More and more people are choosing to live in HMOs. Due to the increase in demand, HMOs are becoming increasingly popular with buy-to-let investors.
Gross rental yields from HMO properties can be 2–3 percentage points higher than traditional buy to let. But the initial outlay can be higher and the red tape more intensive.
Generally, HMOs tend to targeted the lower end of the rental sphere. They offer cheap accommodation to those on low incomes and/or in receipt of benefits. Students are also drawn to HMOs.
As an HMO landlord, the tenants your property will attract will be different to those drawn to family homes or one-bedroom properties. You are less likely to attract couples, families or tenants with pets.
If you already have a target property in mind, you can check the latest HMO mortgages for variable and fixed rates.
If you haven’t yet found a property, you should start by thinking about what tenant groups you want to attract.
Generally speaking, HMOs are attractive to the following tenants:
- foreign workers
- LHA (Local Housing Allowance) claimants
- tenants on low incomes
- people who move around a lot for work (such as contract workers)
It is important to plan this ahead of time. There is little point in tailoring an HMO property to students unless you are investing in a university town. Similarly, if your property is in an upmarket suburb, LHA tenants and those on low incomes may find living costs harder to manage.
If you are familiar with the area in which you are investing, you will know about your local target market. Otherwise, your letting agent may be able to help you. (In any case, it is always good to get local professional insight). Your goal is to make your HMO property as appealing as possible to the tenants you want.
Letting to sharers is different to letting to an individual household. An HMO landlord has additional legalities to consider.
First, you face the choice of letting individual rooms on single tenancies, or letting the whole property on a single AST (assured shorthold tenancy) agreement.
- Each tenant has their own tenancy agreement. They pay rent individually and if any tenant violates the terms of their agreement, you take action against them individually.
- Tenants share non-exclusive use of common areas. You can access shared areas of the property as you wish. Tenants have exclusive use of their own rooms; you will need to give notice and get your tenant’s permission before you enter.
- Utilities and council tax are usually in the landlord’s name. You can include a premium for this in the rent you charge. (Be up front in your marketing about what is and is not included in the rent.)
- When individual rooms are best: When you are letting to single professionals or other tenants who will move in and out at different times. This type of HMO is common in areas where bedsits and one-bedroom flats are out of the price range of many single professionals. Because you charge rent for individual rooms, rental yields may be higher, but managing the property may entail more administration and marketing costs.
- The tenants all sign a single tenancy agreement. They are ‘joint and severally liable’ for paying rent and taking care of the property. If one tenant falls into arrears, you can recoup the shortfall from the other tenants.
- Joint tenants have exclusive right to the whole property. You will need to give notice and gain permission to enter the property.
- If one tenant wishes to leave, they retain their responsibility for their share of the rent and bills. If the remaining tenants agree to take on the outgoing tenant’s share, they should sign a new tenancy agreement. If the outgoing tenant finds a replacement, they can assign their share of the tenancy to the new tenant.
- Council tax and utilities can be in the tenants’ names.
- When a joint tenancy is best: Joint tenancies are most appropriate when the housemates know one another and expect to move in and out at similar times. Students most commonly sign joint tenancy agreements.
Paul Routledge, a successful HMO landlord, has kindly shared some of the insight he has gained during his career.
1 – Investing in HMO property
What is the very first piece of information you’d give a landlord looking to invest in HMOs?
Make sure that you make as many of the units as possible self-contained with bathrooms and kitchenettes to stop sharing. The biggest problems are started in communal areas or shared facilities when food is stolen or others are not as clean as some. I separated all my units and gave them all small shower units and kitchenettes and the problems were halved overnight.
What is the best type of property for HMO investment / conversion?
As above – one that has room to accommodate small en-suite shower rooms and fridges, etc.
N.B. Depending on your local authority, you may need planning permission to convert a property into an HMO. You may also need an HMO license. Find contact details for your local council on the Gov.UK website.
What is the best area or target market for an HMO investment?
Cities and large towns are usually a good bet.
2 – Running an HMO property
Do you let to joint tenants or on a room-by-room basis?
I give them all an AST.
Are there any pitfalls HMO landlords should know about?
Always write down everything and note every conversation as it happens. Take pictures and have a witness with you if you are addressing a tenant over a legal issue.
Can you name any good resources for new HMO landlords?
Join LRS so you don’t take the problem tenant from the landlord next door, who he knocked half an hour ago! Our one-hour tenant alerts save hundreds of landlords.
Paul is not the only HMO landlord offering helpful information to newcomers. Below is a summary of relevant online sources. If you are considering becoming an HMO landlord, then you should investigate:
This is a blog written by HMO Landlady, Serena Thompson, who gets very involved with her tenants. From reading her blog, it’s clear to see that she really cares about her tenants, and has a really positive attitude towards being a landlady. The blog won the PrimeLocation best newcomer award in 2012.
Run by successful HMO landlord Jim Haliburton, HMO Daddy offers regular HMO courses. The courses cover a variety of subjects, from how to convert properties to HMOs to DIY eviction tips. The site also contains a huge amount of information for the budding HMO landlord.
HMO Tribes is the HMO section of the well-known property forum, Property Tribes. HMO landlords can ask and answer questions related to setting up and running an HMO.
Landlord Zone provides useful information for all types of landlord. The link above is for their HMO page.
A simple definition of what an HMO is, with links to other relevant places for HMO information.
The legislation that governs the management of HMO properties in England.
If you’re ready to purchase an HMO property, then you will need a specialist HMO mortgage product.
If you need to raise finance to convert your property into an HMO, then a bridging loan may be right for you.