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What is a HMO property?

An exciting investment opportunity that can generate substantial profits under the right circumstances and with careful, informed management, Houses of Multiple Occupancy (HMOs) are not to be dismissed by any investors worth their salt. All too often overlooked in favour of the more traditional single-occupancy buy-to-let properties, our experts here at SDL Property Auctions are here to fight the corner for HMO and share why it holds such unique appeal to landlords and tenants alike.

In this blog, we’ll cover everything you need to know before investing in a HMO property, including what they are, the rules and regulations surrounding buying, converting and renting out a HMO, and the pros and cons of such an investment. We’ll also be sharing our insider knowledge on what you should look for when buying a HMO property, to help you turn a good investment into a great one before you even place the initial bid.

What are HMO properties?

Standing for ‘house in multiple occupation’, a HMO is a property in which a minimum of three people from at least two households live together (in this instance, a ‘household’ is a single person, or couple/group of people who are of the same family, whether through marriage, a relationship, or relatives). Different from an apartment or block of flats in which each occupant has their own defined boundaries (with the potential exception of minimal shared facilities such as laundry), in order to be classified as a HMO the tenants must have essential shared spaces, such as a bathroom or kitchen. 

There is also an additional classification for a large HMO, which has the space to accommodate a minimum of five tenants, again from at least two households. As with a regular HMO, large HMOs must have communal facilities which are shared between some or all of the tenants. 

What are the rules for letting a HMO?

As with any tenanted property, regardless of size or type, the landlord must follow the rules set out by the government (at both national and local levels) that relate specifically to their property’s situation. For single buy-to-lets, we’ve detailed the landlord standard responsibilities in our Beginner’s Guide to Buy-to-Let Property

While all duties laid out in our landlord’s guide also apply to specialist investments such as HMOs, there are some additional HMO-specific rules and regulations that must be followed. We’ve detailed the additional HMO landlord responsibilities below:

  • HMO fire risk assessment: In large HMOs, fire extinguishers must be installed throughout the property. This is in addition to fire alarms, which are expected of all buy-to-let properties.
  • Avoid overcrowding: While the minimum number of occupants for a large HMO is set to five, there isn’t an official limit on how many tenants can be accommodated. This is instead regulated by safety, in that there should be adequate space and facilities for the number of people residing in the property. In order to ensure this, it is the landlord’s responsibility to complete a safety check to prevent overcrowding.
  • Suitable facilities: In a continuation of the previous point, HMO landlords must ensure adequate facilities are available to support all tenants. This includes cooking and washing spaces, as well as a suitable number of bins.
  • Obtain a HMO licence: Depending on the size and location of your property, you may need a HMO licence in order to rent out the property to tenants. We’ve detailed the rules surrounding this in the section below.

HMO licence requirements

The licensing requirements for HMOs change from council to council and country to country, with some requiring that a licence be held by landlords renting out their small HMO, while others allow more occupants before a licence becomes a necessity. As rules differ depending on where your house is, we recommend checking with the local council as to whether or not you need a HMO licence on your property. 

While there is some discretion from local authorities, national rules in England, Wales and Scotland also apply, which are as follows:

  • England and Wales: Landlords must have a HMO licence on large HMOs (those which house at least five tenants from a minimum of two different households). Licences are valid for up to five years, and must be renewed before their end if the house is still in multiple-occupation. Landlords must also secure a licence for each HMO individually, following council-specific rules and costs for each.
  • Scotland: Restrictions in Scotland are tighter than those in England and Wales, with all HMO landlords required to hold an in-date licence. Licences are also required on all HMO properties, not just those classified as large, which means that properties which house at least three tenants from more than one household must have a valid licence. These licences are valid for three years and, like England and Wales, must not be allowed to expire and should be held for each individual HMO property in your portfolio.
  • Northern Ireland: HMO properties in Northern Ireland must have a licence if they are let out to three or more tenants from more than one household. Licences usually last five years, and the cost of the licence is impacted by how many people live in the property. The application process for HMO licences in Northern Ireland is also slightly different in that, rather than applying through your local council, all applications must go to Belfast City Council. 

How to get a HMO licence

In most cases (excluding licence applications made within Northern Ireland), HMO landlords must apply for their licence through their local authority. There are some regulations which must be met in order to qualify for the licence, which include the following:

  • Landlords must provide evidence that HMO safety requirements have been met.
  • The HMO must be suitable for the number of occupants living in the property.
  • The licence holder must be considered to be ‘fit and proper’ in the eyes of the presiding council, meaning they have no criminal record and have made no previous breaches of landlord regulations or laws.

