Buying a House in Multiple Occupation (HMO)
Houses in Multiple Occupation (HMO) are generally associated with the bottom end of the lettings market. Traditionally providing accommodation for tenants unable to afford the rent on a self contained flat. Therefore, they tend to be occupied by tenants on below average earnings, often students, or tenants on benefits who are unemployed or in low paid work. The exception is in London and other high value areas, where house sharing is more common amongst tenants on good salaries because of very high rents.
Tenants of Houses in Multiple Occupation typically stay for shorter periods, than other types of rental property, increasing the burden of management time and expense. All this is worth considering before finding buy-to-let (BTL) property to rent out.
The lower socio-economic grouping of the tenants, a transient nature of the the tenants and the often poor external condition of these older properties has given this sector of the rental market somewhat of a ‘down market’ image.
Houses in Multiple Occupation offer separate bedrooms but with shared facilities such as bathrooms or kitchens shared between occupants.
The attraction of investing in HMOs
The advantages of Houses in Multiple Occupation are that rental 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. Finding an investment property to purchase as a House in Multiple Occupation 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.
How to insure your HMO?
Insuring your HMO is not quite as straight forward as with a standard buy-to-let investment as there are additional risks relating to fire safety and the greater density of occupation combined with the types of tenant profile. Therefore it would be worth talking with a specialist landlord insurance broker to ensure that all your risks are covered off.
`How to get permission for your HMO property?
There is some confusion with landlords and developers as to what requires planning permission in respect of HMOs. Added to this is that permissions to make your new HMO happen are often spread across various different council functions all working to different legislation and guidance and also being in different departments. So as well as requiring planning permission for your HMO you are also likely to have to comply with Building Regulations and also have the relevant licence from what is normally the housing or environmental health function of your local authority. In essence, if one department says YES that doesn’t always mean that the Council has given permission for your HMO. Let’s start with planning permission for your HMO.
How to get planning permission for your HMO?
Firstly, the good news is that generally for a small HMO which is defined as one with 6 people or less sharing the property and not living as a single family so for example a household of students sharing a bathroom and kitchen. The reason for this is that whilst technically the conversion of a single dwelling house to a small HMO is classed as development because it is a change of use from a C3 single dwelling house to C4 small HMO; this change is what is called permitted development as granted by the General Permitted Development Order (GPDO) . This bit of legislation allows certain development to take place without having to make a planning application. So why is all this stuff important? Well, there is a big word BUT so it is possible for a local authority to take away these permitted development rights through an article 4 direction which means that a landlord will still be required to make a planning application to turn their rental property into a small HMO. To find this out it is best to check directly with your local authority to make sure.
If a landlord is looking at creating a large HMO; that it one for more than 6 people sharing then because a large HMO fall within another use class that of Sui Generis (which means a class on it’s own in latin) then a planning application for a new HMO will almost certainly be required. It is adviseable to seek an opinion as to whether planning permission is likely to be granted for the new HMO or else a landlord could go to a lot of expense without much chance of the development going ahead.
Having covered whether you need to make a planning application then a prospective HMO landlord will need to see if there are any permissions needed for proposed changes to the rental property under the building regulations.
Do I need building regulations approval for my HMO?
As soon as you start making any physical alterations to your prospective HMO internally or externally then you will almost certainly require building regulations approval so it is worth notifying the council at a very early stage. If you need a planning application then building regulations will probably be looked at as part of the application process. When looking at the sort of things that will probably require building regulations approval as part of your conversion of the property to an HMO these will include:
- Changing the layout of the space
- New bathroom and kitchen arrangements
- New walls and floors
- New electrics
- Fire alarm systems
- New entrances and exits
Are there minimum room sizes for my HMO?
The government has brought in strict controls on the minimum sizes of rooms within HMOs from the 1st October 2018 as part of it’s mandatory licensing regulations for HMOs. The restrictions on HMO bedroom sizes are as follows:
- One person aged over 10 years – the bedroom must be not less than 6.51 sqm
- Two persons over 10 years – bedroom should not be less than 10.22 sqm
- One person aged under 10 years – room must be not less than 4.64 sqm
These dimensions will be tightly controlled through the new mandatory licence for HMOs including the renewal of existing HMO licences.
If the tenant breaches the above standards and the local authority finds out about it then the local authority has to give notice to the landlord and then the landlord has to put right the situation within the notice period which has a maximum of 18 months. If the landlord includes an ensuite then these dimensions have to be excluded for the purposes of calculating the room size.
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 investing in HMOs
The downside to HMO investments is the heavy management burden they place on a landlord. The density of their occupation means a landlord might have five or more tenancies running in a single investment property. The rapid turnaround in tenancy’s can result in a constant cycle of letting and re-letting. Each new tenancy taking up hours of a landlords time, checking new tenants in and out of a property. Another downside to HMO property is the increasing burden of licensing placed upon this particular segment of the rental industry. The Government introduced a system of HMO licensing as part of the 2004 housing act.
This mandatory licensing of HMOs requires landlords to apply for a license from the local authority in which their investment property is located. A HMO must meet specified standards of layout and safety to become licenced, often requiring expensive building work, and the installation of a dedicated fire alarm system. Before a landlord enters this sector I would advise they look very carefully at the requirements of the relevant authorities and in particular the local authority where the HMO is to be purchased.