Should I invest in a HMO?

HMO stands for House in Multiple occupation, these are shared houses that typically require a licence to operate. Based on the national standards, that includes any property with 5 or more separately let bedrooms, with some local councils requiring a licence for as few as 3 bedrooms.

The main positive with running a HMO is that you can achieve much higher yields than with a standard BTL. Gross yields of 10-15% are typical with a HMO. But all that yield means more work.

One of the first things to look out for is whether there is an article 4 directive in place, the local council website will help you to find out. If there is an article 4 in place that will mean a full planning application will be required to licence it as a HMO, making the process slower, more costly and with a higher chance of failure. If you can find a property that already has a HMO licence within an article 4 area you can easily renew the licence without the need for a full planning application. But be careful, it is common for such properties to be over-priced due to their scarcity. Always remember to value based on bricks and not rental yield.

The refurbishment required on a HMO is different than with a standard BTL because you need the property to be compliant to HMO standards. Exact requirements vary slightly between local councils but as a minimum you’re going to need fire doors, thumb turn locks, a mains connected smoke detection system, emergency lighting and suitable fire escape routes. You may also want to add an ensuite bathroom to some or all of the bedrooms. In addition, HMO’s are almost always let out fully furnished. So remember to factor in these extra costs to your financial modelling.

Once your HMO is up and running, it is going to need to be maintained. With a HMO you can expect the maintenance cost to be higher than with a conventional BTL due to the heavier usage. I typically allow for 10% of gross rent as a maintenance cost on my HMO’s.

Another challenge with HMO’s can come from the tenants and lettings process. Never forget that the tenants are your customers and you are their service provider. You need to be very careful about how you manage a HMO to ensure a harmonious environment where everyone is safe and comfortable. Some people prefer to do this themselves and others will hire a specialist HMO letting agent. If using a letting agent, you can expect the management cost to be slightly higher (in the range 10-15%) than with a standard lettings company.

Another option is to go down the rent to rent route, where an agent offers to pay you a set amount each month whether the rooms are let or not, and they take care of all of the day to management of the property. This can be a good hands off option, but expect to handover around 20-25% of your gross rent here and be sure to carefully vet the agent.

Always remember, even if you outsource the management, you as the landlord still have a legal responsibility to the tenants.

The end users of HMO’s do tend to be people from the poorer parts of society. Issues with tenants to do with anti-social behaviour and drug or alcohol abuse are not uncommon. The way to mitigate this is to ensure you have a good tenant vetting process in place and regular property inspections taking place.

HMO’s tend to have a higher tenant turnover than BTL property, but because you have multiple tenants in one house you are protected to some extent against void periods.

You need to consider your exit strategy with your HMO. Will you sell it as a HMO to another investor or will you try to open it up to first time buyers? The condition of the property and whether or not to leave tenants in situ become relevant here and worthwhile considering from the outset.

Overall, HMO’s can be a fantastic way to ‘sweat your asset’ a little harder, boost rental yield and accelerate your growth, but just remember to go in with your eyes wide open. HMO is not a ‘get rich quick scheme’ and all that extra rental income does come at a price.

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