The last few years have seen "HMO" (house in multiple occupation) evolve far beyond a buzz term, proving a viable option for landlords to maximise their returns.
Its enduring appeal is evident in the strength of the yields on offer, with Q1 2022 data by BVA BDRC's Landlords Panel showing that HMOs continue to achieve the highest rental yields at 6.8%.
Further research by Octane Capital revealed the average HMO in the UK is now worth £364,508 – 32% more than the typical house.
While this represents a favourable return, landlords must bear in mind the associated costs attached to such investments, follow stringent regulations, and get their property up to standard.
Recent restrictions imposed by additional licensing and planning constraints mean landlords must be thoroughly prepared to avoid pitfalls and potential fines while always remaining compliant.
Here, we list four key regulations for landlords to consider to manage their HMO effectively.
HMOs must follow strict building regulations to ensure the safety of tenants. This includes ensuring high-quality, safe and fire-compliant construction work is carried out.
Every HMO must have an electrical certificate, a gas safety certificate, up-to-date smoke, fire and EPC alarms, and be free of mould and damp.
Sleeping accommodations need to be at least 6.51 sq m for one adult and 10.22 sq m for two adults. It's also the landlord's legal obligation to verify that every tenant has the right to rent in the UK – although these checks have recently seen a few changes.
There also mustn't be more people living in the house than initially documented, as this may go against regulations and will fall back on the landlord.
Ultimately, it's your duty as the landlord to keep up to date with the ever-changing rules and regulations in the sector so that your tenants can live in a safe environment.
Planning and Change of Use
If a landlord wishes to convert a property into an HMO, the first and most important step is to consider the property's Use Class. This will determine whether there is a need to get planning permission from a local authority or council.
The Use Class greatly depends on the number of occupants you wish to fit. A small HMO comes under the C4 Use Class, with up to six unrelated occupants.
Landlords typically don't require planning permission for a small HMO unless it is in an Article 4 area – which restricts the conversion of properties into HMOs. If this is the case, though, a planning application is required.
Meanwhile, large HMOs fall under the Sui Generis Use Class and will need planning permission. Failure to obtain this means you are in 'breach of planning'. In this instance, the local authority can serve an enforcement notice, and ignoring the notice can lead to prosecution in a court of law.
Not every HMO landlord needs a licence, but if five or more people occupy your HMO with shared amenities such as bathrooms, toilets, and cooking facilities, you'll most likely need a licence.
A local authority must agree that the landlord is fit to hold a licence before they can acquire one. There are three types of property licensing in the UK: mandatory, additional, and selective.
Mandatory licensing applies to larger HMOs where there are five or more occupants in a property, and the tenants comprise of two or more households.
Additional and selective licensing applies to smaller HMOs, and its enforcement depends on the local authority. It also enables authorities to check if your HMO is up to standard.
Remember that each HMO must have a different licence, with a renewal every five years. HMO licences cannot be transferred, meaning you will need to apply for a new one if you buy an existing HMO. Landlords who operate an HMO without a licence could be liable for an unlimited fine.
With a series of new selective licensing schemes across England and the government's rental reform White Paper set to include a national landlord register and a crack-down on rogue landlords, the need for compliance is ten-fold.
A building fire is one of the most devastating occurrences, so landlords need to make sure their property adheres to the HMO fire regulations and tenants know what to do in the event of a fire.
HMOs must have at least one smoke alarm installed on every floor and a carbon monoxide alarm in any room containing a solid fuel-burning appliance. The building's design and construction should also restrict the spread of fire and smoke as much as possible.
Landlords will need to check that electrical circuits, fittings and equipment throughout the house are in good condition, while gas installations must be checked and serviced at least once a year.
Running an HMO also involves periodic inspections of the building. This includes ensuring the communal areas are clear for tenants to escape in case of a fire and making sure there is a fire extinguisher and fire blanket available if required.
It's also recommended that you avoid any flammable or combustible materials in your HMO to reduce the fire risk.
Is HMO still a worthwhile investment?
Every lucrative venture has its drawbacks, and HMOs can be a challenging investment as they are subject to additional planning rules and can be harder to finance.
Ongoing costs and managing requirements can also be higher than your average buy-to-let, making it far riskier to run.
However, even buy-to-let investors are eager for HMOs, buoyed by the benefits of greater rental incomes, capital growth and return on investment.
You are also less predisposed to rental arrears and the impact they can have on cash flow, while void periods are also generally shorter – especially in city areas where demand from single tenants is consistently high.
Whether you are an existing HMO landlord looking for advice, or a landlord interested in investing in an HMO, it helps to appoint the professional services of an agent that has a finger on the pulse of the sector at all times.