HMO investment opportunities

There is a lack of affordable housing throughout the UK and, as many people can’t afford to save for a mortgage deposit, more and more are looking to live in private rented accommodation.

Houses in Multiple Occupation (HMOs) are a common property type in the UK popular with tenants looking for affordable and flexible housing options and popular with landlords as they can be extreme-ly profitable.

Earn maximum yields

Students are among the most common tenants in HMOs, so if you are letting out in areas near universities you will find a huge demand for these types of properties. Young professionals are also often happy to live in shared housing, as it means they can live in a large property with more facilities but only have to pay for the room they rent.

HMOs have become an increasingly appealing form of property investment for both landlords with years of experience and those new to the sector. For landlords looking for a property which is going to deliver a consistent rental yield for minimal costs, HMOs can fit this bill. But to successfully manage HMOs and ensure you earn maximum yields, it takes careful management and planning.

Tailor-made for HMOs

Some landlords let HMOs as they consider them a more efficient way to run a rental portfolio. Alt-hough there may be more work to do, the opportunity to collect rent from a higher number of ten-ants and a potential higher rental yield is appealing.

What’s more, certain properties and locations are tailor-made for HMOs. When it comes to tenants, HMOs are sometimes preferable due to potentially lower rent payments and the opportunity to live with more people.

However there is often confusion about what makes a property an HMO, in part because the rules vary across the UK.

What is an HMO?

Different local authorities have different definitions of an HMO, but typically it is a rental property with three or more tenants who share a kitchen and/or bathroom and who are not considered one ‘household’ in the way that a family (for example) would be.

In the past, the definition of an HMO dictated that it must be three or more storeys high, but this is no longer the case.

While you should check with your local authority to find out what rules apply in your area, generally:

• A house shared by four unrelated tenants IS an HMO, if facilities are shared
• A house shared by two couples IS an HMO, if facilities are shared
• A house shared by two unrelated tenants is NOT an HMO
• A house shared by five members of the same family is NOT an HMO

A house with more than five tenants is considered a large HMO.

What are the benefits of letting an HMO?

There are various benefits to consider:

• HMOs are often more profitable, as you can charge more rent relative to the total size of the property
• The problems of rent arrears and vacant periods are minimised since you’ll have several separate tenants who are unlikely to all fall behind on rent or move out at the same time
• Demand for HMOs can be higher, particularly in student towns and cities

What are the additional landlord responsibilities with HMOs?

While there are many advantages to letting an HMO, landlords should also be aware of the additional legal responsibilities:

• The property must not be overcrowded
• Washing and cooking facilities must be ample for the number of occupants
• Sufficient waste bins must be provided
• Common areas and facilities must be maintained
• A council-approved fire safety risk assessment must be completed
• Fire safety devices must be installed, including mains-powered smoke alarms and kitchen heat detectors
• Escape routes must be accessible in an emergency
• An annual gas safety check must be conducted
• Electrical installations must be checked annually
• A risk assessment for legionella must be undertaken

HMOs can often have higher associated costs and can be more difficult to obtain a mortgage for. You could also get an unlimited fine for renting out an unlicensed HMO.

How do you become an HMO landlord?

In addition to owning a suitable property to let as an HMO, landlords must follow licensing rules. Large HMOs (with five or more unrelated tenants) require a mandatory licence. HMOs in London frequently require an additional or selective HMO licence. Licences typically last for five years.

You can check if you need a licence and which licence is required with your local authority. You will also apply for the licence through your local authority, for a fee. They will grant one if they believe your property meets the necessary standards.

When applying for a licence, you must also notify the property freeholder (if you are not the property freeholder), the current tenants (if they have more than three years left of their tenancy agreement), and your mortgage provider (if you have a mortgage).

Do I need to provide a written tenancy agreement?

Landlords of HMOs should issue their tenants with a formal, written tenancy agreement. One of the most common types is the ‘room only’ Assured Shorthold Tenancy (AST). These should cover every-thing from keeping pets to arrangements for access, procedures when repairs are required, and re-sponsibility for paying water/sewerage charges and other utility bills.

As a landlord if you take a deposit, this must be protected under one of the government’s approved tenancy deposit schemes.