Are you thinking of investing in an HMO property in 2024? Are you wondering what the rules are and how much harder it is being an HMO landlord than a single let landlord?
With the increase in interest rates, the yields on single let properties in 2024 are less and less likely to meet the mortgage stress tests, unless you have a high deposit. HMOs, on the other hand, usually have higher yields than single lets, making them a potentially more attractive investment opportunity for landlords. However, HMOs involve considerably more management and are subject to more red tape than single lets.
This blog post is a detailed guide which sets out objectively the key nuts and bolts landlords and investors need to know about investing in HMO properties in 2024. It includes licensing, Article 4, average rents by region, a rent comparison with single lets and how to manage HMOs. I also include a section on how the Renters Reform Bill is likely to affect HMOs.
Quick Links: Guide for HMO landlords
- What exactly is an HMO property?
- How will the Renters Reform Bill affect HMO properties in 2024?
- When does an HMO property need a licence?
- What is Article 4 when it comes to HMO properties?
- What are average HMO room rents in late 2023?
- How do HMO room rents compare to single lets in late 2023?
- Tips on how to manage an HMO property
- Changes to the council tax valuation of HMO properties
- Final thoughts on HMOs
What exactly is an HMO property?
HMO is short for House in Multiple Occupation, or House for Multiple Occupation. It loosely refers to shared accommodation and is often called “co-living”.
HMOs are a popular way for people to rent a room in a shared house or flat, typically with bills included or capped. (Although inclusive bills have reduced during the cost of living crisis). Usually the sharers are students or young workers, and are located in towns and cities.
Under Section 254 Housing Act 2004, a property qualifies as an HMO if 3 or more renters live in a property, and they’re from more than one “household”, sharing “one or more basic amenities”. If there are 3-4 renters, it’s a small HMO. If there are 5+ renters, it’s a large HMO. The flowchart above helps explain what is and isn’t an HMO.
What are “basic amenities”?
Section 254(6) states that basic amenities means a toilet, bathroom or cooking facilities (ie a kitchen). This means that it excludes self-contained flats which share an entrance area and laundry room.
What is a “household” for the purposes of an HMO property?
A household includes members of the same family, including a couple. Section 258 takes a very wide definition of household, and it includes every sort of couple and blended or extended family and relations, even cousins and nieces/nephews.
For example, 3 single people with their own bedrooms, or 2 couples in 2 bedrooms, will be a small HMO if they share a bathroom or kitchen. 2 sharers are not an HMO, but if the partner of one of the sharers moves in, then it will be a small HMO.
What is a large HMO property?
A property is a large HMO if at least 5 renters live there, from more than one household, and they share toilet, bathroom or kitchen facilities with other renters.
What is a self-contained flat?
A self-contained flat is accommodation which has the three “basic amenities” inside it, i.e. a kitchen, bathroom and toilet, that are for the exclusive use of the people living in it.
Under the Homes (Fitness for Human Habitation) Act 2018, cooking facilities would need to be enough to enable the preparation and cooking of food, i.e. more than a microwave and fridge. Tenants need to have both a hob (something to heat saucepans and frying pans on the bench top) and an oven. A mini bench top cooker, like this one from Amazon, is likely to be adequate in a self-contained bedsit for one.
If the renters need to leave the flat to access any of these amenities, it’s not a self-contained flat, even if they’re the only ones entitled to use that amenities. For instance, if a room has an en suite, and exclusive access to a kitchen on another floor, that is not a self-contained flat as the renters have to leave the room to use the kitchen.
What is a Section 257 HMO?
A Section 257 HMO arises where a building was converted into self-contained flats, but the conversion didn’t meet the standards of The Building Regulations 1999, and less than two-thirds of the self-contained flats are owner-occupied. A flat is owner-occupied if the occupiers have a long-term lease (over 21 years) or own the freehold.
In other words, for a building to be a s257 HMO, at least one third of the flats in the building must be occupied by private renters under a tenancy agreement.
Is it still an HMO if there’s only one tenancy agreement?
Yes, it will still be an HMO, even if there’s only one tenancy agreement. It makes no difference if there’s one tenancy agreement for the whole property, or separate tenancies for each room.
What counts is whether there are three or more individual renters from more than one household.
Is it an HMO if a family has lodgers?
A family can have up to two lodgers without being classified as an HMO. Under Schedule 14 of the Housing Act 2004, if the building is occupied by the owner, they can have up to two lodgers without it being an HMO. If they have more than two lodgers, it will be an HMO.
How will the Renters Reform Bill affect HMO properties in 2024?
For the most part, the Renters Reform Bill is likely to affect HMOs in the same way as single lets. However, the following amendments were passed during the Committee Stage of the Bill:
- Student HMOs – new Ground 4A. There is a new mandatory ground for possession for student HMOs where the landlord can serve at least two months’ notice to expire in June to September. However, the students must be full time, there must be a joint tenancy, and the landlord must intend to let the property to full-time tenants.
- Anti-social behaviour – revised Ground 14. This is a discretionary ground for possession, and the court must take into account the effect of the anti-social behaviour on other tenants of the same HMO.
