HMOs a basic guide for investors

HMOs or Houses in multiple occupation have become increasingly popular due mostly to the high returns, and appeal to professional tenants looking for cheaper rental accommodation, especially in larger towns and cities where accommodation has become scarce. In many places now there is increased demand for affordable and flexible rented accommodation, and HMOs help to alleviate this demand by taking existing housing and increasing the amount of availability in each property, meaning less new builds on green belt land, and more inner city availability.

Firstly, the property does not have to be a house, it can be a flat, or another property type, the term HMO relates to multiple households/people not from the same family, living in the same property. The most common type of property are large Victorian or Edwardian terrace properties, which were originally 3 or 4 bedroom properties, and have been converted into 6, 7 or 8 bedrooms. Normally, each tenant will have a separate rental agreement with the landlord. The tenants will have their own bedrooms and then share facilities like the kitchen, lounge, and bathrooms, sometimes bedrooms may have en-suites. HMOs became popular as an investment strategy due to landlords being able to make more money from a single property, and at the same time, rents for each tenant are generally lower than having to rent an entire property. HMOs also help to lower the impact of a tenant defaulting on their rent, so investors see them as a way to make higher returns while mitigating risk.

HMOs are popular with young single professionals, especially when moving to a city for work, providing cheaper accommodation and at the same time the potential to meet new people (other residents in the HMO). They are not, however, restricted to just the professional sector, with tenants from the following benefiting from HMO accommodation:

• Professional tenants & key workers

• Lower income tenants

• Social housing and housing authority tenants

• Students

Article 4

HMOs have been the subject of tighter regulations in more recent years to ensure landlords provide good quality accommodation to tenants, and at the same time, respecting the wider community where the property is located, with some councils making HMO licensing mandatory, and setting limits on the number of HMOs in a particular area. You may have heard of Article 4 areas. Article 4 Direction is a government-added planning control measure that councils can implement to limit the number of HMOs in a specific area. If your property is not in an Article 4 area then you have development rights that mean you can convert your property into an HMO or C4 use class, without planning permission, whereas Article 4 removes this right from the property owners in that given area. This means that if your property falls in an Article 4 area you are governed by the local council as to whether you can convert your property into an HMO, having to submit for planning permission. Article 4 areas allow local councils to ensure a particular area doesn't become overcrowded, helping to limit anti-social behaviour, but it is also there to conserve national parks and heritage sites. Your local council must make Article 4 directions public when they introduce them to an area, and this might mean publicising the Article 4 direction in a local newspaper, the planning section of their website and they should also notify each owner / occupier affected by the Article 4 direction. However, it is always advisable to check with your local council if you are unsure whether the area is an Article 4 or not as there is no centralised database showing all Article 4 areas in England.

Although HMOs are popular with many tenant types if considering HMOs as a strategy then like other investment properties, it is a good idea to check the area for competition, avoiding areas of saturation with too many HMOs.

HMO compared to Buy to let properties

HMOs tend to provide higher GROSS rents than the same property if it were let as a single unit. Forgetting the costs of refurbishment for a moment, a typical 3 bedroom terrace property might achieve £1,000 per calendar month on the open market to rent to a family, however that same property, if converted to a 5 bedroom property, might achieve £2500 per calendar month, if each tenant paid £500 per room. This means as the landlord you could increase your GROSS monthly income by £1,500, but the tenants individually are only paying £500 a month. Also if one tenant moves out, instead of now having an empty property and receiving nothing until you find a new family, you are still receiving £2,000 (in our example) until such time you can fill the empty room. And so HMOs can mitigate some risk of void periods.

There is a BUT, though, which is that HMOs require a lot more management, you are dealing with more tenants per property, and separate tenants, who generally will not know each other. This can lead to conflict between tenants and or neighbours. There is more tenant turnover in HMOs. And with more tenants, you normally find more wear and tear with an increase in maintenance issues and repairs required. The increase in potential repairs, and also bills, mean that HMOS have larger running costs, and so with the higher GROSS yields, there will be much increased expenditure compared to a standard BTL. But with the right HMO, in the right location, appealing to the right tenant profile, this increased expenditure is offset by maximising the returns and so many investors prefer the potential to make 9%, 10%, 11%+ in some cases.

Bills included?

We have glossed over the expenditure and bills, one thing to remember is that with many HMOs the tenants will expect the bills to be included. This brings with it issues for landlords, in that you have to cut down the risk to yourself that the tenants are spending more than needed in running the utilities, this can be in the form of payment meters, or timed switches, or keeping control of the heating automatically, smart thermostats for example. There are definitely pros and cons to having bills included in the rents, but ultimately you are trying to make the whole process for the tenants as simple as possible; no one wants to split bills with strangers, as this could lead to disputes.

Buying an HMO

When looking for an HMO, you need to make the decision whether you want to buy a going concern, a property that is already converted and running as an HMO, similar to buying an established business, or are you happy to pay for the conversion costs. Buying an established HMO is easier, it means you get an immediate income, and you don't have to worry about getting a license and the compliance should already be in place. However it is already an investment property and as such the seller is probably going to want a premium in return. You might also want to question why the investor is selling, are you inheriting a load of issues?

Converting a property to become an HMO can add value to the property, and means you can control the design, this might work out cheaper in the long run as well, because you control the cost of conversion but again there are risks such as unexpected costs arising during conversion that were unplanned or unforeseen. You also might need to get planning depending on the area, and licensing, these are all added costs. There are ways to convert and add value, this can be initially adding en-suites to rooms, converting reception rooms into bedrooms, adding extensions in larger gardens, lofts and cellars.

The specification

It is important, in order to maximise your returns, to provide nice communal spaces, with good quality seating areas, and if possible communal entertaining areas. The kitchen should give tenants a well designed space not only to cook and store things, but to socialise. The provision of dining tables and chairs is important, and just expecting tenants to eat in their own bedrooms is not going to appeal to the majority of tenants, certainly not professional tenants, though this might be ok in social housing, where the tenants want privacy.

If you are appealing to students, then make sure they have areas in their bedrooms or elsewhere why they can study, but also socialise. Desks in bedrooms are ideal.

Outdoor space has become very important to many of us, especially since the COVID pandemic, and so a garden or patio space outside is a great selling point.

Even though this is rented accommodation, you must think about tenant satisfaction and the competition, which will reflect in the amount you can charge and decrease the potential for large tenant turnover. Ask yourself whether you would be happy living in the property.

HMOs are a great way for investors to increase the returns from a single property, and they are good to diversify your portfolio, but they are not without risk, and like all property investments they depend on good location, due diligence in terms of tenant profile and rent expectations, careful financial budgeting by the investor, extra on going management, and the potential for regulatory changes in the future.

Speak to a member of the team at Landmarka, our trusted partner, who are experts in HMO sourcing, planning, refurbishment and management - click HERE