Investing in HMOs

Posted by Vesta Property on 11th October 2019 -

Should I invest in an HMO?

A House of Multiple Occupation (HMO) is a property where rooms are rented out individually to un-related people, rather than renting out a dwelling on a single tenancy, such as to a family or couple.

HMO tenants rent their room and share communal spaces such as the kitchen and sometimes the bathroom and lounge. They pay an “all inclusive” rent that includes utilities and council tax.

HMOs appeared in popular culture in the 1970’s in the TV programme “Rising Damp” where live-in landlord, Rupert Rigsby, provided rooms of dubious quality for a random group of people.

However, the current market demands that HMOs attain a much higher standard and they often feature designer interiors and lifestyle extras to cater to discerning professional tenants of all ages who like to pay an “all inclusive” rent while enjoying the social aspects of house shares.

Landlords are attracted to HMOs because they typically deliver significantly higher yields than a property rented out as a whole dwelling.

However, as with any investment, with higher rewards comes higher risk, and for this reason HMOs are typically the domain of more experienced landlords who are aware of the much stricter compliance issues, and who are also skilled at tenant management and being more “hands on” in that regards.

Some of the main considerations around HMOs

• Finance: If you don’t have much experience of being a landlord, it will be much harder to get HMO finance. Lenders like to see some level of previous experience of property and tenant management.
• Costs: Attractive gross yields are possible - up to three times greater than a single occupancy BTL property - but these are countered by higher costs (usually higher maintenance & repairs and tenant turnover) and more time intensive/“hands-on” management. HMOs are not generally recommended for first timer or amateur landlords for these reasons.

Attractive gross yields are possible - up to three times greater than a single occupancy BTL property - but these are countered by higher costs

• Licensing and stricter regulations, particularly around safety, including fire and escape routes.
• Valuation: lenders look to bricks & mortar to anchor their valuations but yields usually imply a higher value; similarly there’s often a valuation gap between buyers - closer to bricks & mortar - and sellers - looking for a greater yield premium.
• Tenant vetting: Landlords need to be careful about tenant selection to ensure that harmonious households are created. One “bad apple” tenant can upset an entire HMO and result in other tenants leaving.
• Parking: HMOs can be unpopular with local residents and can cause parking issues if all 5 tenants own a car.
• If it is a licensable HMO, there will be significant costs associated with getting the property up to standard and licensed.
• Many areas are bringing in what is known as Article 4 to reduce the number of HMOs.