5 key questions answered for new HMO landlords
Wed 11 Jan 2023
If you’re thinking of investing in a HMO (house of multiple occupation) for the first time, you might already know that they’re a different type of rental to traditional single lets. They can be very profitable in terms of rental income, but you do need to work a bit harder to reap the rewards.
Here are five key questions to ask and things to know that should help you prepare for being an HMO landlord:
Are HMOs a good investment?
They certainly can be. If your main investment goal is getting as much rental income and profit as possible, then you should give HMOs some serious consideration. Letting to multiple contract-holders on a per-room basis can give you two to three times the rental income you’d get if you let the same dwelling to a single household.
However, there are a few things you need to understand:
- Your expenditure will be higher because of things like extra wear and tear caused by multiple contract-holders, higher mortgage costs and additional safety requirements, so the extra income won’t all be profit.
- Properties in areas where HMOs are permitted and room rentals are in demand may not always increase in value as much as well as single-let properties, so there could be a trade-off between rental income and capital growth.
- Managing a HMO is more work than a single let, as your contract-holders will often all be on separate ASTs and moving in and out at different times – plus, because they usually don’t know each other, you, or your agent may have to spend more time on helping your contract-holders live harmoniously.
What type of finance do you need for a HMO?
Mortgage providers consider having multiple, unrelated contract-holders in a dwelling to be a higher risk investment than letting to one household, so you’ll need a specialist HMO mortgage (and insurance). These have different lending criteria and usually higher interest rates than ‘traditional’ buy-to-let mortgages, so it’s worth taking advice from a buy-to-let specialist broker, especially as rates are rising at the moment. For a free initial consultation to discuss your plans, just contact the team at our sister company, Mortgage Scout.
How are the rules and regulations for HMOs different to a ‘normal’ let?
Again, because of the higher risk associated with having multiple, unrelated contract-holders living in your dwelling, there’s much more legislation associated with HMOs, especially around health and safety. Here are just a few of them:
- If you have 5 or more contract-holders forming more than one household, the dwelling will need to be licensed. However, just as with planning, each local authority can also impose their own additional and/or selective licensing rules for smaller HMOs.
- If the dwelling wasn’t already an HMO when you bought it, you may need planning permission from the council for change of use and it’s likely you will have to pay and adhere to local licensing rules and regulations.
- Fire safety is a big responsibility – for instance, you must have fire doors on escape routes, provide fire extinguishers on each floor, and install mains-powered, interconnected fire alarm system that includes smoke alarms in each individual bedroom and a heat alarm in the kitchen.
- There are minimum room size requirements – e.g. if two people are occupying a room, it has to be over 10.22 m² and a minimum height applied to this space.
Do you include all bills?
If you’re letting on a per-room basis to individuals who will all be moving in and out at different times, their rent should also cover all bills: council tax, electricity, gas, water, WiFi, TV licence, etc.
You’ve got to decide on how much is fair, so that you’re properly compensated for your contract-holders’ usage and they’re not overpaying – which is particularly important in the current energy crisis. Fitting a smart meter should help you keep track of how much energy they’re using – but bear in mind that it’s better to have your dwelling fully let at a slightly lower rate than have rooms sitting empty.
What’s the best way to achieve success with a HMO?
The best way to make a success of any property investment is to work with buy-to-let experts that know the market in your local area. For HMOs, it’s particularly important to take advice from an agent, like us, that’s used to dealing with multi-lets and can advise you on what to buy, legal requirements, and dwelling and tenant management. We also focus on increasing rents on an annual basis, to ensure our landlords are getting the best profit from their investments.