Houses in multiple occupation (HMO’s): A short guide

Background

This is a sub division of the buy to let sector and has seen steady growth over the last few years as housing demographics have evolved.

The demand for HMOs is increasing as more people are priced out of single-occupancy rental properties.

This trend is more prominent in urban areas.

What is an HMO?

The difference compared to standard buy to let mortgages is how the house is rented out.

A standard buy to let will normally have a single tenancy covering up to 4 people.

An HMO will have multiple tenancies with each of the occupiers having their own agreement.

A property is normally considered an HMO if there are 3 unrelated people living in a property sharing amenities.

HMO’s break down into 2 further categories:

Small HMO’s – don’t normally require a license from the local council

Large HMO’s – will require an HMO license from the local council

Why do people buy HMO’s?

Increased yield versus traditional buy to let

Paragon Banking Group's PRS (Private Rental Sector) report for the first quarter of this year in England shows HMOs generate the best yields at 6%, versus 5.3% for houses and 5% for flats and bungalows. And their latest research shows HMO yields around the UK varying from around 6% to 9%.

Professional HMO’s

This is a relatively new area which offer higher quality accommodation compared to traditional HMOs, catering to a growing demand for better living standards within shared housing.

Tenants are getting pickier—they want more than just affordability. They’re looking for comfort, convenience, and modern amenities.

Larger rooms, en-suites, and high-quality furnishings are also requirements of tenants in this area. Good broadband and fast internet is a must-have, especially with more people working from home. Modern amenities like smart home features are also becoming more popular.

However, there's another market where landlords focus on location. For example, young professionals who live far from their job just need a place to sleep, so they rent an HMO, which serves more like a hotel than a full-time home. This also includes young professionals looking for cheaper options.

Does an HMO require planning permission?

A standard residential dwelling occupied by a family has C3 planning use. However, this same property with three or more people who are not from one household changes to a C4 planning use (a small HMO). A large HMO, a property with more than six occupants, falls into ‘Sui Generis’, a class of its own.

Just because there is an HMO license in place doesn’t mean the correct planning consent is in place: they are two different things dealt with by different departments within the council. So it’s important you ask your legal adviser to check this.

Article 4 directions - this is the mechanism that local councils use to limit development in certain areas. They will use this if there is an over concentration of HMO’s in one place. Normally permitted development will now need planning permission in these designated areas. Therefore if the property you are considering buying is in an area covered by Article 4 and it hasn’t got planning permission for an HMO then you may not be able to obtain consent.

Will I need an HMO license?

Having an HMO means there are additional requirements you will have to meet.

You may not need a license if the property is classed as a small HMO. Even if you don’t need a license for your HMO you will need to meet appropriate standards for fire precautions, amenity provisions and room sizes.

If the property is classed as a large HMO then you will need a license. The council must be satisfied that you, as the proposed licence holder, are a fit and proper person. Specific property licences are required for HMOs and are generally valid for five years. As licences are granted on a case-by-case basis, it’s not a one-size-fits-all approach. The license does not transfer with the property; as a new owner you will be required to apply to the council.

Things to consider

Your target market – who are your prospective tenants and what do they expect?

Tenant Harmony – it is recommended that you seek tenants in similar situations, or with similar lifestyles, ie young professionals or students. This will minimise potential upset, disputes and ultimately, void periods.

Tenant Guarantors – having an additional person guaranteeing the tenancy commitments, including rents should they not be paid on time References – including credit checks, proof of income from employers and references from a previous landlord

Running costs also need to be considered. Nearly two thirds of landlords spend over 10% of rental income on annual property maintenance. With multiple tenants, more frequent maintenance is to be expected.

Bills – 83% of landlords include some level of bills, whether that be all in, or just utilities. You will need to consider how you intend to manage this for cash flow management.

Important

Please note that some forms of Buy-To-Let mortgages are not regulated by the FCA.

If you would like more information or would like to arrange a free no obligation meeting to discuss your requirements then please get in touch today.

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