Letting an HMO – how to weigh the pros and cons
With property prices climbing and the government slashing tax relief on buy-to-lets, many landlords and investors are converting their properties into houses in multiple occupation (HMOs) as a way of generating higher rates of return.
If you’re thinking of joining them, there’s a lot to learn. Let’s begin by defining what HMO means…
What is an HMO?
According to the GOV.UK website, a house is an HMO if at least three unrelated tenants live there to form more than one household, and share facilities such as a kitchen and bathroom.
A house is deemed a large HMO if it is at least three storeys high; if at least five tenants live there, forming more than one household; and if those tenants share bathroom or kitchen facilities with one another.
Large HMO licence
If you plan to let out a large HMO in England or Wales, then you’ll need to obtain a licence from your local council. You’ll need one licence per HMO, and each one needs to be renewed once every five years.
As part of the conditions of the licence, you must ensure the size of the house and its facilities are suitable for the number of tenants. The manager of the HMO – whether that’s you or a nominated agent – must also be considered ‘fit and proper.’ This means you must not have a criminal record, or any convictions to suggest you would be unsuitable to manage the HMO.
The exact conditions of your HMO licence will depend on the location of your property. For instance, some councils request that landlords must hold a licence for properties with fewer than five tenants who form more than one household.
As an HMO landlord, you have extra responsibilities put in place to limit the risk of fire within the property. You must send an updated gas safety certificate to the council once a year if you hold a licence, install and maintain smoke detectors, and provide electrical appliance safety certificate when/if requested.
You also have a duty of carrying out repairs to communal areas within your home, including:
- The bricks-and-mortar and exterior of the building (including windows and gutters)
- Electrical wiring
- Water and gas pipes
- Bathroom fittings – sinks, toilets, basins
- Fixed heaters and water heaters
Tenants may carry out minor repairs, and your rental agreement will determine who is responsible for what.
Breaching your licence
If you were found to be in breach of the licence terms without a reasonable excuse, this will be considered a criminal offence and you could face a fine of up to £5,000. Depending on the severity of your case, you could also have your licence revoked.
Your local council has the power of revoking your licence if they believe that the HMO is not being sufficiently managed, or if the property is no longer suitable for the number of tenants living there.
So, is it for you?
The main advantage of converting a property to an HMO is that rental yields tend to be higher than with a single occupancy house. Online letting agent Upad explains that the average rental yield on traditional buy-to-lets is around 6.5%; but this figure jumps to 9% for HMOs.
If your property is maintained to a high standard, then there is a chance to charge a premium rent for the provision of services including cleaning, gardening, broadband and satellite TV.
But there are certain drawbacks, namely relating to the practicalities of managing tenants. Tenant turnover in HMOs tend to be higher compared with single occupancy lets; this, coupled with the fact that you could be dealing with five or more tenants at once, means you’ll need to dedicate lots of your time to management tasks or employ the services of a managing agent.
Essentially, you need to weigh up whether a potential increase in rental yields is worth your time and effort. If you’ve decided it is, then you should consider speaking to a professional advisor about what steps to take next.
Don’t forget – you’ll need to acquire quality landlord insurance for your HMO property. Get in touch with Stride Direct today to see how we can help.