- 1. What Is A Hmo Property?
- 2. HMO Advantages To Landlords
- 3. HMO Disadvantages To Landlords
- 4. HMO Licencing Requirements
- 5. What To Do If Your HMO License Is Rejected?
- 6. Landlord HMO Rental Yields
- 7. HMO Rental Income Calculator
- 8. Tenants For Your HMO
- 9. Rules & Regulations For Renting Out Your Property
- 10. Landlord Insurance
- 11. Getting A Property Manager To Help
- 12. Property Manager Fees For HMO Properties
- 13. HMO Mortgage Guide
Following a landlord HMO property 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 letting agent 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.
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1. 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.
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.
2. 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 getting a let agreed as a HMO.
- 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
3. 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.
4. 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;
- The HMO is rented to under five people who form more than one household.
- The property is under three floors high.
- 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.
5. 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.
6. 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
7. 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.
HMO Rent Calculator
8. 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.
9. RULES & REGULATIONS FOR RENTING OUT YOUR PROPERTY
Just like every tenant is required to uphold their end of the tenancy agreement, landlords have their own ethical and legal obligations.
It can be tempting to cut corners to save money and time. The problem with this is that these missteps will eventually catch up to you.
Not to mention, it’s never a good idea to break the law. This kind of bad behavior can destroy your reputation and result in a loss of license. To make sure you stay on the up-and-up, let’s cover some of the laws, obligations, and regulations that every landlord must adhere to.
LANDLORD LICENSING REGULATIONS
A new landlord licensing scheme (The Housing Act of 2004) requires that landlords letting property owned in certain areas must first obtain a license from the local council before doing so.
Landlords who chose not to get the required license could face a fine as much as £30,000. Landlords must apply and qualify for the license by proving they are working within the local laws and managing their properties appropriately. All local councils have their own set of guidelines to follow.
Once you’ve obtained the necessary license, you can start legally letting out your property. This starts with a tenancy agreement and lots of paperwork.
Landlords must provide tenants with all of the required information and documentation before collecting rent and starting a tenancy. Tenants who choose an assured shorthold tenancy (AST) are entitled to have their deposit protected in a government-backed scheme within 30 days of making the payment. Other paperwork you must provide tenants include:
- A copy of an updated “How to Rent Guide”
- A gas safety certificate
- An EPC (Energy Performance Certificate)
Not providing this information or failing to protect their deposit in an approved scheme could result in fines as much as three times the amount of the deposit itself. If you end up needing to evict the tenant (serve them with a Section 21 notice), not protecting their deposit could interfere with this process.
ENDING OR TERMINATING A TENANCY
Landlords must end any tenancy legally. This means if you choose to end a tenancy agreement early or repossess the property, you have to either serve tenants with a Section 8 or Section 21 notice.
SECTION 8 NOTICE
Section 8 notices apply to several scenarios. In some cases, a judge orders the tenants’ eviction while others are made on mandatory grounds.
An example of one such incident is that the renter fails to pay their rent for 2 consecutive months or more. Unsure if your situation falls under the Section 8 laws? Check with your local council before making any decisions or moves to evict your tenants.
SECTION 21 NOTICE
In order to legally evict a tenant using a Section 21 Notice, you must provide them with the following documentation.
- A recent copy of the government’s “How to Rent Guide”
- A valid gas safety record (if it applies to your property)
- A valid EPC (Energy Performance Certificate)
In the event that you collect a deposit, you must also provide renters with detailed information about which government-scheme you used to protect the money. There are three acceptable schemes. The information you provide the tenant must include:
- A certificate proving the deposit was registered and protected
- A leaflet about the deposit protection scheme
If the tenant files a complaint about the condition of the property, the Section 21 Notice may be considered invalid.
SAFETY REQUIREMENTS AND REGULATIONS
Safety is another major concern of tenants and a major responsibility for landlords. Not only must landlords ensure the safety of the property itself but also of the tenants occupying the space. There are several guidelines that surround property safety standards for landlords and tenants.
At minimum, all rental properties must have fire alarms and carbon monoxide detectors property installed before renters move in.