- Rent Repayment Orders. If an HMO is a rent-to-rent, the superior landlord will now be liable for a Rent Repayment Order, not just the rent-to-renter. This reverses a previous case which said only the intermediate landlord could be subject to a Rent Repayment Order.
The NRLA is still lobbying for student landlords to be able to issue fixed-term contracts, ie to exclude student tenancies from the abolition of fixed term tenancies so that tenancies can run for the academic year. It wasn’t changed during the Committee Stage. If it’s not changed during the rest of passage of the Bill through parliament, landlords of student HMOs may decide to market HMOs to non-students. They may also decide to offer smaller properties as single lets, or convert them into self-contained studios or flats. Unless the wording is changed, the outcome is likely to be fewer HMO rooms available specifically to students.
Another issue potentially affecting HMO is the new implied right for landlords to accept pets. I believe that landlords would have reasonable grounds to turn down requests for pets in HMOs. We’re waiting for government guidance on this, but I would be surprised if landlords couldn’t make a case that anything beyond a goldfish isn’t suitable for HMOs. Click here for my blog post on pets.
When does an HMO property need a licence?
Not all HMOs need a licence. Here’s an overview of the three different sorts of licences for HMOs in England:
1. What is Mandatory Licensing for HMO properties?
All large HMOs must have a mandatory licence. These are properties with 5 or more renters from at least 2 households, sharing basic amenities.
If a property needs licensing, the landlord must submit a licence application to the local council using their prescribed application process. The process isn’t centralised and differs between councils. Click here to find out the local council for a given postcode.
If the landlord operates an unlicensed HMO, they risk a civil penalty of up to £30,000. They could be subject to a Rent Repayment Order and have to repay up to 12 months rental income to the renters.
Until the application is submitted, a landlord can’t use Section 21 to evict tenants.
2. What is Additional Licensing for HMO properties?
Local authorities have the authority under Part II Housing Act 2004 to require small HMOs not covered by mandatory licensing to be licensed. They can only do this if they believe that a significant proportion of the HMOs in an area or even the whole district are not being managed effectively, and that this causes/ is likely to cause problems for local residents or the public.
Councils need to consult before introducing additional licensing.
Unfortunately, there isn’t a central database which will say if an address needs an additional licence. It can vary from road to road, even within a local authority, so you’ll need to check with your local council to see if the property is covered.
Take the two neighbouring boroughs in London, Wandsworth and Lambeth, who have contrasting approaches to HMOs. Wandsworth doesn’t have an additional licensing scheme. Lambeth, on the other hand, introduced additional licensing in December 2021 for the entire borough.
Lambeth’s additional licensing scheme covers small HMOs and also extends to some self-contained flats. The cost of the licence is £506 “per habitable room” although there is a 20% discount if the landlord is accredited with the NRLA by doing their HMO Fundamentals course and some other organisations. The licence usually lasts 5 years, and the renewal fee is discounted.
The council can ask for the usual documents that any landlord needs to give renters (ie gas safety certificate and EICR), in addition to the following:
- Automatic fire detection certificate
- Fire risk assessment (see this page for an overview of fire safety)
- Accreditation membership
- Floor plan
- Emergency lighting certificate
- Tenancy/Management agreement(s)
- PAT testing
- HM Land Registry title (dated within 28 days of application)
- Property insurance
- Asbestos survey
3. Selective Licensing
Local authorities also have the power to implement selective licensing schemes, which apply to all private rented properties within a defined area. In other words, not just HMOs.
What is Article 4 when it comes to HMO properties?
Article 4 Directions enable a local planning authority to require property owners in specific areas to obtain planning permission when it would ordinarily be allowed under the permitted development rules.
For HMOs, this means that planning permission is needed for converting single homes (C3 use) into HMOs (C4 use). When an Article 4 Direction is introduced for HMOs, planning permission is only needed for new conversions, ie if the property is not already an HMO.
Consequently, if you’re planning to convert a single home to an HMO in an area subject to Article 4, you’ll need to allow extra time for the planning permission. Also, there may be a risk that it’s not granted, so you’ll need a Plan B.
What are average HMO room rents in late 2023?
According to the Q3 2023 data from SpareRoom, the average rent including bills for an HMO room in the UK outside of London is now £630. This is an increase of 16% on Q3 2022. In London, the yearly increase has been higher at 16%, with an average of £971 per room. There’s no longer a single London postcode with average rents under £750.
This is well above CPI inflation and is also more than the increase for single lets. The average rent increase excluding London for the same period for new single let tenancies is 10%, or £1,278 pcm.
Click here for a table with SpareRoom data showing on how much HMO rents have increased in average across the UK. For a detailed comparison with average rent increases for single lets, click here for the comparable Rightmove Q3 2023 data.
|Av. HMO room rent Q2 2023
|Yorkshire & Humberside
|Av UK ex London
Source: Q3 2023 SpareRoom Rental Index
How do HMO room rents compare to single lets in late 2023?
