Over recent years, the UK’s housing market has seen a marked shift towards the House in Multiple Occupation (HMO) and private rental sectors. This trend stems from the growing chasm between escalating house prices and stagnant wage increments. Presently, with the median house price hovering around £250,000, first-time buyers face the daunting task of amassing a deposit nearing £37,500, especially when juxtaposed against the average wage of £30,800. In the capital, this challenge intensifies, with house valuations often exceeding £500,000.
Such financial dynamics have nudged many, predominantly those aged 21-35, towards the rental realm, a trend especially pronounced in urban centres. By the close of 2018, the private rental domain encompassed an impressive 4.7 million individuals, with HMOs accounting for nearly 500,000 establishments across England and Wales.
While the government’s aspiration to usher in 345,000 new homes each year remains aspirational, the importance of HMOs and the broader Private Rented Sector (PRS) in addressing this housing conundrum cannot be overstated. With local councils divesting from their housing portfolios, the onus increasingly falls on private HMO investors. This shift has ushered in rigorous regulations for HMOs, elevating both safety and living standards.
Given this backdrop, the allure of the HMO investment sector for both tenants and forward-thinking investors is evident. As affordable housing remains a pressing concern, HMOs stand out as a beacon of opportunity for savvy property stakeholders.
Understanding the HMO Landscape
A House in Multiple Occupation (HMO) is a distinct British housing concept where multiple tenants from different households share ‘common areas’ within a property. Originally, these were larger homes designed for single families but have been subdivided to cater to multiple tenants. Shared facilities typically include bathrooms and kitchens.
The prominence of HMOs in the UK housing sector is intertwined with safety regulations. Past incidents in overcrowded residences led to the introduction of stringent fire safety standards, ensuring HMOs today are well-equipped to protect tenants. The Housing Act 2004 further solidified the regulatory framework, mandating licenses for larger HMOs. Specifically, properties housing five or more tenants from different households sharing facilities fall under this category.
For property investors, HMOs offer a lucrative opportunity. However, it’s essential to understand and adhere to the regulatory landscape. These regulations not only ensure tenant safety but also provide clarity for landlords. In essence, HMOs represent a unique blend of opportunity and responsibility in the UK’s property market.
The House of Multiple Occupancy (HMO) market in the UK has surged in value, reaching an estimated £26 billion in England. Several factors make HMOs an attractive investment for property investors. Firstly, they offer higher rental yields, with a notable 7.5% recorded in early 2021. This is attributed to the room-by-room rental system, which maximises rentable space, often generating significantly more revenue than single-let properties.
Secondly, there’s a robust demand for HMOs, especially among Gen Z and millennials, due to rising house prices and the flexibility HMOs offer. Additionally, university cities see heightened demand due to the influx of international students. HMOs also provide stability during rental void periods; if one tenant leaves, others continue to pay, ensuring a consistent income. Lastly, HMOs allow for efficient portfolio management, enabling investors to achieve higher cash flow with fewer properties.
The Financial Benefits of HMOs
HMOs offer some key financial benefits to investors.
Elevated Rental Returns: HMOs stand out for their ability to deliver superior rental yields. When juxtaposed with conventional single-let dwellings, the segmented rental approach of HMOs optimises the utilisation of available space. To illustrate, a residence that might command a rent of £1,200 as a standard let could see its revenue soar to around £2,500 or more as an HMO, contingent on factors like room count and prevailing market rates.
Diversified Revenue Channels: The essence of an HMO investment lies in its capacity to consolidate multiple revenue streams under one roof. Rather than being tethered to the financial fate of a single tenant, HMO landlords enjoy the cushion of receiving rents from multiple occupants. This model amplifies the aggregate rental income and offers a buffer. Should a tenant depart, the financial impact is mitigated by the contributions of the remaining occupants, ensuring revenue continuity.
Tax Benefits and Incentives: There are deductions that can be made against the income generated from the HMO before tax is payable. It’s essential for investors to consult with a professional accountant to ensure they’re maximising their tax benefits and adhering to all regulations.
