You’ve probably heard that HMOs are much more lucrative than traditional buy-to-let investments and wondered whether this market is right for you. Well, first of all let’s look at what HMO actually means and the pros and cons of this type of investment.
HMO stands for House in Multiple Occupation and refers to any property let as a main or only home to three or more unrelated tenants who form more than one household and share basic facilities such as a kitchen or bathroom.
So, if you let a house to three friends or two couples, it’s an HMO.
Large HMOs can produce attractive rental income in areas where there is high demand for rooms to rent, such as cities with big student populations or migrant workers.
While the average rental yield on traditional buy-to-let properties is around 6.5%, on HMOs it’s over 9%. Also, there’s less risk of long voids because rooms tend to let faster than entire properties; you can often advertise a room for rent and have it filled in a matter of days with tenants fully referenced and ready to move in.
However, HMOs can be time-consuming to manage as there is usually more tenant ‘churn’ and, more importantly, you might need a licence and planning permission too.
Whether you need planning permission and/or a licence or not depends on the number of tenants, whether they are related, and also where your property is located.
Mandatory licensing exists for all rental properties of three floors or more let to five or more tenants who form more than one household and share basic facilities.
So, if you let a three storey four-bedroom property to a family of five, you don’t need an HMO licence as they would all form one ‘household’, but if you let the same house to three single people and a couple who aren’t all related you do.
However, you might need a licence for a smaller HMO with fewer tenants.
Some local authorities, including Brighton, Southampton and Portsmouth have introduced selective licensing for small HMOs, either city-wide or in certain boroughs, so if you intend to let any property to three or more sharers you should contact your council to find out if you need a licence.
This is very important because if you let an HMO without the necessary licence you could be slapped with a fine of £20,000, plus costs. Ignorance is no defence.
Note that even if you live in the property where you are letting rooms, you might still need an HMO licence.
You can find a further explanation to HMOs in this Government-issued guide, but if you’re not sure whether you need a licence or not, contact your local council’s housing department.
HMO licences are issued by the local authority and usually last for five years, although sometimes they’re granted for shorter periods.
The cost of the licence varies according to the size and type of HMO and the local authority. For example, the London Borough of Wandsworth charges up to £1,370 for a three-storey property and up to £1,870 for a five-storey HMO. In Oxford, a one-year HMO licence costs £400, it costs £210 to renew for a further two years and £300 to renew for a further five years.
Many local authorities surcharge landlords who are discovered operating an HMO without a licence so it pays to approach them before they find you.
Some will also offer a large discount on the fee if you’re an accredited landlord with a recognised body, such as the London Rental Standard. Some local authorities will only grant HMO licences to accredited landlords.
Getting a licence isn’t simply about filling in a form and handing over a cheque. You’ll have to prove that both you and the property are suitable and that the rental will be properly managed.
Depending on the size and location of your property, you might also need planning permission to convert it into an HMO.
If you intend to let to more than six tenants, you will. You might not need planning permission to convert a smaller house into an HMO for up to six tenants, but it depends on your local authority. The easiest way to find out is to call the council planning department and ask.
To find out whether the HMO market is right for you, look out for our next HMO blog.