Local councils also have the right to set out additional conditions for the application approval process, so make sure to check if any of these apply to your licence before you apply. If your application is rejected for any reason, you will also have the opportunity to appeal the decision. 

How much is a HMO licence? 

If your local council requires you to hold a HMO licence, you should expect to pay an application fee for using this service. The fees are set by the presiding authority, so how much this will cost will depend entirely on the location of your property. Costs are often set around a few hundred pounds, but can be upwards of £1000, so factor this into your costs when deciding whether or not a particular property is worth investing in. 

Are HMO properties a good investment?

With additional licensing and safety considerations increasing the costs and responsibilities involved in running a HMO property, particularly in comparison to that of a standard buy-to-let property, you may be asking yourself whether or not such an investment is worthwhile. 

Fortunately, while the base investment of time, money and effort may be increased, so too are the returns. To help you evaluate whether or not a HMO property is worth it for you, we’ve laid out the main pros and cons of this type of investment below.

Benefits of HMO investment

  • Increased demand: While all property types attract tenants, particularly when the location is carefully considered, HMOs are good for generating interest from a wide range of groups. In particular, the flexible rental periods, cheaper tenancy fees and increased sociability of HMOs help to attract students and young professionals. 
  • Higher rental yields: No property type can guarantee incoming tenancy fees, but HMOs are unique in that they typically have higher rental yields than their single-let counterparts. This is because landlords have multiple smaller streams of income which, when all rooms are filled, usually come to more than an individual renter’s payments from a single let.
  • Consistent income: While this is not a guaranteed benefit, as it relies on too many outside factors, HMO landlords are likely to have a consistent stream of income. This is because, after the initial set-up period during which all of the empty rooms in the HMO are being advertised, you’re likely to have tenants arrive and stay with different tenancy lengths. With overlapping contracts and more than one tenant, those expensive periods of vacancy are all but erased.
  • Minimised risk: While rare, it should be a consideration of all landlords regardless of investment type that tenants could fall behind on rent and miss payments. While there are protections in the contract to help ensure landlords receive their rental fees, the disruption of cash flow can be damaging. A benefit of a HMO property is that these risks are spread over a number of tenants meaning that, should one fall behind, you still have the rental income from the others to fall back on.

Drawbacks of HMO investment

  • Starting investment: Depending on the size of the HMO property you’re looking to invest in, you can expect to pay more in initial start-up fees than in a traditional buy-to-let property. This is because you can, naturally, expect to pay a bigger price for a bigger property, but also because HMOs are most commonly furnished by the landlord.
  • HMO mortgages: If you’re considering buying a property with a HMO mortgage rather than as a cash buyer, you’re likely to face higher mortgage rates than traditional buy-to-let mortgages. While there is some competition among lenders thanks to the increasing demand for these properties helping to show them as a worthwhile investment to support, another route to keeping costs down is to purchase at a lower price by browsing HMO-suitable lots at auction.
  • More administrative tasks: Managing multiple short-term lets in one property is more time-consuming than typical single tenancy agreements, especially when you consider the advertising efforts that are required to attract tenants. For landlords with a large portfolio of HMO properties, or those with just one who are willing to sacrifice some profit to secure a more passive investment, it may be worth considering hiring a property manager.
  • Additional maintenance: While many landlords of traditional, long-term tenants can often earn passive income and not be called upon often for assistance, maintenance responsibilities of HMO landlords are more common. The more people in the property, the faster general wear and tear occurs, so expect to help with maintenance requests more often in this type of investment.

With all of the biggest pros and cons considered, are HMO properties really a good investment? While no one can make the decision of whether or not to invest for you, we would say that, as long as you make informed decisions, yes – HMO properties can be a great investment. 

If you want to invest, you’ll need to apply your research right from the beginning, with careful consideration going into step number one of investing in a HMO property: finding the right property to purchase.

Buying a HMO property at SDL Property Auctions

As property auction experts, we see plenty of attractive lots with HMO potential and know what to look out for when hunting for the right one. If you’re considering investing in this type of property, and want to start your own search, start browsing through our property finder by clicking the button below. You can also filter by size, so whether you’re looking to start small with a three-bed HMO, or want to take on the high-yield challenge of a five-bed HMO, you’ll find the perfect investment lot at SDL Property Auctions.