Landlords should also consider installing at least one fire extinguisher on the premises. Properties with multiple levels must have a smoke detector on every floor. Any rooms that contain a solid fuel-burning device are required to have a carbon monoxide detector as well. Ensure that all detectors are in working order and all inspections are up to date before letting renters move in.
Landlords are required to ensure all electrics, including stationary and portable appliances, are up to code and in safe, working order.
Landlords must hire a professional electrician to test all electrical components of the property every five years. For your protection, it’s best you keep a record of all inspections as a reference
Properties with a gas supply must perform an annual gas safety inspection. Upon completion, landlords must provide the tenants with a Gas Safety Certificate as proof. This inspection checks all air vents, pipework, and installations to guarantee they are in safe, working condition.
THE IMMIGRATION ACT OF 2016
On 1 December 2016, England passed the Immigration Act which requires all landlords to check and ensure that tenants or prospective tenants have the legal right to live in the UK.
This check must be done before the tenant moves in or a tenancy agreement is signed. Proof of residency includes the tenant’s passport, visa, or other identifying documents. Landlords who let to an unqualified or illegal tenant could face large fines and up to 5 years imprisonment. Landlords who take the right steps to legally terminate the tenancy agreement and evict illegal renters are protected under this act.
As long as the eviction takes place within 3 months of discovering the renter is not legally able to rent in the UK. Landlords can defend themselves and possibly avoid jail time and fines.
GDPR FOR LANDLORDS
On 25 May 2018, the GDPR rules went into effect in Europe. These rules apply to landlords but were also created to give EU citizens more control over their personal data and information. Landlords are considered data controllers, which means they’re required (by law) to handle and process all confidential tenant information in a secure manner.
When collecting data and information, landlords must explain to the tenants exactly why the information is necessary, how it will be stored and used, and how long the landlord plans to hold the information before terminating it in a safe and legal way.
BASIC LANDLORD OBLIGATIONS
The rules and regulations that govern landlords aren’t just written in law. There are also moral obligations that all landlords must adhere to. Not only are these obligations moral, but failure to follow them puts tenants in the position to take legal action later on.
These obligations include protecting the health and safety of the tenants and property as well as performing maintenance and repairs.
Landlords are responsible for maintaining safe living conditions on the interior of the property’s structure. This includes (but isn’t limited to), all heating and hot water installations, baths, sinks, all sanitary areas, and heating and cooling systems.
For fixed tenancy contracts that span 7 years, the tenant then assumes responsibility for these issues. At this time, landlords can’t be held responsible for damages caused by the tenant.
Because the landlord is the owner of the property, they’re also responsible for maintaining and repairing both the interior and exterior of the building structure.
Major repairs include (but aren’t limited to) damage to the roof, gutters, chimney, walls, and any drains. Landlords must also maintain any and all equipment that supplies the gas (if applicable), electric and water for the property to ensure it’s in safe, working order.
If the landlord needs to access the property for a routine inspection or to check on or perform any repair or maintenance issues, they must give the tenants ample notice. Some tenancy agreements state what is considered “ample notice” and must be agreed upon by both the landlord and renters.
10. LANDLORD INSURANCE
Like most other insurances, some landlords are tempted to skimp on landlord insurance. But similar to other insurances, this protection is in place in the event that you need it. It offers peace of mind when renting out your property.
Landlord insurance protects your property against unforeseen damage, but also protects you from being sued if your tenant is injured or their property is damaged during the tenancy agreement. Don’t be fooled into thinking saving money now on monthly payments is worth the risk of not having landlord insurance.
If something goes wrong, you’ll be facing much bigger bills and headaches in the future. Try to think of landlord insurance as a long-term investment. Here are some of your landlord insurance options explained.
WHAT DOES LANDLORD INSURANCE COVER?
Are you wondering if landlord insurance is worth it? Well, for starters, it protects you from damages, accidents, and other financial losses you may incur when renting out your property. Without insurance, you’ll be responsible for the entire cost of any of the above mentioned accidents.
These also include theft, fire, water damage, and other natural, unpredictable events. Certain policies protect both your property and its contents (if you’re renting out a fully-furnished property).
Some landlords also have unpaid rent added to their insurance policies to protect against non paying tenants.
