Houses in Multiple Occupation (HMOs) are becoming more and more popular, with many investing in them to raise their income. However, there are a host of things you need to know before ‘taking the plunge’ such as the legal requirements, financing and responsibilities.
In this article, Commercial Property Specialist Patsy Whitford and the team from Property Loan Market outline everything landlords need to know to start an HMO.
What is an HMO?
An HMO is defined by the Government as a property that is rented out by at least 3 tenants who are not from the same household but share ‘facilities’ such as the bathroom and kitchen.
An HMO with at least 5 tenants occupying the property is known as a ‘large HMO’.
Why start an HMO?
The Property Loan Market team highlight that “rent payments on HMOs can often be higher than if you were to have a single tenancy that covers the property. While there can often be more work involved and income may vary as people move in and out – this extra return can be attractive to many landlords.
We are finding more interest in HMOs as interest rates have risen and landlords want to increase their income. In addition – difficultly in renting and rising rental costs is driving demand from tenants.”
What are the legal requirements for an HMO?
HMOs have certain requirements which they must meet.
One of which is a valid tenancy. So, any tenancy agreement that is in place must be one that complies with the law.
HMO landlords often opt for an Assured Shorthold Tenancy (AST). This is the most common format of letting property and is usually a fixed tenancy of 6-12 months. Read the importance of having a suitable AST in place here.
Do landlords need an HMO licence?
All large HMOs to be licenced.
However, the council has the discretion to decide whether small HMOs should be licenced. It is therefore important to speak to the council to find out if your property requires a licence or not.
To apply for an HMO licence, speak to the council most local to the property. Be aware that there is a small fee involved in application and that you’ll require relevant documentation.
Licences are valid for 5 years and need to be renewed after this time. Licences are not transferable, so if you are purchasing an HMO you will need to apply for a new licence.
What is the minimum room size for an HMO?
As part of the licensing process, you will need to ensure that the bedrooms are of a certain size.
The minimum bedroom sizes for HMOs are as follows:
- A bedroom occupied with one adult - 6.51 M2
- A bedroom occupied by two adults – 10.22 M2
- A bedroom occupied by children under the age of 10 – 4.64 M2
Can an HMO licence be refused?
Yes, an HMO licence may be refused for various reasons such as if it does not meet the minimum requirements (e.g. the room size conditions).
The most common reason for refusal though, is that the property has too many rooms or occupants. A licence may also be refused if there are a high number of HMOs in your local area.
What happens if I’m refused an HMO licence?
The steps available will depend on the reason for the refusal.
If the property is refused because it does not meet the minimum requirements, then to obtain the licence you will need to undertake the works and bring the property up to standard.
If a licence is refused you do have the ability to appeal the decision with the First-tier Tribunal (Property Chamber), usually within 28 days. More information as to how to appeal a refusal can be found on the government website.
Can the council repossess an HMO?
Sometimes the council will set out conditions to be met before the licence is granted. If these conditions are not complied with, the council has the right to issue an Interim Management Order (IMO) and take over the management of the property.
The council will have the right to take possession of the property and use any income received to undertake the necessary repairs to the property.
If after 12 months, the property is still unsuitable then the council can apply for a Final Management Order (FMO) which would last for five years.
Do I need planning permission for an HMO?
For small HMOs, generally no, but ‘large HMOs’ of 5 or more tenants will usually require planning permission.
However, a number of councils are implementing Article 4 Directions which will mean if you are changing the use of the property from a residential dwelling (Use Class C3) into an HMO (Use Class C4) you must obtain planning permission.
Simply obtaining a licence will not be sufficient. Almost the whole of Bournemouth is subject to this direction, so it is important to check whether the property is affected by this restriction.
To apply for planning permission, contact your local planning authority through your local council.
What are the conditions of running an HMO?
When a property’s use is changed from being a single dwelling to an HMO, and more than six tenants exist, building regulations will be required.
Contact a local authority or private building control body to apply for approval.
What are the HMO rules for landlords?
HMO landlords are responsible for:
- Taking and implementing fire safety measures
- Keeping communal areas and facilities in a good state of repair
- Electrical and gas safety checks
- Electrical, water, gas, bathroom, heater and house structure repairs
Read more about the responsibilities of a residential landlord here.
What makes a good HMO?
Property Loan Market have outlined some key areas to consider below:
Tenant type
This could be students, professionals or targeted at specific groups – e.g NHS workers
Size
Larger HMOs are subject to different rules and will require more management but may offer economies of scale.
Location
Consider the wider geographic area - taking into account house prices, rental demand, yield and so then. If you are investing somewhere that is not near to where you live – also consider how you will manage it as returns can be chewed up with higher management costs if you are remote.
Next consider the immediate location. This should also be linked to the tenant type you want – e.g. near hospital/university, proximity to entertainment, transportation and so on.
Refurbishment
Will you acquire an existing HMO or convert/extend an existing property? The former will be less work and you’ll get a more immediate income. However – it may be possible to add more value and/or rental income by creating an HMO – particularly if adding rental rooms.
How much does an HMO cost?
According to Patsy Whitford & the Property Loan Market Experts, there are many costs involved with buying and setting up an HMO. On top of the actual property some of the most prominent costs may include:
- Refurbishment and/or extension costs
- Conveyancing fees
- Obtaining a tenancy agreement through a solicitor
- Licensing fee
- Furnishings
- Marketing
How much does it cost to run an HMO?
There is a number of potential costs to consider:
- Agency management costs
- An allowance for ongoing replacement of fixture and furnishings over time – as well as larger items such as boilers/roofs etc
- Gas, electricity, water costs
- Broadband, TV packages and TV licence
- Maintenance – including communal and garden areas
- Obtaining an EICR
- Obtaining energy performance and gas certificates
How to fund an HMO purchase
Property Loan Market say…
Assuming you aren’t sitting on the cash – it is likely that you’ll need to borrow some of the money. It may be possible to fund an existing or prospective HMO directly with a specific buy-to-let mortgage.
However - we find that investors often want to carry out works to create/improve an HMO – refinancing onto a BTL mortgage once the works (and hence expected value increase) have been completed.
There are now dozens of specialist lenders – focused on these types of transactions – each with different strengths/appetites. It’s possible to obtain direct access to them for free on our website here.
Related: How to start an HMO - Advice for landlords
HMO advice solicitors
At Frettens, our bright Property Team would be happy to assist you in purchasing an HMO or single dwelling.
The team could also assist you in the creation of a legally-binding tenancy agreement that meets the legal standards.
We offer a free initial appointment for all new clients, where we can iron out the details, so please don’t hesitate to get in touch on 01202 499255 or by filling out the form at the top of this page.
We have also put together a comprehensive residential landlords’ guide, which includes everything you need to know from becoming a landlord, your responsibilities and the costs; to dealing with tenant issues and eviction. Download your free copy here.
Property Funding
Property Loan Market is a platform enabling property investors to get multiple specialist lenders to compete on their funding requirements and directly access key decision makers for free.
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