Houses in Multiple Occupation: A Guide for Landlords

Investing in rental properties can be a lucrative venture for landlords, and one strategy that has gained popularity is Houses in Multiple Occupation (HMOs). HMOs allow landlords to maximise their rental income by renting out a property to multiple tenants who form separate households.

In this comprehensive guide, we will explore what HMOs are, the benefits they offer, and the regulations and considerations that landlords need to be aware of.

Key Takeaways

• Investing in Houses in Multiple Occupation (HMOs) can result in higher rental yields compared to traditional buy-to-let properties. By renting out individual rooms to multiple tenants, landlords can generate multiple income streams from a single property, significantly boosting profitability.
• Lower Risk of Void Periods: HMOs offer a reduced risk of void periods compared to traditional rental properties. Even if one tenant moves out, landlords can still receive rental income from the remaining tenants, ensuring a steady cash flow.
• Greater Economies of Scale: Managing multiple properties can be time-consuming and costly, but HMOs offer economies of scale. Landlords only need to maintain one property while collecting rent from multiple tenants, resulting in fewer expenses for maintenance and repairs, making HMOs more cost-effective in the long run.
• High Demand and Lower Risk of Rent Arrears: There is a high demand for affordable shared accommodation, making HMOs a reliable investment option. Additionally, in an HMO, each tenant is responsible for their own rent, reducing the risk of rent arrears. Landlords can also request guarantors for additional financial security.

What are Houses in Multiple Occupation?

House in Multiple Occupation (HMO), or house of multiple occupancy, refers to residential properties where shared "common areas" are used by multiple households. Usually, multiple tenants live in one property under this arrangement.

These properties are rented out to three or more tenants who are not from the same household. An HMO can be a house, flat, or even a converted building with multiple self-contained units.

The defining feature of an HMO is the sharing of facilities such as kitchens, bathrooms, and communal areas among the tenants.

Houses in Multiple Occupation (HMOs) are basically rental properties where three or more tenants live, but they aren't all from one family. These properties can be regular houses, apartments, or even buildings that have been split into separate living spaces.

HMOs can take various forms, including properties rented out to students, young professionals, or individuals on a lower income. They provide affordable accommodation options and foster a sense of community among tenants. The demand for HMOs remains strong, making them an attractive investment opportunity for landlords.

What constitutes a house in multiple occupation?

A House in Multiple Occupation (HMO) is defined by British law as a property where at least three tenants live, forming more than one household, and share common facilities like bathrooms or kitchens. This includes properties occupied by students or professionals living together.

How many people is a house of multiple occupancy?

A House in Multiple Occupation (HMO) typically refers to a property where at least three or more tenants reside, forming multiple households, and share common facilities. However, the exact number of people can vary depending on local regulations and the size of the property.

The Benefits of Investing in HMOs

Higher Rental Yields

One of the primary advantages of investing in HMOs is the potential for higher rental yields compared to traditional buy-to-let properties. With multiple tenants renting individual rooms, landlords can generate multiple income streams from a single property. This increased cash flow can significantly boost profitability.

For example, let's consider a three-bedroom house that could be converted into a six-bedroom HMO. If each room generates £450 in rent, the total monthly rental income would be £2,700, compared to the £1,400 that could be earned from renting the property as a whole.

Lower Risk of Void Periods

Another benefit of HMOs is the reduced risk of void periods. In a traditional buy-to-let property, if one tenant moves out, the landlord may face a period without rental income while searching for a new tenant. However, in an HMO, even if one tenant leaves, there are still multiple other tenants paying rent, ensuring a steady stream of income.

Greater Economies of Scale

Managing multiple properties can be time-consuming and costly for landlords. However, with an HMO, there are economies of scale. Landlords only need to maintain one property while collecting rent from multiple tenants. This means fewer expenses for maintenance and repairs, making HMOs more cost-effective in the long run.

High Demand and Lower Risk of Rent Arrears

The demand for affordable shared accommodation remains high, making HMOs a reliable investment option. Tenants, such as students or young professionals, are actively seeking affordable rooms to rent. Moreover, in an HMO, each tenant is responsible for their own rent, reducing the risk of rent arrears. Landlords can also request guarantors for additional financial security.

Regulations and Considerations for HMOs

HMO Licensing

In the UK, HMOs are subject to licencing regulations. Any HMO with five or more tenants forming two or more households requires a licence. Even smaller HMOs may require additional licencing depending on local authority regulations. Obtaining an HMO licence typically involves an application process and a fee.

It's important for landlords to familiarise themselves with the licencing requirements in their area and ensure compliance. Non-compliance with HMO licencing can result in penalties and legal consequences.

Safety and Compliance

Safety is of paramount importance when managing an HMO. Landlords must ensure that their property meets fire safety regulations, including having functional smoke alarms on each floor. Carbon monoxide detectors are also necessary in rooms with solid fuel-burning appliances.

Regular gas safety inspections and electrical installation condition reports (EICRs) are required to ensure the safety of tenants. Landlords must also conduct Right to Rent checks and ensure that there are no overcrowding issues within the property.

Planning Permission

While some HMOs may fall under permitted development rights, larger HMOs or those in specific locations may require planning permission. Local authorities may have Article 4 directions in place, which restrict permitted development rights for HMOs. It is crucial for landlords to check with the local planning authority before converting a property into an HMO.

Financial Considerations

Investing in an HMO requires careful financial planning. Landlords must consider the upfront costs of furnishing the property since HMOs are typically fully furnished. Additionally, landlords should account for ongoing maintenance and repairs, as well as any mortgage or finance arrangements specific to HMO properties.

It's also important for landlords to review their insurance policies and ensure they have adequate coverage for an HMO. Specialist HMO insurance is available to protect against risks unique to this type of rental property.

Who pays council tax in HMO?

In a House in Multiple Occupation (HMO), responsibility for paying council tax can vary depending on the specific arrangements and agreements between the landlord and tenants. Generally, the landlord is responsible for paying council tax for the property as a whole. However, in some cases, tenants may be individually responsible for paying their portion of the council tax if they have separate tenancy agreements for their individual rooms. It's essential for landlords and tenants to clarify the council tax arrangements in the tenancy agreement to avoid misunderstandings.

Conclusion

Houses in Multiple Occupation (HMOs) can be a profitable investment strategy for landlords, offering higher rental yields, lower void periods, and greater economies of scale. However, it is essential for landlords to understand and comply with the regulations surrounding HMOs, including licencing, safety requirements, and planning permission.

By conducting thorough research, seeking professional guidance, and maintaining open communication with tenants, landlords can successfully navigate the world of HMOs and capitalise on the benefits they offer. Remember, investing in HMOs requires careful consideration and planning, but with the right approach, it can be a rewarding venture in the rental property market.