2021 & Investing in HMOs: 13 Top Tips (you might want to think about first)

Posted by Alfred James Financial on 1st September 2021 -

What is HMO investment property?

HMO is shorthand for Houses in Multiple Occupancy or Houses of Multiple Occupancy. They are also commonly called multi-lets.

If you own and rent out a property to 3 or more people, all unrelated to each other, who share the same communal facilities such as kitchen and bathroom, you are investing in HMOs.

If the number of unrelated tenants sharing your property is greater than 5 you are running a large HMO.

Each unrelated tenant is paying for a room, with their own tenancy agreement – they are not renting the whole house, as in a Buy-to-Let (BTL).

This is the simplified version – what constitutes an HMO investment property varies between councils. Check with the council where you are thinking of investing.

You should talk to the HMO officer in that council before you even offer on a property, establish their HMO criteria and understand the planning and licensing rules you need to observe.

Are HMOs a good investment?

The Benefits of Investing in HMOs (v Buy-to-Lets)

1. Yields

There’s a good reason why investing in HMOs is so popular. Research suggests the gross rental yields for HMOs can be 3 times greater than the returns for a BTL, varying between 8% and 15%, in contrast to the 3% to 8% returns you can expect from a BTL. This disparity is greatest in the North West in cities such as Liverpool and Manchester.

2. Demand

The pandemic dust has still to fully settle but early signs suggest the demand for affordable housing remains strong. Young professionals, for example, still value shared accommodation that is in close proximity to their work or to good transport links.

3. Voids and Arrears

When a tenant falls behind with the rent or leaves a BTL your income dries up. In contrast, when you are investing in HMOs, you know that rent is still coming in from the remaining rooms rented out. The greater the number of tenants, the greater your security of cash flow.

4. Tax Benefits

Investing in HMOs can also be beneficial when the taxman comes calling. It is worth discussing with your accountant how much of your refurbishment costs are revenue costs and therefore tax deductible

What are the disadvantages of HMOs?

5. Planning & Licensing

If you are investing in HMOs you are looking at a lot of red tape that you ignore at your peril, as this recent case scenario illustrates:

The client had an existing BTL and converted it to HMO and got a licence. Refinancing to a new lender and no planning in place. It was required as the area was under an Article 4 and was refused due to saturation. The client tried to do a product switch but the current lender said no as they don’t do HMO’s. Needs to take it back to a normal BTL to get anything. Waste of money and property valuation alters.

A salutary lesson learned that your HMO journey starts with the council planning department and a conversation with the planning officer.

The officer will confirm that if you plan to convert a property into 5 or more rooms, you will need planning permission – less than 5 rooms and you generally don’t as this falls under permitted development.

If in conversation you establish the council has an Article 4 directive and your property falls within its catchment area, the number of rooms becomes immaterial – all applications must go to planning.

The officer will warn you that if the council deems the area to be at saturation point with HMOs, your chances of getting planning permission diminish significantly. If you can’t secure planning consent your chances of securing funding are slim.

If the council does approve your application in an Article 4 area your challenges aren’t over. You need to check with the council licensing department.

Until Article 4 was introduced, mandatory licensing only applied to large HMOs with 5 rooms or more. Now councils are increasingly extending this requirement to all HMOs, irrespective of size. Failure to comply could land you with a fine of up to £20,000.

While you are on the council website check the fire safety and health regulations for HMOs. Investing in HMOs, you soon realise, is a whole lot more than ensuring rooms are the correct size (6.5m2 isize for one adult, rising to 10.22m2 if 2 adults share, and at least 4.64m2 for children under 10).

6. Start up costs

When you decide you want to invest in HMOs you are looking at refurb costs that will be much higher than for a BTL, especially if you are looking at a high end finish with ensuite rooms. Once you have finished the refurb, you then need to furnish it, in contrast to a BTL that is usually rented out unfurnished.

7. Running costs

In contrast to a BTL when you are investing in HMOs it is your responsibility as a landlord to pay the bills including council tax, water and electricity. High speed internet is a benefit expected by your tenants, arguably ahead of oxygen.

8. Property management

If you self manage you need to find 3 or more tenants and each one requires their own tenancy agreement.

When damage occurs in a BTL there is only one tenant and it’s not hard to apportion blame. In an HMO the tenant is only responsible for the room they are renting. Any damage that occurs in the common areas is hard to prove and claim back.

Remember also that when tenants fall out you have got to sort it out. A good HMO agent will do all this for you – at a cost. Unfortunately agents specialising in this sector are in short supply.

9. Voids

When you secure a tenant for your BTL you know they could be there for years. You don’t have that long-term certainty with HMOs and voids are a fact of life.

10. Housing stock

When you invest in BTL you can pretty much look at any property in any neighbourhood. This is not the case when you are investing in HMOs.

You are looking for a property of a certain size in a particular location – and there is limited stock of what you are looking for.

11. Location & Saturation

Location is everything when you are investing in HMOs. It is no accident that HMOs tend to be clustered in the same area, all competing with each other. This can lead to saturation and you may be forced to lower the rent to secure tenants.

12. Resale market

When you convert a property into an HMO the resale market narrows to property investors like you.

Buying a HMO property (& why finance comes first)

13. Finance

If you are investing in HMOs finance is a key consideration and there are a few things to bear in mind right at the start:

•  If you are investing in HMOs for the first time you may find it hard to raise finance. There are products available but expect to pay a significant deposit, as high as 25%. The more experienced you are the lower the rates and the more you can borrow.
• Interest rates for HMO mortgages are higher than for BTL mortgages, typically 3-4%
• There is a wide variety of HMO mortgage products available. What mortgage you secure depends on what you are looking to create – a small 3-4 bed or larger HMO with 5 or more rooms.
• Fees can vary widely amongst lenders, so check first. Some don’t charge at all, others levy a flat fee and some work on a percentage basis