HMO Investment handbook

HMO investing, also referred to as houses of multiple occupancy, is the subject of this article. It explains what these properties are, who would want to live in them, and—most importantly—why you might want to think about investing in them.
Thankfully, the days of filthy “bedsit-style” student housing are quickly disappearing.
It’s critical to comprehend exactly what they are and how they operate because more contemporary shared living is growing in popularity among both tenants and real estate investors.

What is a HMO?

A HMO (House in Multiple Occupation) property investment refers to a type of real estate investment in which an investor purchases a property and rents out individual rooms to multiple tenants who share communal facilities such as a kitchen or bathroom. HMOs are typically popular with young professionals or students who are looking for affordable housing options and are willing to live with others.

Investing in a HMO property can be attractive for investors because it can generate higher rental income compared to a traditional buy-to-let property. However, HMO properties also come with additional responsibilities and regulations that need to be followed. HMO properties are typically subject to licensing requirements and safety regulations to ensure that the property is safe and suitable for multiple occupants.

Before investing in a HMO property, it’s important to carefully consider the location, potential rental income, management and maintenance costs, and local regulations to ensure that it is a suitable investment opportunity for your financial goals and risk tolerance.

What is a Licensable HMO?

A Licensable HMO is a type of HMO that requires a mandatory license from the local housing authority before it can be rented out to tenants.

The licensing requirement for HMOs varies between countries and local jurisdictions. In the UK, for example, an HMO property is considered Licensable if it meets the following criteria:

Landlords who fail to obtain a license for a Licensable HMO may face legal action and be subject to fines or other penalties. The licensing process typically involves a thorough inspection of the property to ensure that it meets the required safety and living standards for multiple occupants.

In addition to licensing requirements, landlords of Licensable HMOs may also be required to comply with other regulations such as fire safety regulations, electrical safety regulations, and gas safety regulations. It’s important for landlords to stay up to date with local regulations to ensure that their properties are safe and compliant with the law.

What are Planning Use Classes for HMOs?

Planning Use Classes are a set of regulations that define the different uses that a property can be put to without requiring planning permission. In the UK, HMOs fall under Use Class C4, which refers specifically to small HMOs that are occupied by up to six unrelated individuals who share basic amenities such as a kitchen or bathroom.

However, in recent years, the UK government has introduced changes to the planning regulations for HMOs. From 1st September 2010, the planning use classes for HMOs were changed, and small HMOs (up to 6 occupants) were moved from Use Class C3 (dwelling house) to Use Class C4 (HMO).

In addition to this, larger HMOs that are occupied by more than six unrelated individuals are now considered as Sui Generis, which means that they do not fall under any of the existing planning use classes. This means that planning permission is required for properties that are being converted into larger HMOs.

It’s important for landlords and property investors to be aware of the planning use classes for HMOs in their local area, as well as any other regulations and requirements that may apply to HMO properties. This will ensure that they are compliant with the law and can avoid any potential legal issues or fines.

Who typically lives in an HMO?

HMOs (Houses in Multiple Occupation) are typically popular with certain demographic groups, such as students, young professionals, and low-income earners.

Students are a common group that live in HMOs as they often require affordable accommodation close to their university or college campuses. Living in an HMO can provide them with a more social and community-based living experience, as well as more affordable rent prices compared to other accommodation options.

Young professionals who are starting their careers and are looking for affordable housing options may also choose to live in HMOs, particularly in urban areas with high living costs. Living in an HMO can allow them to save money on rent and living expenses, while also providing them with a social environment to meet and network with other young professionals.

Low-income earners, such as those on benefits or working in low-paying jobs, may also choose to live in HMOs as they can provide more affordable accommodation compared to renting a traditional apartment or house.

However, it’s important to note that anyone can live in an HMO as long as they meet the landlord’s requirements and are able to afford the rent. HMOs can provide a more affordable and social living experience for many different types of people and are a popular option for those who want to live in a shared community setting.

Why are HMOs appealing to tenants?

HMOs (Houses in Multiple Occupation) are appealing to tenants for several reasons, including:

1. Affordability: HMOs are often more affordable than renting a traditional apartment or house, as tenants are only responsible for paying rent for their individual room and share communal spaces such as the kitchen and bathroom with other tenants. This can be particularly attractive to students and young professionals who are looking for more affordable accommodation options.
2. Flexibility: HMOs can offer more flexibility for tenants as they are often available for shorter rental periods than traditional rental properties. This can be useful for students or young professionals who may not want to commit to a long-term lease.
3. Social environment: HMOs provide a social environment for tenants, as they are living with other people and sharing communal spaces. This can be particularly attractive for those who are new to an area or looking to meet new people.
4. Shared responsibilities: In HMOs, tenants share responsibilities for communal areas such as cleaning and maintenance. This can be a convenient and cost-effective way to live as the workload is shared among all tenants.
5. Location: HMOs are often located in central areas close to universities, colleges, or city centers. This can be attractive to tenants who want to live in convenient locations close to their work or study.

Overall, HMOs can offer a more affordable and social living experience for tenants who are looking for a more flexible and communal living arrangement.

