Investor Guide: Should I buy a House in Multiple Occupation (HMO)?

With the new university year beginning, there are opportunities for landlords to rent out rooms individually. The biggest advantage of renting rooms to students is that there is a consistent, strong demand for accommodation, depending on where you buy of course. In today’s market, students are not the only tenants looking to house-share. According to Ideal Flatmate, the average age of a room-share tenant is now 30 years’ old.[1] Houses in Multiple Occupation (HMOs) are the second largest tenure in the UK; there are about 4.5 million HMO households in England.[2]

What is a House in Multiple Occupation (HMO)?

A HMO is a property in which at least three people, who are not from the same household, rent out rooms. A household is either one person or several members of the same family. A property with two couples would be considered as making up two households (whether they are married or not), whilst four unrelated people would make up four households. 

A property is defined as a HMO if it’s the tenants’ main residence, they pay rent, and they share a bathroom, toilet, kitchen and other facilities. 

The legal definition of a HMO can be found in section 254 of the Housing Act 2004[3] and it is also referenced in The Licensing of Houses in Multiple Occupation (Prescribed Description) (England) Order 2018.[4]

Is a HMO a good investment?

Consider location. In some areas, employment opportunities mean there is a high demand for affordable property. It’s important to gather information about rental prices for similar properties in the area so you can calculate your likely rental yield. 

Here are some reasons to invest in a HMO property:

• Rental yields for a HMO can be up to three times higher than a single-let investment property. HMOs produced average yields of 8.9% in 2017, which is higher than any other type of buy-to-let property.[5]
• There is an increased demand for student accommodation. A record number of students were accepted for university places in 2018.[6] 
• You maximise the value of your investment. If you do not wish to own multiple properties, a higher rental yield from a HMO means you don’t need to. Fewer properties also means lower outlay and maintenance costs. 
• It’s a financially safer option than a single-let property. In a single-let property, if the tenant falls into rental arrears or decides to move, there’s the risk of losing your rental income from the one source and having a completely vacant property. With a HMO, the risk is spread across multiple tenants.
• As a HMO landlord, you may be able to can claim tax breaks that other landlords are not entitled to receive. For example, it may be possible to offset a proportion of your income against ‘Plant and Machinery Capital Allowances’, which can cover items like plumbing systems, electrical systems, lighting and lifts in communal areas such as corridors and basements. Be mindful, though, that any expenditure may outweigh the tax benefit for small-scale conversions.[7] It’s best to seek advice from one of our property solicitors before undertaking any work to see if there are significant tax savings to be had.
   

Will I need a HMO licence?

If you own a HMO in England or Wales rented by three people or less, you may not need a licence. Some local authorities only require licences for properties in certain areas or ’zones’ so it is very important to check with them. Information can be found on your local authority website.

You will need a HMO licence if it meets the ‘prescribed definition’ set out in The Licensing of Houses in Multiple Occupation (Prescribed Description) (England) Order 2018.[8] That definition will be met if the following conditions apply:

• More than 5 people from more than one household rent the property
• All or some of the tenants share a kitchen, bathroom and toilet
• At least one of the tenants pays rent
• Your property is defined under the Housing Act 2004[9] under sections 254(2), or 254(3), or and 254(4)

In order to be granted a licence you must ensure that:

• The size and facilities of your house are suitable for the number of occupants
• You are considered a ‘fit and proper’ person to be a landlord
• The house has an up-to-date gas safety certificate
• Smoke alarms have been installed
• You have safety certificates for all electrical appliances

Licences are valid for five years and they are not transferrable to other owners so, if you are buying a property which has a HMO licence, you need to reapply.[10]

What are my legal responsibilities as a HMO landlord?

All landlords must fulfill a set of legal responsibilities.[11] HMO landlords have additional responsibilities, including:

• Making sure that bedrooms meet the minimum size requirements under the Ministry of Housing, Community and Local Government Regulations 2018[12]
• Ensuring the property is not over-crowded
• Taking into account the additional fire risks that result from multiple households sharing a property; this includes installing extra fire safety equipment, considering fire escape routes for all occupants, and carrying out thorough risk assessments
• Ensuring all tenants can access suitable cooking and washing facilities
• Holding an up-to-date legionella risk assessment
• Making sure there are enough waste bins for everybody
• Maintaining all communal areas and facilities[13]

All tenants and landlords have statutory rights under the law. Our property solicitors can help you negotiate a lease. This lease can give you and your tenants more than your rights and responsibilities under the law, but not less.

What are the penalties for failing to meet legal obligations?

