Investing in Houses in Multiple Occupation,(HMO's) a Landlords Guide
BUYING A HMO
The abbreviation HMO stands for a House in Multiple Occupation. They are sometimes referred to as HIMO. These properties offer separate bedrooms but with shared facilities such as bathrooms or kitchens shared between occupants.
HMO properties are generally associated with the bottom end of the market. They have traditionally provided accommodation for people unable to afford their own flat. Therefore, they tend to be occupied by individuals with below average earnings. The majority of HMO tenants are unemployed, students or in low paid work. The exception is in London and other high value areas. Here house sharing for people even with good salaries is an economic imperative because of very high rents. Often tenants will only stay for relatively short periods, which is one of the reasons why management time and expense is greater than for self-contained accommodation. The lower socio-economic grouping of the tenants and the often poor external condition of these older properties has given this sector somewhat of a ‘down market’ image.
Attractions of HMOs
The advantages of HIMOs are that yields are generally good making them attractive to income orientated investors or those who want to buy in more expensive areas where the economics of self contained units doesn’t add up. The purchase of an investment property as a HMO in an area which initially they couldn’t afford to live has often been used by landlords as a way of securing their future family home. After a number of years of renting the property it can be reclaimed from the tenants and converted back to a single family residence. These properties are also attractive to landlords who want to buy in the best areas, because these investment properties are then attractive to professional sharers who don’t want the commitment or expense of renting their own self contained accommodation. If the buy-to-let property is fitted out to a high standard there are opportunities for a premium rent to be achieved through the provision of premium services such as cleaning, gardening, broadband and satellite TV for example. A landlord can then make the rent inclusive of all bills, which means that there are no additional expenses for the ‘busy’ executive. I know of a landlord who provides this kind of accommodation and he claims to be achieving a 17 % gross yield. This is very attractive in the current low yield environment. In addition there are attractions to this type of investment property in that some landlords are happier with the concept of a single more expensive property with professional tenants in, rather than having to manage a number of cheaper properties in less salubrious areas.
Cheaper HMO alternatives
Alternatively, HMOs are often found in inexpensive areas and landlords have often used the fact that they can buy a lot of residential space cheaply to maximise income by letting out the space to less ‘choosy’ tenants. These include students and those tenants receiving benefits. Whilst rents are low the fact that occupational density is high and capital costs low, yields can be very attractive, reaching 20%+ in some circumstances.
The downside to HMO investments
The downside to HMO investments are that because of the density of occupation – a landlord might have 5+ tenancies running in a single investment property the management time in running a HMO investment is greater than with a flat or house let on a single tenancy. The other aspect which is a downside to HMO investment properties is the fact that the government through the 2004 housing act has introduced a system of HMO licensing.
This requires landlords to apply for a license from the local authority in which their investment property is located. Unfortunately, the cost of acquiring the license can pale into insignificance compared to the building works, particularly the installation of dedicated fire alarm systems which the local authority require in order for the property to be granted it’s licence. Therefore, a landlord is advised to look very carefully at this and talk to the relevant authorities before purchasing an HMO investment property.