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.
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 requirments of the relevant authorities and in particluar the local authority where the HMO is to be purchased.