If you rent out an unlicensed HMO, you ‘could get an unlimited fine’.[14]

Fines for breaching licence safety standards can also bankrupt landlords. A landlord team were fined £60,000 in Uxbridge Magistrates Court for letting a room in a HMO property that was deemed unsafe.[15] 

Landlords also need to be aware of what they can and can’t charge tenants under the Tenant Fees Act 2019.[16] If it’s found that you unlawfully charged a tenant fees (that’s all fees other than rent), you can be fined up to £30,000.[17]

Landlords who do not meet the Minimum Energy Efficiency Standard of ‘E’ can also be fined up to £5,000.[18]

Additionally, landlords who fail to follow the appropriate steps to evict somebody can face fines of up to £2,000.[19]

Get legal advice

Investing in a HMO property is different from buying a house for yourself, which is why you need to talk to a specialist property solicitor who understands your legal obligations and your local market.

QualitySolicitors property specialists will:

• Advise you on any changes you need to make to your property to comply with current legislation
• Draft a strong lease agreement to help make your investment a success
• Support you to understand and uphold your responsibilities so you comply with HMO licence conditions
• Provide ongoing legal advice, for example if any disputes arise in the future

Whether you are investing in your first HMO property or building up your property portfolio, our expert property team are happy to advise you. Call us on 08082747557.

 

[1] Ideal Flatmate, The rise of the silver room sharer, https://blog.idealflatmate.co.uk/landlord-HQ/the-rise-of-the-silver-room-sharer/

[2] House of Commons Library, 30 September 2019, Houses in Multiple Occupation (HMOs) in England and Wales

[3] Legislation.gov.uk, Housing Act 2004, http://www.legislation.gov.uk/ukpga/2004/34/part/7/crossheading/meaning-of-house-in-multiple-occupation

[4] Legislation.gov.uk, The Licensing of Houses in Multiple Occupation (Prescribed Description) (England) Order 2018, http://www.legislation.gov.uk/uksi/2018/221/made

[5] Complex Buy-to-Let Index, https://www.mortgagesforbusiness.co.uk/media/2379/complex-btl-index-q1-2017.pdf

[6] UCAS, https://www.ucas.com/corporate/news-and-key-documents/news/record-percentage-young-people-are-university

[7] Menzies, HMOs: are you missing out on capital allowances? https://www.menzies.co.uk/hmos-capital-allowances/

[8] Legislation.gov.uk, The Licensing of Houses in Multiple Occupation (Prescribed Description) (England) Order 2018, http://www.legislation.gov.uk/uksi/2018/221/made

[9] Legislation.gov.uk, Housing Act 2004, http://www.legislation.gov.uk/ukpga/2004/34/part/7/crossheading/meaning-of-house-in-multiple-occupation

[10] Gov.uk, House in multiple occupation licence, https://www.gov.uk/house-in-multiple-occupation-licence

[11] Simply Business, Landlords’ and tenants’ responsibilities – a quick-start guide, https://www.simplybusiness.co.uk/knowledge/articles/2016/06/landlord-vs-tenant-responsibilities/

[12] National Association of Landlords, HMO minimum room sizes to come into force 1 October 2018, https://landlords.org.uk/news-campaigns/news/hmo-minimum-room-sizes-come-force-1-october-2018

[13] Croydon.gov.uk, Houses in multiple occupation, https://www.croydon.gov.uk/housing/privatehousing/hmo/hmosafety

[14] Gov.uk, House in multiple occupation licence, https://www.gov.uk/house-in-multiple-occupation-licence

[15] Simply Business, Landlord legal obligations: 5 big fines and penalties received by landlords, https://www.simplybusiness.co.uk/knowledge/articles/2018/01/landlord-legal-obligations-and-5-biggest-fines/

[16] Gov.uk, Tenant Fees Act 2019, https://www.gov.uk/government/collections/tenant-fees-act

[17] Simply Business, £30,000 fines for landlords and letting agents who charge tenant fees, https://www.simplybusiness.co.uk/knowledge/articles/2017/11/tenant-fees-ban-could-see-landlords-and-letting-agents-charged-thousands-of-pounds/

[18] Simply Business, New Energy Efficiency Regulations, https://www.simplybusiness.co.uk/knowledge/articles/2017/04/buy-to-let-landlords-warned-over-low-epc-ratings-regulations-starting-in-april-2018/

[19] Simply Business, Tenant evictions costing landlords £2,000, https://www.simplybusiness.co.uk/knowledge/articles/2017/05/tenant-evictions-costing-landlords-2000-and-nine-months-of-misery/