This article still contains plenty of useful, reliable information, but is a little out of date. Read this article on HMOs for 2020.
HMOs, or houses in multiple occupation, can be a great investment option for buy-to-let landlords, although running one comes with its own set of rules and requirements compared to a standard rental.
Renting property in the UK is nothing new, but buy-to-let landlords and investors looking to rent out their properties have seen a rising tenant demand that is only expected to soar further over the coming years. This is down to a number of reasons, from changing lifestyle preferences towards flexible, city centre living to high house prices meaning people are getting onto the ladder later in life and so renting for longer.
HMOs in a nutshell
Where a rental property is occupied by three or more people forming more than one ‘household’ (a household being a single person or members of the same family), with shared toilet, bathroom or kitchen facilities, this is classed as an HMO. A ‘large HMO’ is where there are five or more occupants forming more than one household with shared facilities. Large HMOs, as well as certain regular HMOs, need a licence from the local council to operate.
Why choose an HMO?
High yields: HMOs have the potential to offer the owner higher yields than a traditional rental, with research from the National Landlords Association showing that average returns for HMOs are around 6.9%, which is 1.3% higher than non-HMOs. For a comprehensive, simple way of working out your potential returns, download our free return on investment calculator tool below to help you work out costs and potential income.
Growing demand: As previously mentioned, tenant demand is high and isn’t slowing down any time soon. In fact, analysis of the UK housing market indicates that tenants renting privately could make up more than half of the housing market in 20 years. Multi-let properties (including HMOs) are hugely popular with the 25-34 year old demographic, which makes up 32.6% of tenants according to research by the RLA. Added to this is demand from students, for those landlords who are willing to go down this route, which has huge potential if you target major university towns and cities. More information on this can be found here. University towns and cities are also a great target for those looking to accommodate young professionals.
Less impact from voids: Because of the nature of an HMO, where rooms in a house are rented out individually, you are less likely to face significant void periods where you have no rental income. Void periods are something all landlords must factor in when calculating their costs, but the risk is offset in an HMO.
In the unlikely but unfortunate event that you have a tenant who refuses to pay, there will still be income from the rest of the HMO to minimise the effects.
Licensing: As mentioned above, some HMOs and all large HMOs need a licence, which can be obtained from the local council. Landlords with HMOs must find out whether they fall under selective or additional licensing rules, as failure to comply will lead to penalties. The rules changed in October 2018, where the minimum storey requirement was removed (with previous rules stating the property had to be three or more storeys to be classed as a large HMO). This meant thousands more landlords had to apply for licences.
Bedroom sizes: Properties must also have minimum bedroom sizes (for those that where licensed on or after 1 October 2018, or anyone renewing a licence since then). Bedrooms in an HMO must be at least 6.51 square metres for an adult, 10.22 square metres for two adults, and 4.64 square metres for children under 10. Councils have the right to impose higher minimum room sizes if they see fit.
The idea behind the new legislation is to outlaw rogue landlords and prevent tenants being forced to live in unacceptable conditions.
While some in the industry have criticised the new rules as a crackdown on landlords, in fact weeding out those who are giving the industry a bad name is arguably a huge positive for the vast majority of landlords who keep up with regulations and offer a high standard of living.
Management: While an upside of owning an HMO can mean less void periods of a whole property, having separate contracts for each tenant can be more time consuming than having one contract per property, as tenancies may start and end at different times meaning more time spent seeking occupiers. Some landlords will enlist management companies to deal with this side of things for them, and some HMO opportunities are offered as a fully managed/hands-off investment. It is up to the investor to decide what would suit them best.
How to invest
Having a good knowledge of the market is vital when considering an HMO investment. Location, as with any property purchase, is key to getting the best returns, taking into account the initial costs, potential capital gains as well as tenant demand and potential rental yields in the area.
While London is always going to have a high demand, house prices and running costs are high – sometimes prohibitively so. Looking elsewhere, such as Manchester, Leeds, Liverpool and Birmingham, as well as more peripheral towns and cities, is likely to see the best returns overall.
At BuyAssociation, we work with a number of specialist developers with a proven track record in offering fantastic HMO opportunities, as well as tailored property management options for investors. If you’d like more information or for full details on our HMO investment opportunities, get in touch.