Other line items you can add to your landlord insurance policy include:
- Replacing fixtures and fittings
- Replacing locks and keys
- Damage or theft at the hands of tenants
- Water leaks or damage
You’re putting yourself and your property at risk when you don’t take out landlord insurance. When renting out your property, you need to weigh all the pros and cons of obtaining landlord insurance.
Things to consider include maintenance, repairs, the value of the items, property location, and the value of any items inside the home.
HOW COVID-19 HAS IMPACTED ON LANDLORD INSURANCE
The recent Coronavirus pandemic has impacted the landlord insurance industry in multiple ways. Certain government agencies recently passed laws preventing all landlords from performing evictions for a 90-day period.
This grace period is known as a payment holiday and gives both tenants and landlords a financial break in light of any burdens incurred due to Covid-19.
DO I REALLY NEED LANDLORD INSURANCE?
As we said before, landlord insurance isn’t a must-have but it is highly recommended. Most landlords don’t have enough money to cover serious damages, losses, or exorbitant repairs. Unpredictable incidents happen ranging from theft to natural disasters and tenants who fail to pay rent on time.
Think of landlord insurance as a financial cushion and peace of mind for landlords renting out their property.
WHAT KIND OF LANDLORD INSURANCE IS BEST?
There are several landlord insurance policies to choose from. Knowing which policies are available can help you make an informed decision.
Consider your budget, your expenses, and the value of both your property and contents.
If you’re unsure, start with a basic policy and add onto it as time goes on or your circumstances change. The more coverage or line items you add, the more expensive your monthly payments will be.
This is the most common type of insurance and covers basic items. Building insurance also covers the cost of damage (caused by weather or tenants), all repairs, and maintenance. Common natural disasters include fires, hurricanes, and floods. Tenant damage is usually described as theft or vandalism.
For landlords renting out their property plus contents, content insurance is a good idea. Most basic policies cover the contents of your property as well, including appliances and furniture. This is an important line item if you plan to rent your property fully furnished.
Tenants who bring their own contents into your building are required to get their own content insurance to protect their belongings.
There are certain legal requirements that go along with renting your property. Legal expense policies help cover any legal expenses associated with evicting tenants, going after late rent payments, personal injury claims, and other court costs in the event you’re sued by your tenant.
Accidents happen and they’re often unpredictable. Accidental damage coverage protects you against household damage including any damage to the walls or floors, burns, major spills, broken glass or windows, and similar everyday occurrences.
As the landlord, you’re responsible for these expenses and accidental damage coverage can help cover some of these associated expenses.
Landlord Home Emergency
Part of being a landlord is being available for your tenant’s needs, which may occur 24 hours a day, 7 days a week. Landlord home emergency coverage provides renters with assistance and support at any time of day without disturbing you.
Landlord home emergency policies cover expenses related to things like a broken furnace or boiler, water pipe, or even a power outage.
Non-paying tenants are every landlord’s worst nightmare. Regardless of how extensive you research and reference applicants, irresponsible tenants sometimes fall through the cracks. When facing a tenant who refuses to pay, it’s a ripple effect.
Non-paying tenants put you behind on your own bills and financial obligations. Rent guarantee coverage actually provides you with rent in the event your tenants don’t pay. After 60-days of non-payment (or 2 months), you can take out a claim and collect up to 8 months of owed rent. Most policies cover up to £2500 a month in rent.
Damage to your building, property, and contents are an important concern but not your only one. If a renter is injured on your property during their tenancy, they can sue you for their medical bills and related expenses.
This type of insurance is known as liability, public liability, or landlord liability and helps cover financial expenses and legal fees in the event that a renter becomes seriously injured on your property. It also helps pay whatever settlement or payout the tenant receives.
LANDLORD INSURANCE IS A GOOD IDEA WHEN RENTING YOUR PROPERTY
Landlords are in the rental business to make extra money. Because of this, some landlords and property owners are tempted to cut costs and pinch pennies at every turn.
While this might be okay sometimes, your insurance policy isn’t a place to cut corners.
Although it’s not a must-have feature, it’s definitely one that protects your finances and offers you peace of mind. A small investment now could mean big savings of time and aggravation down the road.
11. GETTING A PROPERTY MANAGER TO HELP
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.
12. 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.
Rentround 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.
13. 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 Rentround find the best property manager local to you.