensing and do I need it?

Typically “large HMOs” require licensing to be put in place however keep in mind some local authorities have additional licensing requirements in place so always confirm with your local authority. In recent years increased level of regulation has come into place to further protect tenants. So even though you might operate a standard HMO, some councils will still require you to have some form of licensing.

What are my roles and responsibilities as a HMO landlord?

Operating a HMO is a serious obligation which is not to be taken lightly. Rules over the years have been put in place to protect vulnerable tenants from slumlords and to improve the conditions and perceptions of the UK rental market. Different areas can have different requirements, so we advise you to confirm with your local authority. Some examples include:

- Gas Safety checks.

- Smoke Alarms maintenance.

- Fire doors.

- Safety certificates for electric appliances.

What are the benefits of HMOs?

Higher Yields

HMOs often carry higher yields due to the nature of each room being let individually and the increased tenant turnover. If managed efficiently, this can be easy to increase your yield significantly,. However, beware of untenanted void periods of each room as this can reduce the high yields you're expecting. The aim is to try and keep every room rented out for as long as possible. If you are unsure about paying a management agent, just remember if you're not able to manage the HMO effectively, some rooms might not be rented out for a significant time reducing your profits.

For example, a 3-bedroom property in Surrey can be let to a family for circa £1150 per month. However if the same property was let out with each room on an individual basis, 2 double rooms can be rented for £550 per month and a small room for £400. The same property is now being rented for £1500, an increase of £350 per month.

Bear in mind that don’t need to worry too much if the whole house is rented to a family, you can pretty much expect the full rent every month with no issues. However if the property is let as a HMO, one room not being let out is more likely than the whole property not being rented

Less risky void periods

With multiple tenants in the same home, there’s impact on your cashflow if even room in the HMO isn’t being let, you can still rely on the other room’s income, helping ensure your mortgage and bills are paid.

HMO conversions

More and more landlords are choosing to turn their regular 3 or 4 bedroom homes into HMOs to get higher yields. Turning a regular family home into a HMO is inexpensive depending on the size you’re looking to convert. Standard HMOs are the easier option to convert due to less regulation and cost such as new internal doors, fire-doors, smoke detectors etc. Large HMOs can be a little bit more expensive as local authority regulation can be more significant and complex. For example, the larger the HMO, the more bathrooms/kitchens may be necessary. Always be sure to research into the local authority’s regulations surrounding HMOs as this can vary across different areas.

Negatives of HMOs

Increased level of regulation

With the increasing popularity of HMOs, the government has bought in more regulation and licensing requirements. The main aim is increasing the quality of housing within this sector, which as a result is what everyone should be supporting. In the fight against poor housing and even worse slum-landlords, landlords can be subject to further licensing and regulation further down the line, potentially costing licensing fees and works needing to be done to the property.

More costly and specialist finance

HMOs are higher risk for lenders, as you would expect the rates are a bit higher than normal buy-to-let rates, the larger the HMO you have, the more costly and complex the finance can be. This typically isn't too much of an issue for most HMO landlords as the rental yields are significantly higher. HMOs can be considered specialist depending on the size, so one downfall is the smaller availability of HMO lenders in the market. Having reduced options for mortgage lending and higher rates can be a sure down-fall for landlords who don’t receive a high rental yield.

Higher turnover in tenants

Due to the nature of HMO tenants, many tenants are short term tenants; this means you’ll be sure to see more tenants coming and going. Depending on how you source for tenants, if you use a lettings agent, this can be an expensive service. If you’re sourcing tenants yourself, it may not be expensive however this can be time consuming.

In conclusion, do you research into your options if you're interested in becoming a HMO landlord; as always, get in touch if you have any questions!