What is a HMO?
Put simply an HMO is a property in which multiple independent tenants reside. Officially a property is considered an HMO if it meets both of the following criteria:
- At least three or more tenants reside there and consist of more than one household.
- Tenants share certain facilities such as the bathroom, kitchen, or other common areas.
If there are five or more tenants, then this is considered a large HMO and further regulations begin to apply.
HMO specific regulation
Smaller HMO’s do not have specific regulation and are governed by the same rules as a standard let you should always fulfil you role & responsibilities as a landlord and make sure that the property is compliant before you let it out.
For Large HMO’s you will likely require a license from the council to operate. The council will then require a housing Health and Safety Rating System Risk Assessment (HHSRS) be performed within five years of your license application. Any issues discovered during the risk assessment will have to be corrected at your expense. Further, any changes made to the HMO either by yourself or the tenants, including domestic changes such as a baby being born, should to be reported to the council.
Large HMO’s are also subject to additional regulation meaning there are specific requirements that they must adhere to. Scotland, Wales, and Northern Ireland may have slightly different requirements outlined so be sure to check what applies in your jurisdiction.
HMO specific obligations
While many of these are also important best practice to perform for all rentals the higher regulatory burden means these are essential for large HMO’s. Be sure to stay within the legal framework and always perform the following:
- Clearly display a property manager notice with your name address and contact information
- Carry out and document regular inspections to keep the property safe & habitable
- Perform and document regular fire risk assessments
- Protect water pipes, ensure clean water supply, and maintain good drainage systems.
- Put controls in place to prevent overcrowding.
- Ensure electrical equipment is safe and maintained and perform inspections at least every five years.
- Keep common areas including the exterior of the property clean and safe.
- Be ready to provide gas and electrical safety records to the council if asked.
- Take care of elements of refuse disposal including having enough bins in common areas.
- Purchase landlord insurance and keep it up to date.
What Rental Margins can I expect from an HMO?
The biggest advantage of an HMO is the ability to potentially produce higher profit margins. With more rooms and more tenants rental yield will often be higher in an HMO versus a standard tenancy.
A standard occupancy property typically yields 5 to 7 percent, whereas an HMO often yields 12 to 15 percent with some landlords reporting a 20 percent yield. Performance will always depend on your individual property and situation but it is easy to see why HMO’s are an attractive option.
Be aware though letting agents will often charge significantly higher fees for managing HMO’s versus standard lets which can eat into your profit. If you are considering self-management to keep the costs down our guide to managing your own rental property is a good place to start.
HMO Tenants and Turnover
Every tenant is an individual but there are some trend that are often seen with HMO’s. Students, short-term workers, and younger tenants are more likely to want rooms in an HMO due to the lower per-room cost.
In larger towns and cities, this might lead to increased demand for HMOs meaning an easier time finding tenants and fewer periods when rooms lie vacant when compared to single-occupancy flats. The flipside is however that tenant turnover can often be higher with, short notice changes common with HMO’s.
Changing tenants will likely incur costs so you should factor this into your budget when deciding whether to take on an HMO. It is worth considering using an advertising partner who can provide advertising on Rightmove Zoopla & PrimeLocation from £29.
Start-up and Operating costs for HMO’s
HMO’s typically require more capital upfront as due to the required size the property is likely to be more expensive to purchase. Similarly converting an existing single-occupancy home into an HMO will likely require a relatively significant investment too.
The running cost for an HMO also tend to be higher in general and regulatory requirements can lead to increase maintenance costs. These costs are often offset by the increased rental yield but HMO’s usually require a landlord with good cashflow to get the most out of them.
If you require a mortgage then you will need to acquire a buy-to-let mortgage that is specific for HMO’s. The key difference for this type of mortgage are:
- HMO mortgages are usually linked to rates like LIBOR rather than the Bank of England base rate
- Landlords must prove their experience before taking one out
- Maximum Loan to Value (LTV) ratios are typically between 60-75%
- HMO mortgages tend to be more expensive, both in terms of interest and fees
Obtaining a mortgage for an HMO, particularly for a first-time buyer, may be a difficult task and many lenders will only deal with brokers, so this might require more effort and research on your part to get into the market. This is partly why many landlords opt to gain experience and reputation in the single-occupancy market first.
How Sharehouse can help with self-management
We were created to specifically support DIY landlords by making self-management simple. Our free online library of landlord resources contains everything you need to know and our network of service providers brings together industry leading companies in one place top help with all stages of the rental journey.