Following a landlord HMO guide is vital, considering the rental market for House in Multiple Occupation (HMO) properties is growing. More landlords are applying for HMO mortgages and demand to hire single rooms, instead of entire houses is increasing.

A HMO can generate more income vs a ‘normal’ buy to let property for a landlord. In addition single room tenants prefer the lower deposits and lower rent charges.

However with a HMO property, usually comes more work. This is why many landlords opt for a property manager, whether online or high street, to deal with the running of the property.

Our property manager comparison tool shows you property manager fees & ratings in your area. Comparing property managers is free and can save you £000’s in rental costs.

What is a HMO Property?

An HMO (House in Multiple Occupation) is a property that is lived in by tenants operating as separate entities. The rent is received from each tenant living in the property individually.

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Each tenant usually has 1 room within the property. The toilet, bathroom and kitchen facilities are usually shared.

A traditional rental property is normally for 1 family/person, so rent would be due from one household who usually also pay the utility bills.

A property housing multiple students is an example of a property being operated as a HMO.

HMO advantages to landlords

  • Higher rental yields are by far the largest benefit. Compared to operating a property as a traditional letting, a landlord can expect a higher rental income.
  • Single room lettings are in hot demand. Renting out an entire house or flat is very costly. For singles & working professionals, the cost save of renting a room is substantial
  • Landlords have a level of protection against arrears. If one tenant decides to vacate, the rental income from the other tenants would be unaffected

HMO disadvantages to landlords

  • Landlords have to manage high tenant turnover
  • Conflict is more likely. As the property is occupied with individuals who may not know each other, personality clashes are a higher risk
  • There is far more admin work involved such as collecting rent from each individual as opposed to one person
  • Furnishing costs will be higher. As the property is shared, the individuals are unlikely to commit to paying their share for a TV or sofa. As a result more furnishings need to be provided by the landlord
  • There is more regulations that need to be followed for landlords operating a HMO. These include licensing & safety requirements.

 HMO Licencing Requirements

With higher rental yields however does come extra complexity. For larger HMOs, landlords need an HMO licence granted from the local council. Licenses, valid for five years, are on a property basis not per landlord (i.e. 5 properties need 5 licenses even under 1 owner).

Although every council is different, smaller HMOs may not require a license. A HMO is usually defined as small if they meet one of the below criteria;

  1. The HMO is rented to under five people who form more than one household.
  2. The property is under three floors high.
  3. Tenants do not share facilities such as toilets, bathrooms or kitchens.

Fees for a license will be set by your council as well as how long the process will take to approve.

What to do if your HMO License is rejected?

Factors considered are the property conditions, suitability as an HMO property and landlord history (i.e.you haven’t breached landlord laws previously). In addition your local council may reject your license until elements of the property are improved or adapted.

If rejected, you can appeal to the Residential Property Tribunal. Operating without a license is a serious offence and can result in an unlimited fine or a prison sentence, especially if the property falls below housing standards.

LANDLORD HMO Rental Yields

As alluded to previously, a landlord on average can expect a higher rental yield running their property as a HMO. Below are some example figures to showcase some of the potential income values:

Traditional buy to let

  • Location: Midlands
  • 3 bedroom semi-detached house with 2 reception rooms
  • Rented to a family
  • 1 Months’ rent = £700
  • Annually = £8400

HMO buy to let

  • Location: Midlands
  • 3 bedroom semi-detached house with 2 reception rooms
  • 1 reception room converted to a bedroom
  • Rented to 4 single working professionals
  • 1 Months’ rent per tenant = £300
  • Monthly rental income = 1200
  • Annual rental income = £14,400

HMO Rental Income calculator

To see your expected income operating your property as a HMO, enter your details below.

The HMO rental income calculator uses average rental incomes sourced from research conducted in 2019.

 

Although in the above example there is a higher rental income to be made from an HMO, there are higher expenditures and effort.

In an HMO the bills are usually paid by landlords which reduces profit.

Maintenance costs are also higher and typically require more time & effort; each individual room requires locks and more stringent HMO health & safety guidelines need to be followed.

