While bedsits and roommate arrangements have always existed, a number of cultural shifts are increasing the number of HMOs. This includes the increase of Monday to Friday renters in London and other urban centres and college students moving from dorms to shared houses. As a property owner, HMOs can be an alternative if you want to increase your potential income per unit and decrease the chances of default. However, they do come with their risks and specificities. Here are a number of things all landlords should know before managing HMOs.
The Definition of HMOs
HMO includes several different categories of rentals. An owner-occupied property with more than two tenants and some shared areas falls into this category. A flat shared by three or more people from at least two different households counts too.
Certain student accommodation options are considered HMOs as well since the Housing Act of 2004 went into effect. Four students renting a house together is a classic example. However, buildings partially or entirely converted to self-contained units don’t count. In general, they have to share common areas like kitchens and bathrooms.
A building doesn’t count as an HMO if it isn’t the permanent residence of the occupants. It also doesn’t count if they don’t pay rent. Bedsits may count as an HMO once you have three or more bedrooms involved.
The Benefits of HMO Properties
HMO properties offer a number of advantages. One is their greater average profitability, which is generally because you’re renting several rooms to individual adult renters willing and able to pay a higher rate than a large family occupying the same space.
Multiple tenancies increase the odds you’ll receive at least some income. If one tenant can’t pay the rent, the other two tenants probably can. And, by breaking up the property into several smaller tenancies, you’ll attract a larger number of potential tenants, which will improve your occupancy rate.
One of the main reasons investors grow their property portfolio is for the profits they bring in, and when it comes to return on investment, HMOs are seen as one of the leading investment models in the property industry.
Rental yields for an HMO property can often be as much as three times as high as single lets and are the highest of all buy-to-let property types on average.
HMO’s are typically already fit for purpose when they are purchased. This means they can be let out without any necessary improvements that need to be made.
However, if, after purchasing an HMO, you decide to change the property by doing something like adding an extension, these improvements can be classed as a revenue cost.
Revenue costs are usually tax-deductible, as opposed to capital costs which are classed as costs incurred in bringing the property up to a habitable state.
Luckily for HMO landlords, these properties often need little work in order to get them into a habitable state. Therefore, any follow-up costs you incur are more likely to be tax-deductible.
Getting the Right Coverage
Owning an HMO brings with it more regulations and licensing requirements than single lets. This is mainly due to the increased use of shared facilities and importance of fire regulations. Planning and licensing legislations and fire safety regulations are constantly changing, making it more difficult for private investors to keep up.
As such, the majority of HMO landlords engage property managers who are more knowledgeable on the topic, which inevitably raises their monthly expenses. Also, if you decide to manage it on your own and neglect a new piece of legislation, the potential fines could cost significantly more.
Mortgages for HMOs are not only more expensive than those for single buy-to-lets, but also more difficult to get.
Lenders will generally require you to provide a larger deposit, as well as additional funds for any potential refurbishments that may be required. Many letting agents won’t even take on HMOs if you decide to have the property managed by a third party and if they do, their management fees are usually higher than those for traditional houses or apartments.
Many lenders also prefer to work with investors who already have prior experience with HMO ownership. As a result, if you’re looking to purchase an HMO for the first time, you might find it very difficult to find the funding.
All landlords need the appropriate level of insurance. One of the things you will need is HMO insurance since standard insurance policies consider multi-tenant situations to be a greater risk. However, this generally results in higher premiums.
Fortunately, sites like quotezone.co.uk allow you to compare HMO insurance between different insurers. They will allow you to compare some of the top insurance providers in the country, and find the perfect coverage for your needs. You can look up quotes using a single simple form, which will save you both time and money.
HMOs are increasingly common, but they come with a new set of challenges for landlords. Know the rules that apply to you, whether you are renting out spare bedrooms in your home or managing student accommodation in a former mansion.
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2 Replies to “Things All Landlords Should Know Before Managing HMOs”
“so you can either ban pets or require a pet deposit.” Since June 2019 it is unlawful to seek a deposit greater than a sum equal to 5 weeks’ rent (6 weeks for rents over £50,000 pa). Pet deposits (meaning a sum greater than the standard deposit) are now almost impossible without exceeding the limit.
Daniel, you article needs to be re-written, Whether it is 3 things or four things (you state both), it is not clear what those things are. Knowing that HMOs are on average more profitable is hardly what you need to know before MANAGING an HMO. Getting a quote online rather than through a specialist broker is also risky unless you are in a position to scrutinise and compare policy terms.
Ian we’ve picked up on this. HUGE APOLOGIES that this one slipped through today without being scrutinised. Thankfully you did and we’ve amended to suit! The article was written with insurance in mind but it seems that an awful lot of more valuable information was missed in the process. Thanks for your input! We do listen!