How to Choose the right property for an HMO
The right property can amplify returns, while a misjudged choice can erode potential gains. Here, we delve into the critical factors to consider and offer insights into making informed decisions:
Location: The adage ‘location, location, location’ holds especially true for HMOs. Proximity to universities, business hubs, and city centres can significantly boost demand and returns for your HMO investment. Additionally, areas with good transport links and easy access to essential services are often preferred by potential tenants.
Property Size: Size matters when it comes to HMOs. Larger properties, especially those with multiple bathrooms or the potential to add en-suite facilities, can command higher rents. However, it’s essential to balance size with the cost of acquisition and potential return on investment.
Local Demand: Understanding the local tenant market is crucial. Are you catering to students, young professionals, or DSS housing benefit tenants? You could even target asylum seekers on very lucrative rent guarantee contracts with the government. Each demographic has distinct needs, and ensuring your property aligns with these can enhance occupancy rates.
Amenities: Modern tenants often seek more than just a room. Communal areas, high-speed internet, modern kitchens, and outdoor spaces can make your HMO more attractive, allowing you to command a premium rent.
Thorough Market Research: Before any acquisition, conduct comprehensive market research. Understand local rental yields, occupancy rates, and tenant preferences. Engage with local letting agents, attend property seminars, and join investor networks to gain insights.
Spotting Undervalued Properties: One of the hallmarks of a savvy investor is the ability to identify properties with untapped HMO potential. Look for properties in emerging areas, those requiring cosmetic upgrades, or larger homes that can be easily subdivided. Often, these properties are undervalued in the market but can offer significant returns once converted to HMOs.
Navigating HMO Regulations and Licensing:
HMO investors must pay particular attention to the regulation and licensing of Houses in Multiple Occupation (HMOs). They are governed by specific criteria set out nationally but enforced by local authorities (Councils). These standards ensure the safety and well-being of tenant to address the safety concerns of the past.
Licensing Requirements: If you’re renting out a large HMO in England or Wales, obtaining a licence is mandatory. A property is categorised as a large HMO if:
- It is rented to 5 or more people forming more than one household.
- Some or all tenants share facilities such as toilets, bathrooms, or kitchens.
Extension of Mandatory Licensing: From 1 October 2018, the mandatory licensing of HMOs was extended to include smaller properties used as HMOs in England that house 5 or more people.
Legislation: The primary legislation governing the licensing of HMOs is encapsulated in Part 2 of the Housing Act 2004. This act sets out the conditions and requirements for HMOs, ensuring they meet specific safety and management standards.
Safety and Management Standards: HMOs are subject to higher safety and management standards compared to typical family homes. This is to ensure the well-being of multiple tenants living in shared spaces.
Effective HMO Management
Managing a House in Multiple Occupation (HMO) presents unique challenges, from catering to diverse tenant needs to ensuring regular maintenance of shared facilities. Conflicts can arise in shared living spaces, and the stringent regulatory landscape of HMOs demands meticulous attention. To attract and retain reliable tenants, it’s essential to employ effective marketing, conduct thorough tenant screenings, and maintain open communication channels.
Regular property upgrades can also enhance tenant satisfaction and retention. For many landlords, partnering with property management companies offers a solution. These companies provide expertise in HMO management, ensuring regulatory compliance and efficient operations. They handle everything from tenant relations to financial management, allowing landlords to enjoy the benefits of their HMO investment without the day-to-day hassles. In essence, a strategic approach, combined with expert assistance, can make HMO management both profitable and seamless.
Maximising Returns on Your HMO Investment:
To optimise returns on HMO investments, setting the right rental rate is crucial. Research local markets to ensure your rates are competitive yet profitable. Regular maintenance and periodic upgrades not only enhance property appeal but can also command higher rents. It’s an investment that ensures tenant retention and boosts property value. To reduce vacancies, proactive marketing is key. Offer incentives for extended leases and maintain strong landlord-tenant relationships. Tenant-focused approaches almost always increases returns.
About the Author
I’m Gemma, I have been working in HMOs since 2009 from sourcing, development, financing, construction, tenanting, management, refinancing and exits. You name it I’ve done it. And don’t get me started on speaking to utility companies (*#$*!!). I set this business up to help other fellow HMO investors sell their HMOs in a manner that suits them – be that price, ease or speed. I aim to help as many HMO landlords as possible navigate the HMO sales process, if I can help you too please reach out, I would love to meet you.