What’s an HMO? A Beginner’s Guide

What’s an HMO? A Beginner’s Guide

Landlords have faced increasing pressure and financial challenges in recent years due to legislation changes like Section 24, which meant they couldn’t claim as much tax relief as previously, as well as the 3% stamp duty surcharge on buy-to-let properties.

As a result, the higher yields promised by HMOs compared to standard buy-to-let properties have become increasingly tempting for landlords.

With average incomes in the UK now lower than house prices, living in an HMO is a way for many tenants to save money for a future deposit on a house and there is a very real demand for multi-let accommodation.

So:

  • What exactly is an HMO?
  • What counts as a House in Multiple Occupation?
  • What’s involved with getting an HMO licence?
  • What are the upsides and downsides of investing in an HMO?

Finally, if you do decide that an HMO is a right choice for you, what’s required in converting a standard property into an HMO?

What is an HMO? A Brief Definition

HMO stands for a House in Multiple Occupation or House of Multiple Occupancy.

While the exact definition of an HMO is complex and varies by council area, in essence:

HMO is a property where the people living there aren’t related and share certain facilities.

More specifically, an HMO is considered to be any property where there are more than three tenants renting who don’t constitute a single family or household. A household is considered to be either a single person or different members of the same family.

These tenants might also share a kitchen, bathroom, or toilet.

Examples of HMOs include bedsits, shared houses, houses with lodgers, residential care homes, hostels, halls of residence, and some blocks of flats.

HMO Licensing: What You Need to Know

HMO licences were introduced as part of the Housing Act 2004 in order to protect tenants in shared housing. For landlords, applying for an HMO licence and adhering to its strict conditions is essential to ensure you don’t face harsh penalties.

Health and safety standards in HMOs are taken seriously by councils. If a tenant has a grievance, they can bring it to the council who will then listen to their complaint and ask the landlord to address any issues.

If the landlord refuses, the council can take over the running of the HMO themselves.

The Three Types of HMO Licensing

Large HMO Mandatory Licencing

Larger HMOs are those properties rented to five or more people from more than one household and where tenants share certain facilities. In these situations, there are minimum sizes for bedrooms and landlords must also follow council refuse schemes.

Additional HMO Licensing

Smaller HMOs may not require a licence but it’s up to your local authority. They will decide if your particular multi-let requires additional licensing or not.

Selective Licensing

Councils can implement selective licensing as they see fit. It will depend on the borough and can affect rental properties of all sizes.

Local authorities may decide to instigate mandatory licensing for all properties on a certain street, for example. This is quite common for student accommodation.

How Much Do HMO Licences Cost?

HMO licences cost, on average, around £600. But some can cost over £1,000 and others as little as £60. Councils are able to decide how much to charge for an HMO licence and costs vary according to location.

How Long Do HMO Licences Last?

Licences usually last for five years. You need to keep track of when your licence expires and be ready to begin the application process for a new one sooner rather than later.

What Happens if I Don’t Get an HMO Licence?

Landlords are responsible for finding out if they need a licence or not. If you manage an HMO without a licence, you could face an unlimited fine—this has been known to be up to £20,000. So, if you’re not sure, check with your local council.

It’s considered a criminal offence to violate the terms of the licence and so there are fines of up to £5,000 if you do so—or you could have your licence revoked.

If you’re found not to have a licence, tenants can apply for a Rent Repayment Order, allowing them to reclaim rent paid for up to 12 months. Councils can also claim back any housing benefit payments.

On the other side of the coin, without a property licence, your Section 21 Notice won’t be valid, and you won’t be able to evict tenants if necessary.

Exemptions from HMO Licence?

You are only eligible for an exemption from an HMO licence if you can prove that your property isn’t being used or is about to stop being used as an HMO—and you’ll need to give proof.

This exemption will last around three months. If an HMO landlord dies, the property is also subject to a temporary exemption for three months.

How to Apply for an HMO Licence

HMO application forms can be downloaded from the gov.uk website. To apply, you’ll need certain documents, such as gas safety and electrical safety certificates for the property, plus a plan of the property.

The council will also check that you don’t have a criminal record and have never breached landlords regulations before.

They’ll also want to see that the property is suitable for use as an HMO—that it meets certain health and safety standards and has adequate facilities.

In practice, this might mean checking that:

  • There are the appropriate fire safety measures i.e., smoke detectors and extinguishers
  • Your gas checks are all up to date
  • Electrical wiring and appliances have been certified as safe within the last five years
  • There’s an appropriate number of people living in the property
  • The cooking and washing facilities are in good condition and are a good size.
  • Communal areas are clean and well-maintained
  • There are facilities for rubbish storage and disposal

As a landlord, you’ll want to verify all these things beforehand to ensure your application stands a good chance of being accepted. You’ll also need to undertake Right to Rent immigration checks on adults renting the HMO.

