Tips for letting HMOs

Thinking of letting an HMO but not sure how best to invest your finances? Property expert Kate Faulkner explores whether you should go boutique or budget. Plus, learn about the latest HMO rules and regulations.

What is a HMO property?

HMOs are Houses in Multiple Occupation and they have become increasingly popular over the past decade, for both landlords and tenants. Landlords are able to get higher yields and higher monthly profits by letting properties by the room. Tenants can get a private bedroom with shared facilities for a convenient all-in-one monthly rent, which can cost a lot less than renting a whole property.

In addition to yield and profit, HMO landlords also tend to monitor the return on their investment. In simple terms, that's the annual profit figure as a percentage of the amount of capital they've had to invest.

Things to consider when letting an HMO

Before you invest in a HMO property, you need to be clear on:

What kind of tenants you're intending to have, e.g. tenants on benefits, students or working adults.
How much rent you can charge for each room
The amount of money you will have to spend on the property in order to let it legally and attract the kind of tenants you want.

The combination of these three factors will give you a picture of what kind of HMO will deliver the best returns. In some areas, it may be that providing good but fairly basic accommodation is the most financially sound investment. In others, investing more into the quality of accommodation could pay dividends.

Top 3 reasons to go 'budget'

If it's your first HMO or your resources are more limited, you might want to go for a budget project.

In many areas where budget shared accommodation is in demand, the capital values are lower, so you can get some experience in the market for a lower initial capital input and risk.
Students and lower-paid workers, looking for a cost-effective housing solution, represent a large proportion of the HMO market, so demand is strong in most areas.
Because 'budget' tenants don't tend to expect en-suites, you can make the most of the space you have for bedrooms - something that's particularly important with the new minimum room size legislation.

Top 3 reasons to go 'boutique'

If you're a more experienced investor, or want to invest in a particular area where the demand is greatest for luxury accommodation, you may want to let a boutique HMO property.

Where demand for quality is greatest, property values tend to be more buoyant and therefore capital growth is usually higher than average, which can boost your overall returns.
With many landlords choosing to keep their initial capital input to a minimum, there is likely to be less competition than at the budget end of the market.
As long as you provide all the things tenants are looking for - such as smart TVs, high-speed broadband (preferably unlimited), en-suite shower rooms and in some cases, even a cleaner - you should be able to pitch your rent at the upper end of what people are prepared to pay.

However, regardless of whether you go for a more 'budget' finish or a 'boutique' feel, it's important to be aware of two important facts:

All tenants today expect a much higher standard of accommodation than they might have done ten years ago.
The recent increase in legislation - particularly around health and safety - means you need to spend more to ensure your property meets the new HMO rules, even at the 'budget' end of the spectrum.

Be aware that rules for letting an HMO can be different in Scotland, Wales, N.Ireland and in England. Plus, in England, local authorities can have different definitions and rules and regulations. The information below focuses primarily on HMOs in England.

Your health & safety obligations as an HMO landlord

The first thing to understand is that you are subject to more regulation as an HMO landlord than if you were letting the property as a single unit, which means a higher initial spend when you're refurbishing. These extra requirements generally include:

More fire alarms
Fire doors
Emergency lighting and/or signage
Suitable fire escapes
Additional bathrooms & toilets (a maximum of 4 tenants to one bathroom)
Additional cooking facilities (speak to the local council to confirm their requirements)

Because the tenants are only renting their bedrooms and the rest of the house is communal, you are also obliged to make more checks, such as:

Regularly testing fire alarms
Ensuring communal areas are kept clean and free of fire hazards
Ensuring rubbish/waste is kept under control

In terms of the furnishings and other provisions, all HMO tenants will expect:

Beds, wardrobes and side tables for each bedroom
Enough sofas, chairs and dining furniture for all occupants
White goods, including a dishwasher and washing machine
Other kitchen equipment, such as a microwave, kettle and toaster
A television in the communal area
Broadband

Over and above these things, in a 'boutique' HMO, you should provide:

A smart TV
High-speed broadband
A tumble drier
Bedside lamps
Better-quality kitchen equipment
Higher-specification fittings and furniture, plus soft furnishings for extra appeal

New HMO regulations

Two pieces of legislation came into force for HMOs in October 2018:

1. Extended mandatory licensing

It used to be the case that only properties of three or more storeys required a licence under national regulations. Now any property housing five or more people, forming two or more households, must be licensed - regardless of the number of storeys. The cost ranges from £500 to £1,000, depending on location, and licences are usually valid for five years, meaning an annual cost of just £100 to £200.

Extra work may need to be undertaken on the property to comply with the terms of the licence, for instance:

upgrading the fire alarm system
installing basins in all bedrooms
providing additional toilet facilities

2. New minimum bedroom sizes

This is something that could have a big impact on cost for HMO landlords. Bedrooms must now measure at least:

6.51m² for one person over 10 years of age
10.22m² for two people over 10 years
4.64m² for one child under 10 years

Any room of less than 4.64m² cannot be used for sleeping in, and the measure cannot include any area where the ceiling height is lower than 1.5m.

That means a cheaper property that might have made financial sense as a budget HMO before the new legislation came in, may now not be viable. To make sure rooms are big enough to let legally, investors might have to pay a little more on the purchase price.

At the boutique end of the market, it's likely to have even more impact, mainly because there is more of a demand for en-suites. Pre-last October, where landlords might have been able to create shower rooms by dividing off a portion of a bedroom, the new minimum sizes might mean there are fewer suitable properties on the market and investors have to spend quite a bit more to satisfy both tenants' demands and legal requirements.

The deciding factor

The amount of capital you have available, together with solid research into local demand and council policy are the three key elements in deciding what kind of HMO will give you the returns you want or need.

Kate Faulkner is one of the UK's leading, independent property experts and regularly features in major newspapers, on the BBC and ITV, as well as regularly co-hosting the Property Show on LBC.

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Added: 5 Jun 2019