HMO (Houses of Multiple Occupation) can be a very useful strategy to have within your property portfolio.
Then, understanding the basics of a HMO is important as they are traditionally a lot more complex than a regular Buy To Let.
People can often get concerned about owning HMO’s as there can be a lot more red tape involved and more processes to go through and many more aspects to understand.
For the purpose of understanding the basics, the assumption for this article is that you do not already own a HMO but are looking to own one.
What you will learn
- What a HMO is and is not
- Different HMO strategies that exist
- Advantages of a HMO
- Disadvantages of a HMO
What is a HMO?
For a building or part of a building (such as a flat) to be classified as an HMO under the Act it must meet all of the following tests:
The Building Test:
An HMO is a building or part of a building (eg a flat):
- In which more than one household shares an amenity (or the building lacks an amenity) such as a bathroom, toilet or cooking facilities (see appendix A) or
- Which is a converted building that does not entirely comprise self contained flats (whether or not there is also a sharing, or lack, of amenities) (see appendix B) or;
- Which is comprised entirely of converted self contained flats and where the standard of conversion does not meet the minimum that is required by the 1991 Building Regulations, and more than one third of the flats are occupied under short tenancies. (see Appendix C)
The Residence Test
For a building to be classified as an HMO it must also be occupied by more than one household as their only or main residence. This includes occupation:
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- By asylum seekers and migrant and seasonal workers
- As a refuge by persons escaping domestic violence; or
- By students in higher or further education.
If a council is satisfied that a building is not being used entirely as the occupiers’ only or main residence, but that a significant number of the occupiers are living there on that basis, it can serve an HMO Declaration.
This has the effect of bringing the building within the HMO definition.
Such a declaration may, for example, be made in respect of a Bed and Breakfast establishment which provides both tourist accommodation and housing for some of its residents on a more permanent footing.
The More-Than-One-Household Test
A group of people who are not all members of the same family living in the same building will form more than one household.
A ‘household’ is either a single person or members of the same family who are living together. This includes people who are married or living together as married (including those in same-sex relationships).
It also includes specific relatives who are living together: parents, grandparents, children (and step-children), grandchildren, brothers, sisters, uncles, aunts, nephews, nieces or cousins. Foster children are also treated as part of their parents’ household.
The Consideration Test
An important additional requirement for a building to be classified as an HMO is that some ‘consideration’ needs to be payable for the occupation.
This will usually be in the form of rents or fees but it also includes, for example, employment where ’live-in’ accommodation is provided – except in the case of certain types of domestic employment.
Which Buildings Are Exempt From The HMO Definition?
Certain buildings exempt from the HMO definition include:
- Those occupied by the resident landlord and a maximum of two other persons who are not part of his or her household; and
- Those occupied by no more than two persons.
Schedule 14 of the Housing Act 2004 lists all the exemptions. You can find Schedule 14 at https://www.legislation.gov.uk/ukpga/2004/34/schedule/14
Different HMO Strategies that exist
As briefly touched upon above, there are many different types of HMO strategies that exist. The most popular strategies include:
- White collar professionals (office workers predominantly)
- Blue collar professionals (shift workers)
- Asylum seekers
- Housing Association HMO’s (vulnerable people or people escaping domestic violence)
Although the fundamentals remain the same, each strategy is different as it can depend on the area in which you operate, the finish of the HMO (i.e what white collar professionals need and want are different to what students need and want) and the type of housing stock that is available in your area.
Advantages of owning a HMO:
1. Better Cashflow
Cashflow is king. You can earn a lot more per HMO than you would a buy to let. HMO’s can vary in size but the general rule of thumb is that the first two tenants’ rent pays your mortgage. The 3rd and 4th tenants’ rent pays your bills and that any extra tenants’ rent from 5 upwards is profit.
