The Ultimate Lowdown on HMOs
Published on April 28, 2020 by Paul Cassar
Lots of landlords are making the most of the greater yields that a house in multiple occupation (HMO) can bring in comparison to a traditional let.
According to Precise Mortgages, more than 20 per cent of landlords are looking to include an HMO within their portfolios. And it is no wonder when you look at the potential yield that can be achieved from this type of property.
What is the definition of an HMO?
A property is defined as an HMO if at least three tenants live there, forming more than one household, and if toilet, bathroom or kitchen facilities are shared amongst the tenants.
A property is defined as a large HMO if at least five tenants live there, forming more than one household, and again if toilet, bathroom or kitchen facilities are shared.
A household is defined as either a single person, or members of the same family who live together. A family includes couples who are living together or married; relatives or half-relatives; step parents and step children.
What is the average rental yield for an HMO?
HMOs have become more profitable than individually let properties, especially in areas of the UK where the demographic centres mostly on young professionals and students. The average yield for April-June 2019 was 6.3 per cent, compared to the market average of 5.5 per cent.
Returns on HMOs are known to outperform traditional buy to let properties by a significant percentage. Looking at figures from 2010-2014, HMOs had an average return of equity (ROE) of 108 per cent over four years, compared to 77 per cent for regular buy to let properties.
What are the additional benefits of investing in an HMO?
A house in multiple occupation that is well-managed doesn’t only achieve greater yields, it also carries a reduced risk, because if one of the tenants wishes to end the tenancy, there is less of an impact.
Granted, running an HMO is not as straightforward as managing a traditional rental property, but the rewards do make them more attractive.
Licensing is one area that needs to be addressed, and minimum room size is another. These factors aside, in university towns landlords are finding there is much demand for the HMO, where students, graduates and young professionals are seeking to save money without compromising on living in a thriving and well-connected area, and in a high quality home. Demand is therefore high.
How to convert a house into an HMO?
If you have a property that is suitable for converting into an HMO, you will either need permitted development rights for change of use, or alternatively you’ll need to make an HMO panning permission application with the local authority.
It is not always necessary to obtain planning permission when converting a property to an HMO, but it is important to be aware that the rules do vary. In England, the Town and Country Planning (General Permitted Development) (England) Order 2015 allows the change of use of a Dwelling House (class C3) to a House in Multiple Occupation (C4), subject to various limits and conditions.
The Order states that planning permission will be required if a local authority has removed some permitted development rights by issuing an Article 4 direction. This will not prevent the development of the HMO, it just means that a planning application will have to be submitted.
Article 4 directions are issued when the character of an area of acknowledged importance would be put under threat. This will usually be the case in conservation areas. Other issues may prompt local authorities to issue the directions too, such as the potential for a reduction in environmental quality; increased noise complaints and pressures on parking and local services, and loss of single family dwelling houses.
Checking with the local planning authority is the only way to be certain whether an Article 4 direction has been issued.
What licensing is needed for an HMO?
All large HMOs in England or Wales (see definition above) must have an HMO licence granted by the local council. HMOs that do not fall under the definition of a large HMO may still need a licence, depending on the local authority’s individual rules, so it is vital to check.
All licences are valid for a maximum of five years, and must be renewed before they expire. For each HMO operated, landlords must hold a separate licence.
To qualify for a licence, an HMO must:
- Be suitable for the number of occupants
- Be managed by a ‘fit and proper’ person, in other words, someone with no criminal record or a history of having breached landlord laws or codes of practice
- Be issued with an up to date gas safety certificate each year, which must be supplied to the local council
- Be fitted with appropriate smoke alarms which are maintained in line with relevant legislation
- Have appropriate safety certificates for all electrical appliances which must be supplied to the council on request
Other conditions may be added to the licence by individual councils, for example conditions that pertain to the type and standard of facilities, and the number of people living in the property. Local councils charge a fee for an HMO licence. Landlords found to be renting out HMOs without the appropriate licence can be issued unlimited fines.
Once granted, the licence must be clearly displayed in the communal areas of the property, alongside the name, address and telephone number of the licensee or property manager. A copy of the current gas safety certificate must also be displayed.
Within five years of receiving a licence application, the local council must conduct a Housing Health and Safety Rating System (HHSRS) risk assessment. Any unacceptable risks discovered by the inspector will result in an instruction to the landlord to rectify them. Landlords of HMOs also have a duty to notify their local council if they intend to make any structural or decorative changes to the property, or if the tenant makes any changes, or if a tenant’s circumstances change, for example they have a child.
What are national minimum room sizes?
National minimum room sizes apply to any room used as sleeping accommodation, defined as a room usually used as a bedroom, whether or not it is used for other purposes.
Any HMO licence granted under Part 2 of the Housing Act 2004, pursuant to mandatory and additional licensing schemes, will include conditions requiring the licensee to ensure any room used for sleeping accommodation is not less than:
- 6.51 m2 for one person over 10 years of age
- 10.22 m2 for two persons over 10 years of age
- 4.64 m2 for one person aged under 10 years of age
Government guidance states that these statutory minimums are not intended to optimal room sizes and that individual local councils will continue to have discretion when it comes to setting their own standards, providing the minimums are met.
Always consult your local authority for specific advice on HMO standards and licensing in your particular area.
There are various regulatory requirements when it comes to HMO health and safety and fire safety, and a great deal that needs to be strictly adhered to. All considered though, an HMO can potentially prove to be quite a lucrative investment for a landlord.