Rents per property are almost always higher with an HMO than a single let. HMO room rents are also increasing more quickly than those of single lets. However, HMO rents normally include bills and the rooms are furnished, which is something to bear in mind when comparing returns.
|Av. HMO Room Rent
|Av. Single Let Rent
|Yorks. & Humber
|Av GB ex London
Sources: Q3 2023 SpareRoom Rental Index and Q3 2023 Rightmove Rental Tracker
Tips on how to manage an HMO property
HMO Management Regulations 2006
The Management of Houses in Multiple Occupation (England) Regulations 2006 apply to all HMOs, whether or not they’re licensable, including the standard s254 HMOs (3 or more sharers from 2 households). Some of the rules apply to s257 HMOs (building converted into flats).
The Regulations impose duties on a “manager”, who may be the landlord or the letting agent. They must provide their contact details to each household, and have them on display in the property. There are a number of duties relating to safety, such as ensuring all means of escape from fire are maintained and kept free from obstruction, ensuring the annual gas safety checks are done, and providing adequate waste storage facilities.
Managers must keep the internal structure, fixtures, fittings and appliances maintained “in good repair and clean working order”. They must also “maintain in repair and keep clean all common parts and installations, and ensure common parts have adequate lighting”.
>> Related Post: Landlord guide to the successful management of HMOs
Is it possible for landlords to self-manage HMO properties themselves?
Yes, it is possible to self-manage your own HMOs. However, you need to be highly organised and have a thorough understanding of your obligations as a landlord of an HMO, particularly if they are license.
Why is this? Managing an HMO is a completely different proposition to managing a single let. Even the most determined self-managing landlords usually get some sort of help to manage HMOs if they have more than a couple of HMOs.
Whereas a single let landlord can easily manage a few properties, this is difficult for HMOs. This is because renters are continually moving in and out, causing a lot of admin, and there are the HMO Management Regulations to comply with. It’s even more onerous if the property is subject to Mandatory or Additional Licensing.
Is it best to use letting agents or VAs to manage HMO properties?
Letting agents are the traditional way to manage HMOs, and they can be an excellent solution, provided they’re competent, of course. And unfortunately, that doesn’t go without saying.
If you’re looking for a letting agent to manage your HMO, it is best to choose one that specialises in HMOs. I spoke to Lee-Anne Ingham and Louisa Trunks of Greenway Lettings in Cornwall, and they are HMO and Holiday Let specialists, and are geared up to manage it all in-house. They have dedicated maintenance and housekeeping teams who look after the properties under their care.
Another approach is to use property VAs. Kim Opszala of Komo Properties, has 44 tenants in 3 single lets and 7 HMOs, and uses a mixture of VAs and a part-time property manager to manage her properties. This enables her to obtain economies of scale as she expands her portfolio. Click here for more tips on achieving economies of scale as your portfolio expands.
VAs can provide a wide range of administrative and business support. This includes most if not all of the tasks letting agents do where someone doesn’t need to be physically present.
Jane Scroggs has set up an agency called Beam, which offers fully trained UK-based VAs with experience in property management, to provide services to HMO and single let landlords. Jane says that VAs works particularly well for portfolios with at least 20 tenants, and it enables the landlords to achieve economies of scale.
Electronic tenant management for HMO landlords
Gone are the days when tenants should have to call or email landlords or lettings agencies to lodge repair and maintenance issues. Louisa Trunk of Greenway Lettings explains that electronic tenant management helps to professionalise the relationship between the renters and the agency (or landlord). Everything is recorded centrally in the cloud, making it easy for a team to manage the issues. It’s also great for record keeping and keeps an audit trail.
Kim Opszala agrees that using an electronic tenant management system is essential for HMOs. However, as Jane Scroggs warns, they do take a bit of setting up, which is something her team of VAs have a lot of experience in doing for landlords.
How to manage bills if you’re an HMO landlord
Landlords of HMOs have the choice of whether or not to include bills in the rent. This varies from area to area, and the type of HMO. Larger HMOs are more likely to have the rent included. Inclusive bills is also very popular with renters as it saves them the hassle and is helpful when people move in and out.
There are now lots of companies that offer utility management services for landlords. Smart meters are also very useful as it saves having to do meter readings.
Changes to the council tax valuation of HMO properties
The Council Tax (Chargeable Dwellings and Liability for Owners) (Amendment) (England) Regulations 2023 were published on 8 November 2023 and came into effect on 1 December.
The Regulations clarify that HMOs are to be valued as a single property for the purposes of council tax. The Explanatory Memorandum says that the Regulations “will ensure that an HMO has one council tax band and receives only one bill.”
‘HMO” means a building or part of a building which is a “house in multiple occupation” as defined by section 254 of the Housing Act 2004 but as if subsections (1)(e) and (5) of that section were omitted;”.
In other words, there is no additional carve out for a self-contained room within an HMO, covered by Section 245.
Final thoughts on HMOs
HMOs can provide landlords with excellent returns. However, they’re a big step up from single lets in terms of regulation, management and hassle. Getting organised is key.
Even if landlords outsource management, they should still keep up to date with their legal responsibilities, as ultimately, the buck (rightly) stops with the landlord.