To adhere to the conditions of an HMO licence, you’ll also need to ensure there are no more than two people sleeping in any room.

Additionally, new rules on HMOs established in 2018 dictate minimum room sizes. Any room to be used as sleeping accommodation must be no less than 4.64m² if the occupant is under the age of 10, 6.51m² if the occupant is over 10, and no less than 10.22m² if there are two occupants over 10 sleeping in there.

Finally, landlords must ensure they provide at least one bathroom for every four tenants living in the property.

The council will also carry out a Housing Health and Safety Rating System risk assessment on an HMO within five years of your application. If there are any risks, you, as the landlord, will be instructed to rectify them.

After You Receive Your HMO Licence

Once you have your licence, not only must you adhere to its conditions, but the licence should be displayed within the property’s communal areas, including the name and contact details of the licensee. The current gas safety certificate should also be displayed.

You also need to notify the council if you plan to make any changes to the property or if the nature of the tenants changes—if one of the tenants has a child, for example.

The Benefits of Letting an HMO

While securing an HMO licence might sound daunting, managing an HMO does have several potential advantages. For example:

  • For some landlords, managing one building with multiple tenants is more efficient than managing multiple standard properties in terms of both time and money.
  • Demands for a shared living tend to weather economic change and uncertainty better as tenants will always want affordable rooms. Indeed, with the UK’s current crisis in affordable housing, communal living is the only option for many people and the market has a huge scope for growth.
  • Certain properties and locations are ideal for HMOs, such as popular student areas with many large properties that can be converted.
  • Obviously, renting to multiple tenants means higher rental yields. In fact, according to a 2017 report, HMOs produce average yields of 8.9%, the highest of all buy-to-let properties.
  • Similarly, rental void periods are less damaging to your finances. You’ll still be renting other rooms and so the property won’t be entirely empty.
  • In the same way, one tenant falling into arrears is less harmful to your cash flow when you have other tenants paying on time.
  • Refurbishment costs are tax-deductible as they’re considered a revenue cost.

The Downsides to Letting an HMO

Inevitably there are disadvantages to the HMO that you need to weigh up before deciding if it’s right for you. These include:

  • Licencing regulations are demanding and there’s a great financial risk involved in failing to comply.
  • It can be harder to get a mortgage for an HMO property. Not all buy-to-let agreements allow properties to be rented as HMOs. However, there are HMO mortgages available, including loans for construction and refurbishment.
  • This is lucky, given that the cost of refurbishment for HMOs—and of turning a standard property into an HMO—requires a significant initial outlay.
  • What’s more, not all properties are suitable for being turned into HMOs, so your pool of potential properties is smaller.
  • The resale value of HMOs is often less than standard properties
  • Fewer letting agents are willing to manage HMOs so you may have to self-manage the property, which means extra work and pressure.
  • You may have a higher turnover of tenants which means some void periods. Looking for new tenants regularly could eat up a lot of time.
  • More tenants mean more chance of damage to your property. You’ll also need to respond quickly to requests for repair.

Converting a Building into an HMO

If you’ve weighed up the pros and cons and decided you want to try managing an HMO, you need to consider how to turn your property into one.

Firstly, you’ll need to inform the property freeholder (if you’re a leaseholder) of your plans, or your mortgage lender or managing agent.

Next, decide if you need to make any changes to the nature of the space, perhaps converting some bedrooms into bathrooms or the garage into an additional living space.

Victorian builds are ideal for HMO conversions due to the large size of rooms. You could even turn a reception room into a bedroom—although the lack of communal living space might put some renters off.

These changes may require planning permission, depending on the extent of the work being carried out.

In terms of health and safety, you’ll need to deal with any habitation issues such as damp, ventilation, drainage, and water supply.

Check the Homes (Fitness for Human Habitation) Act 2018 for more information. You might also need to install fire doors in certain places and each bedroom should also have a lock. You also need to ensure pipes are protected from frost.

When renovating your space, remember that the standard kitchens and bathrooms can have a big impact and having a nice outdoor space can also attract tenants. Don’t compromise on quality for the sake of keeping costs down as it will pay off in the long term.

Finally, remember to get the right landlord insurance. HMO properties require specific policies, and you will need to register the property as an HMO in order to be eligible.

Conclusion: Are HMOs Worth It?

If you’re prepared to tackle the sometimes-challenging process of acquiring an HMO licence and are willing to comply with all the red tape and HMO regulations as well as manage your property carefully and scrupulously, then an HMO has the potential to make you a significant profit, especially in areas with good rental demand.

But avoid the temptation to take shortcuts and consider hiring a letting agent to take care of your HMO for you. Their professional help and support can mitigate many of the potential pitfalls of HMOs.

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