2. You need fewer HMO’s to achieve your financial freedom target
Most people enter into property to achieve financial freedom and having HMO’s can help you to achieve your targets quicker. Let’s work on the assumption that a 6 bed HMO will generate you £600 net per calendar month and that a buy to let will generate you £200 net per calendar month.
|HMO #||Total Net Cashflow||Buy To Let #||Total Net Cashflow|
|Total Portfolio Cashflow||£2400 (from 4 HMO’s)||£2400 (from 12 Buy To Lets)|
You can see from the table that you would only need 4 HMO’s compare to 12 Buy To Lets in order to achieve the same financial target. This is not to say that obtaining HMO’s is any easier than Buy To Lets but it demonstrates that fewer HMO’s can yield similar results to having a bigger Buy To Let portfolio.
3. You will be meeting a demand for housing
In a town or city where there are excellent employment opportunities and/or universities present, you will be meeting a demand for accommodation. More and more people are looking to house share due to the cost of obtaining a mortgage and getting on the property ladder.
More and more people are seeking good quality turnkey accommodation i.e. they literally move in and start living straight away. 21st century culture is becoming a case of here and now. People demand good WiFi and instantaneous success. Property is no different. People would rather just turn up and live rather than going through unnecessary hassle.
You will be meeting a demand for this should you do your research and put your HMO’s in the right area of the right place.
4. There are no limits of how many people you can have in a HMO
As long as you are not overcrowding the rooms i.e. 2 people per room throughout your property then there are no limits of how many tenants you can have in a HMO.
It is very common for people to have 4,5 or 6 tenants in a HMO. There are HMO’s out there that have 7,8,9.10 or even 11+ tenants in.
You would not be able to do this in a single buy to let because you would be limited in terms of space and due to the fact that if you put too many different households in one place then you would create a House of Multiple Occupation anyway.
There is a strong demand for shared accommodation at the moment and by doing your due diligence on your investment area there is no reason why you cannot provide good quality accommodation in order to meet the demand.
Disadvantages of owning a HMO
1. More rules and regulations to follow
There are many more rules and regulations that you need to be aware of for HMO’s, such as the ‘HMO Management Regulations 2006’. The red tape can be negated by knowledge. As with anything in life, if you have a better understanding of something then the more that it will help you.
There is nothing scary about the extra rules and regulations. You just have to make sure that you have an understanding of them or that your lettings agent has a very good understanding of them.
2. Higher maintenance costs
HMO’s generally have higher maintenance costs due to the increased wear and tear. Bills such as water, gas and electric will be higher along with management fees (if an agent runs your HMO for you).
This includes HMO mortgages as well. HMO mortgages normally operate on a higher interest rate and thus cost more per month than a regular buy to let mortgage.
3. Higher entrance costs
The cost (in comparison to buying a buy to let in a similar area) is higher due to the fact that more will be needed to be done to the property in terms of refurbishments and general set up. For example, the cost of a refurbishment for a HMO is higher than that of a single let as you will need:
- Interlinked smoke alarms
- Fire doors and furniture
- Extra fire-boarding under the stairs
- Furnishings such as beds, mattresses, tables, chairs, crockery, cutlery etc
Many people do not consider these items when they are preparing a property for HMO use. A general rule of thumb is that HMO’s come fully furnished. The quality of finish that you go to depends on your HMO strategy and who your target market is.
4. More challenging to manage
HMO’s can be more challenging to manage. There are more tenants, more paperwork, more viewings, more bills to pay and generally more issues to deal with. Sometimes people do not realize that there are these extra things to deal with.
A simple way to negate this would be to employ an excellent HMO lettings agent to look after and manage your property for you.
5. Higher tenant turnover and void periods
Tenant turnover is normally higher in HMO’s than single lets. This means that the cashflow you receive per month could vary wildly as you may have more void periods as a result.
The disadvantages may seemingly outweigh the advantages yet this is the reality of HMO’s. It all comes down to management v risk v time. Many people often think that a bad tenant could cause a loss of income in a HMO. This is true.
However, if you had 6 people in a HMO and one was a bad tenant and not paying rent then at least you would still have 5 other tenants paying rent and thus an income.
In a Buy To Let, if you had a bad tenant that did not pay the rent then you would not have an income. This is the main offsetting argument that Buy To Let and HMO investors have.