Are you thinking of investing in an HMO?
With the increase in interest rates in 2022 and 2023, the yields on single let properties 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 HMOs. It includes licensing, Article 4, rent comparison with single lets and how to manage HMOs. I also include a section on how the Renters Reform Bill will affect HMOs.
A Guide to HMO investing at a glance
What exactly is an HMO?
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.
What is the technical definition of an HMO?
Under Sections 254-260 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 helps explain.
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?
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 will not be considered an HMO, but if the partner of one of the sharers moves in, then it will be an HMO.
What is a large HMO?
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.
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, at least two of whom are from different households.
Is it an HMO if a family has lodgers?
A family can have up to two lodges 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?
The Renters Reform Bill is likely to affect HMOs as in the same way as single lets, if the version published on 17 May 2023 is anything to go by.
The big news when the Bill was published, is that the government ignored the recommendations in the Levelling Up Committee report, Reforming the Private Rented Sector, to exclude student tenancies from the abolition of fixed term tenancies. This means that landlords of student HMOs wouldn’t be able to have fixed term tenancies for the academic year, and renters would be able to give notice to expire after their exams.
If this isn’t changed during the 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 to students. However, the penny may have finally dropped at the Department for Levelling Up as The Daily Telegraph has speculated that Michael Gove is considering an amendment to the fixed term rule for student landlords.
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 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. Mandatory Licensing
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. Additional Licensing
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 general 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 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 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) and also 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
- 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?
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 2023?
According to the Q1 2023 data from SpareRoom, the average rent including bills for an HMO room in the UK outside of London is now £598. This is an increase of 14% on Q1 2022. In London, the yearly increase has been an eye-watering 20%, with an average of £952 per room. There’s no longer a single London postcode with average rents under £700.
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 9.4%, or £1,190 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 Q1 2023 data.
| Region/ Country | Av. HMO room rent Q1 2023 |
|---|---|
| East Anglia | £608 |
| East Midlands | £525 |
| North East | £506 |
| North West | £543 |
| South East | £675 |
| South West | £610 |
| West Midlands | £508 |
| Yorkshire & Humberside | £520 |
| London | £952 |
| Scotland | £613 |
| Wales | £527 |
| Northern Ireland | £484 |
| Av UK ex London | £598 |
Source: Q1 2023 SpareRoom Rental Index
How do HMO room rents compare to single lets in 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.
| Region/ Country | Av. HMO Room Rent | Av. Single Let Rent |
|---|---|---|
| East Anglia | £608 | £1,446 |
| East Midlands | £525 | £1,048 |
| North East | £506 | £803 |
| North West | £543 | £1,025 |
| South East | £675 | £1,676 |
| South West | £610 | £1,293 |
| West Midlands | £508 | £1,052 |
| Yorks. & Humber | £520 | £940 |
| London | £952 | £2,501 |
| Scotland | £613 | £957 |
| Wales | £527 | £987 |
| Av UK ex London | £598 | £1,190 |
Sources: Q1 2023 SpareRoom Rental Index and Q1 2023 Rightmove Rental Tracker
Tips on how to manage your HMO
Is it possible to self-manage HMOs?
Yes, it is possible to self-manage your own HMOs. However, you need to be very organised and have a thorough undertanding of your obligations as a landlord of an HMO, Particularly if they are licensed,
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 managing HMOs if they have more than a couple of HMOs.
Whereas a single let landlord can easily manage a few properties, this is difficult when it comes to HMOs. This is because renters are continually moving in and out, causing a lot of admin, and there are more regulations to comply with. Particularly if the property is subject to Mandatory or Additional Licensing.
Are letting agents or VAs best for HMOs?
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
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 on 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 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
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.
Final thoughts
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 do outsource management, they should still keep up to date with their legal responsibilities, as ultimately the buck (rightly) stops with the landlord.
You may also find useful
Achieving Economies of Scale with a Growing Rental portfolio
A Landlord Guide to Increasing Rent
The 10 Key Changes in the Renters Reform Bill
What Abolishing Section 21 means for Landlords
Is Passive Income a Myth for Landlords?