Finally, getting your HMO property setup will be more costly than a standard buy to let. You will usually need to provide a fully furnished property. Standard buy to lets can be offered as unfurnished which will be cheaper for the landlord.

When you fill your standard buy to let with a family, it is likely that family will be your tenant for a while. Whereas in a house of 5 individuals there will be a higher turnover of tenants, meaning there’s the cost of finding tenants, drawing up new agreements and also more void periods where certain rooms may be empty.

Tenants for your HMO

HMOs work better in certain locations. Is your property near a university? If so then that’s perfect for attracting students. If your property has access to city & business regions/or transport links to these places then single professionals could be attracted.

Does your council have a shortage of social housing? HMO landlords can take advantage of providing rooms to this demographic via the working alongside the council.

HMOs no doubt have the risk of being more difficult to manage than normal buy to lets.

Tenants who do not know each other can sometimes fall out, as a landlord you may find yourself mediating between two tenants.

Whereas a normal buy to let model would consist of people who have ‘chosen’ to live together and do not need a landlord to mediate!

It’s a bad idea to mix lifestyles with a HMO as well. Imagine mixing partying students alongside working professionals! It would be best to stick with all students, or all professionals to reduce conflicts.

Getting a property manager to help management of your HMO

Due to the workloads in managing a HMO, many landlords decide to get a property manager.

A property manager can take on the duties of managing the property. Therefore freeing up time for landlords to spend on other activities.

A property manager can do a small subset or majority of activities for a property. The most basic packages usually include finding tenants for a property.

Whereas more comprehensive activities include full property management. This encompasses collecting rent, maintenance, evictions etc.

Property Manager Fees for HMO properties

Property manager fees vary across firms & locations. Full property management is usually charged at 15-20% of monthly rent.

Rent Round can help you assess likely property managers fees in your area. Enter your postcode below to see the best rated & competitively priced local property managers.

HMO Mortgage guide

The final part of our HMO guide cover mortgages. Operating a HMO is different to a traditional property and the risks are perhaps higher. As a result, you may need to ask your lender for a bespoke HMO mortgage.

The below tips are what you need to know about getting a HMO mortgage approved & your property up and running.

HMO Critical factors:

Lenders will consider the below factors for when approving a HMO mortgage:

  • Landlord experience
  • Types of tenants
  • Location of the property
  • The number of rooms in the property
  • Management type
  • Rental income

Lenders will also make standard mortgage assessments, such as affordability, borrowing amount & your credit score.

Landlord HMO Experience

Your experience managing buy to lets before will be a major consideration. Are you a landlord that knows how to deal with property issues, have you managed tenant conflicts and are you financially astute to make sure your monthly payments are viable?

The more your experience in managing properties, the less risk for a lender.

Types of tenants in your HMO

Lenders also consider the type of tenants you will be accommodating. Students or social housing tenants are more risky therefore lenders will scrutinise more for these tenants.

Location of the HMO

The likelihood you are able to fill your property, keeping your rental income intact is a key risk consideration for a lender.

If your property is near a university then that’s perfect for attracting students. If your property has access to city & business regions, then single professionals could be attracted.

Number of rooms

Usually under 5 rooms is acceptable for a standard HMO mortgage. Anything over 5 rooms could potentially fall under commercial finance.

Value of rental income

As with a normal buy to let mortgage, the lender will consider your anticipated rental income. The lender’s looking to see if your rental income will cover the monthly mortgage.

A HMO lender will also look at your income (from your business or salary) to check that if for a period of time you property doesn’t generate any income (i.e. the property has an issue or you can’t find tenants), could you cover the mortgage payments yourself.

HMO management company

The final part of our landlord HMO approval tips is about property managers. If you are planning to use a professional property management company to run your HMO, that reduces the risk to the lender.

A property management firm will have a great wealth of experience and contacts in the industry, as opposed to a first time landlord.

Indicating to your lender that you will use a property manager to run your HMO can work in your favor if you are struggling to get a mortgage.

Check out our property manager comparison facility & let Rent Round find the best property manager local to you.

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I got the best priced agent in my area with all the services I wanted. Using Rent Round I could see all the local agents in my area after just putting in my postcode.