Why is HMO investing appealing to property investors?

HMO investing is appealing to property investors for several reasons, including:

1. Higher Rental Yields: HMOs can generate higher rental yields compared to traditional rental properties as tenants pay rent for individual rooms, resulting in multiple income streams for the landlord.
2. Lower Void Periods: Due to the popularity of HMOs with certain demographics such as students and young professionals, landlords can benefit from lower void periods and a more consistent rental income.
3. Greater Control: HMO landlords have greater control over their properties compared to traditional rental properties, as they can choose their tenants and set their own rules for communal areas.
4. Diversification: HMO investing can provide a diversified property portfolio for investors, as HMOs can offer multiple income streams and provide a buffer against any downturns in the rental market.
5. Property Value Appreciation: Well-maintained and well-managed HMOs can appreciate in value over time, providing potential capital growth for investors.
6. Reduced Risk: HMOs can offer reduced risk for investors, as multiple tenants sharing communal areas can provide a level of natural surveillance and reduce the risk of damage to the property.

Overall, HMO investing can offer attractive returns and provide a diversified property portfolio for investors. However, it’s important for investors to be aware of the regulations and requirements that apply to HMO properties in their local area, as well as the additional management and maintenance responsibilities that come with managing an HMO property.

What is the Average Monthly Profits from HMO investment?

The average monthly profits from HMO (House in Multiple Occupation) investment can vary depending on a range of factors such as location, property type, size, and management costs.

On average, HMO landlords can expect to generate higher rental yields compared to traditional rental properties, as tenants pay rent for individual rooms, resulting in multiple income streams for the landlord. The exact rental yield will depend on the local rental market and the specific property.

As a rough guide, landlords can expect to earn around 8-12% net rental yields from an HMO property, which means that after accounting for expenses such as mortgage payments, management costs, and maintenance, they can expect to earn an average monthly profit of around £500-£1000 or more, depending on the property and location.

However, it’s important to note that HMO investment can also come with additional costs and management responsibilities, such as obtaining licenses, managing communal areas, and complying with regulations. Therefore, investors should carefully consider these factors and seek professional advice before investing in an HMO property.

Is HMO a financially secure investment during recession or in a difficult economic climate?

HMO (House in Multiple Occupation) investment is not completely recession-proof, but it can offer some level of resilience during an economic downturn. The extent of this resilience will depend on the specific factors that impact the local rental market.

During a recession, some tenants may struggle to pay rent, resulting in higher vacancy rates and lower rental yields. However, HMO landlords can benefit from multiple income streams as tenants pay rent for individual rooms, which can help to reduce the impact of any rental arrears.

Furthermore, HMOs can appeal to a range of tenants, including students and young professionals, who may be less impacted by economic downturns compared to other demographics. Additionally, HMOs can offer a more affordable and flexible living arrangement, which can be attractive to tenants during times of financial uncertainty.

However, it’s important to note that HMO investment can also come with additional costs and management responsibilities, such as obtaining licenses, managing communal areas, and complying with regulations. Therefore, investors should carefully consider these factors and seek professional advice before investing in an HMO property to ensure that they have a robust investment strategy that can weather economic fluctuations.

Average Monthly HMO rent per room in UK areas:

The above table is from just one year’s data, however rents are going upwards across every region. Refer to the chart shown spareroom.com, which is a very popular website for finding house or flat share availability across the country.

HMO Finance Options

There are several financing options available for those looking to invest in HMO (House in Multiple Occupation) properties. Here are some of the most common options:

1. Buy-to-Let Mortgage: A buy-to-let mortgage is a loan designed specifically for property investors who want to purchase a property to let out to tenants. Most lenders offer buy-to-let mortgages for HMOs, but they may have stricter lending criteria and require a larger deposit.
2. Commercial Mortgage: A commercial mortgage is a loan designed for commercial properties, including HMOs. These mortgages typically have higher interest rates and require a larger deposit, but they can offer longer terms and higher loan amounts than buy-to-let mortgages.
3. Bridging Loan: A bridging loan is a short-term loan designed to bridge the gap between the purchase of a property and the sale of another property or other long-term finance options. Bridging loans can be useful for HMO investors who need to act quickly to secure a property or make repairs before tenants move in.
4. Property Development Finance: Property development finance is a loan designed for property investors who want to purchase a property that requires refurbishment or renovation. These loans can cover the cost of the purchase, renovation, and other associated costs, and they are typically repaid through the sale or refinancing of the property.
5. Joint Venture: A joint venture is a partnership between two or more investors who share the costs and profits of an HMO investment. Joint ventures can be a useful way to pool resources and expertise to achieve a common goal.

It’s important to note that each finance option has its own advantages and disadvantages, and investors should carefully consider their options and seek professional advice before choosing a finance option for their HMO investment.

What’s Next?

HMOs remain one of our preferred investment options, and we anticipate that they will account for a large portion of our earnings and future expansion.

We have been making investments in this sector for more than 10 years, and we are enthusiastic about the prospect of continuing to grow our HMO portfolio.

If you’re interested in learning more, contact us and we will be surely able to help.