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We take a closer look at what a HMO is and some of the key advantages and challenges that come with investing in this property asset class.
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Written by
Ben Luxon
PUBLISHED ON
Jun 27, 2023
Houses in Multiple Occupancy (HMOs) offer landlords the potential for profitable investment ventures. However, it is essential to acknowledge and consider the associated drawbacks. In this comprehensive guide, we provide you with all the necessary information to make an informed decision.
A House in Multiple Occupancy (HMO) refers to a property that is rented out to multiple individual tenants. An example often seen is student accommodation, where a property is leased to several students, each with their own tenancy agreement.
In the realm of HMOs, every tenant or associated group of individuals residing in the property is considered a separate 'household'. For instance, in a HMO flatshare where two couples rent individual rooms, each couple is regarded as a distinct 'household' within the premises.
Investing in HMO properties offers several appealing benefits, including:
Landlords of HMO properties bear additional responsibilities in comparison to those who rent out standard properties. This is due to the unique risks faced by HMO tenants, who live with multiple individuals rather than alone or with family. One such risk is an increased likelihood of fire incidents in properties occupied by multiple tenants. To ensure the safety of HMO tenants, specific rules and regulations are implemented and enforced.
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If your property is rented out to five or more "households" with shared communal appliances, you will require an HMO licence. However, even if you have fewer households, local authorities may still require you to obtain a licence. It is crucial to consult with your local authority before making any commitments to ensure compliance. Read on for detailed information on the process of obtaining an HMO licence.
Related: What Is An HMO And Do You Need An HMO Licence?
In addition to the standard health and safety obligations for landlords concerning gas, fire, and electricity, HMO landlords have additional responsibilities that may vary depending on the local authority. These obligations typically include:
In 2018, HMO licensing rules were updated to address concerns regarding overcrowding in shared properties. According to the new regulations, the floor area of sleeping accommodation for individuals over 10 years old should be at least 6.51 square meters, and for individuals under 10 years old, it should be at least 4.64 square meters.
Investing in HMO properties can be a promising property investment strategy, but it's crucial to consider the challenges associated with being an HMO landlord before making any decisions. Here are some key considerations:
Securing an HMO licence can be a complex and time-consuming process. Local councils thoroughly evaluate various aspects of the property to ensure its suitability for multiple occupants. This can take several months, and there may be associated costs depending on the local council's requirements. Additionally, there is no guarantee of obtaining an HMO licence, which should be taken into account. However, having an HMO licence demonstrates your commitment to tenant welfare and can lead to financial gains that outweigh the initial efforts. Moreover, having an HMO licence makes it easier to obtain HMO mortgages.
Complying with the extra rules and regulations of being an HMO landlord requires additional time and effort. HMO properties involve more compliance measures and landlord responsibilities compared to standard properties. Whether the financial gains outweigh the increased workload is a decision that depends on individual circumstances.
Renting out HMO properties involves more financial administration compared to standard lets. Managing profit and loss (P&L) statements and income and expenses for each household within the property can be challenging. Collecting rent from multiple households adds to the workload. Fortunately, there are technology solutions available to assist with these tasks. With software like Landlord Studio you can generate separate P&L statements for each household within an HMO, simplifying payment reconciliation and expense management.
Securing a mortgage for an HMO property can be more difficult than for a standard buy-to-let property. Lenders often prefer landlords with a proven track record as single occupancy landlords. HMO mortgages typically come with higher interest rates and a larger deposit may be required.
Investing in an HMO property often entails higher upfront expenses. Adjustments to the property are necessary to comply with local authority HMO regulations, which can add to the initial investment.
Renting to multiple households within one property comes with certain challenges. Wear and tear is typically higher, leading to increased maintenance requirements. HMO tenancies may also have shorter durations compared to single occupancy tenancies, resulting in higher turnover. However, the higher rental yield offered by HMO properties can offset these issues.
It's important to carefully evaluate these challenges and consider whether the potential benefits of investing in HMO properties outweigh the additional responsibilities and costs involved.
Identify a property that you believe is suitable for an HMO. Consider factors such as location, size, and potential demand for shared accommodation.
Contact the local authority in the area where the property is located to determine whether you will need an HMO licence. The local authority will provide guidance on their specific requirements and any licensing fees.
Make the necessary renovations and changes to the property to ensure it meets HMO compliance standards. This may include:
- Adjusting room layouts to meet minimum size requirements by moving or constructing walls.
- Installing fire doors and fire safety equipment to enhance safety.
- Installing locks on bedroom doors for individual security.
- Ensuring an adequate number of toilets and bathrooms are available for the expected number of tenants.
You might explore the option of converting certain spaces within the property into rentable bedrooms, such as converting the current living room or garage. However, it's important to note that some tenants may prefer properties with dedicated living spaces, so consider tenant preferences when making such conversions.
Submit an application for an HMO licence to the local authority once the property meets all the necessary requirements. Be prepared to provide supporting documentation and pay the required licensing fee.
The cost of HMO licences varies depending on the local authority. They can range from about £400 to around £1200.
As an HMO landlord, ensure ongoing compliance with local authority regulations and safety standards. This includes maintaining fire safety measures, conducting regular inspections, and addressing any necessary repairs or maintenance.
Remember, the process of becoming an HMO landlord may vary depending on the local regulations and requirements of your specific area. It's crucial to consult with the local authority and seek professional advice to ensure full compliance and a successful HMO investment.
Related: Landlord Responsibilities and Legal Obligations
In the modern era, property management software has become an invaluable tool for landlords, making the management of HMO properties more efficient and organised. One such software solution is Landlord Studio, which offers a range of features specifically designed to streamline HMO property management.
Tenant Management: Set up individual tenancies for each tenant within your HMO property. This feature enables you to track the income and expenses of each tenant separately.
Communication Management: Efficient communication with tenants is essential in HMO property management. With Landlord Studio you can automate messages and notices, ensuring timely rent payments and well-documented communication. This feature simplifies the process of addressing any concerns or providing updates to multiple tenants within your HMO.
Maintenance Management: Landlord Studio offers a property maintenance management feature that allows you to create, track, and prioritise maintenance tasks.
Expense Tracking and Reporting: Landlord Studio’s award-winning rental accounting tools provide comprehensive financial insights into your portfolio’s profitability. Additionally, the software simplifies the process of generating tax reports, making it easier to fulfill your financial obligations.
Document Storage: Keeping important documents organized and easily accessible is essential for HMO property management. With Landlord Studio all documents are stored in one place, you can access them whenever needed and ensure compliance with legal requirements.
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By utilising property management software like Landlord Studio, you can streamline and automate your HMO property management so you can maximise the benefits of HMO investing and minimise the risks.
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Landlord Studio is an easy to use MTD compliant property management and accounting software designed for UK landlords.
Track income and expenses, run reports,, find and prescreen tenants, manage property maintenance, and more.
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