Houses in Multiple Occupation (HMO) have become extremely popular across the UK as a means of creating double-digit rental income and strong cash flow. The HMO market has expanded significantly over the last decade or so although the authorities are now introducing an array of regulations which have impacted net returns.
There are many different factors to take into consideration when looking at a possible HMO which we will cover below.
What is an HMO?
There are two different classes of HMO which are C4 HMOs which are classed as small shared houses with between three and six unconnected tenants (aka households). There is then the larger HMO which refers to a property with at least seven unconnected (aka households). The term HMO relates to properties where there are shared facilities such as a kitchen, bathroom, etc.
Do I need an HMO licence?
At this moment in time there is some variation between councils across the UK as to which properties need an HMO licence. In general, properties with at least three stories which are in use, a minimum of five tenants all sharing the same facilities will need require a licence from the local authorities. However, as we touched on above, it is worth checking out with your local council as to whether your particular HMO property requires a licence.
There have been murmurings from the authorities regarding mandatory licences for all HMO properties – something which is likely to be included in the forthcoming housing bill. Watch this space……
Running costs
While the ability to create a number of different rentals income streams within one property offers potential for strong cash flow and rental yields, there are various costs to take into consideration. Aside from the potential HMO licence from your local council you will need to ensure the property is safe with regular checks on gas and electric appliances. Landlords will also need to ensure the property is clean and tidy, not over populated and everything is in good working order.
When you also take into account potential wear and tear on furniture and equipment it is worth taking that extra time to check out costs going forward.
Legal obligations
While much has been made of the legal obligations that an HMO landlord takes on in relation to their tenants, landlords have always had a legal obligation in this area. It is perhaps useful going forward that the authorities have made clearer the regulations surrounding larger groups of tenants in one property. As the UK housing problem will likely take many years to resolve we will see more people relying on private landlords for their future accommodation. Will the authorities be of more assistance going forward?
Conclusion
While some of the headline yields may be very attractive in the HMO market you also need to take into account additional costs such as HMO licences, safety regulations, regular checks on equipment and services to name but a few. However, even after taking into account these additional costs many investors seem happy to add HMOs to their property portfolios.