Houses in multiple occupation (HMOs) are becoming increasingly popular for property investors. According to Zoopla, the average gross yield is 5.2%, but when renting rooms individually as opposed to letting the whole property as a single unit, you can achieve 12% or more.
However, although HMOs are extremely attractive from an income and yield perspective, it’s important to realise that to earn this extra income, they will require more work, for example, you (or your agent) may have to deal with different tenants who don’t always get on!
5 key things you need to know about creating and letting HMOs
1. Planning permission
Firstly you need to speak to the local council to find out what their rules are for HMOs. Each local authority has the power to set its own planning rules and some councils will require you to apply for planning permission if you want to change the use class from a single-family home (C3) to a HMO (C4 or Sui Generis HMO). Check with the local planning department whether you’re likely to be granted permission to let your existing property, or a property you plan to invest in, as a HMO – most councils appreciate landlords being diligent and will be happy to advise you.
The second important thing you need to check is: will you need a licence? The answer to this isn’t straightforward. In England, a property is defined as a HMO if it houses three or more tenants, who form more than one household (i.e. are unrelated) and share toilet, bathroom or kitchen facilities – but you only need a licence if there are 5 or more unrelated occupants. That’s the national law. However, just as with planning, each local authority can also impose their own additional and/or selective licensing rules. That means you might need a licence for even a small HMO with just 3 sharers.
The good news is, as local experts, you can just contact us and we’ll be happy to explain the local licensing rules.
3. Health and safety
There are 168 rules and regulations to let a property safely in England (and a similar number in Wales, Scotland and Northern Ireland), but when it comes to HMOs, there are more rules you need to abide by including:
Minimum room sizes
Any individual room that’s let must be a minimum size of 6.51m2 if it’s a person on their own (over 10 years) and 10.22m2 if there are two people sharing.
This might seem straightforward, but you have to take into account the ceiling height too, as you can only count space where the room height is at least 1.5m. And, once again, your local authority has the right to impose its own rules and may request larger rooms, so this is something else to check with them especially if you’re looking to buy a property specifically to let as a HMO. The last thing you want is to end up owning a property you thought had 6 lettable rooms and then find out you can only legally let 4 of them!
Understanding quite complex fire safety rules is essential when creating and running a HMO. Some key fire safety requirements that are different to those for a regular single let:
- Fire doors with automatic closers must be fitted
- Each individual unit (bedroom or bedsit) must have a smoke alarm
- There must be a mains-powered, interconnected fire alarm system
- There must be fire extinguishers on each floor
- If it’s a licensed HMO, there must be a written risk assessment
Whenever we take on a property to let, whether it’s a standard let or an HMO we will do a full check on your property to make sure it meets the latest rules and regulations as our agents are qualified and keep up with latest changes.
4. Council Tax
Check with your local authority or contact the Valuation Office Agency (VOA) directly to find out how council tax will be calculated for your HMO. As most tenants only have their bedroom as private space, then there may just be one council tax charge for the whole property, which you would typically pay But if they have an en-suite or kitchenette, the VOA may assess each private room as a separate self-contained dwelling with its own band, so it’s just worth double checking with your local council before you invest.
Specialist insurers will offer cover for HMOs and although your premiums may be higher than for a single let, if you’ve got several properties, you might be able to save money by taking out ‘portfolio insurance’ and putting all of them on one policy. And of course, you will be earning more income from your HMO than a standard let, so you can afford to pay a bit more too.
Managing a HMO
There is a bit more to do when managing a HMO, but it is possible for a qualified letting agent to take on the additional work for you and at scottfraser we manage many HMOs for landlords, so will be happy to help. As with all lets you will need to keep up with changing rules and regulations on health and safety and local authority changes to licensing rules.
If you self manage, you do need to keep an eye on who is living in the property, or have an agent do this for you. As a landlord, you have to ensure that every tenant in the property is renting legally by carrying out right to rent checks on them, just as you would in an standard let, but if someone moves their partner in or a tenant ‘swaps out’ and a new person takes over their room, you could be liable if it turns out that they don’t have the legal right to live in the country and you could be fined – £1,000 for a first offence, £3,000 thereafter.
Bills are handled a little differently too. For example, in a student let, where all the tenants know each other and will probably be moving in and out at the same time, you might agree that the utilities will be put in their name. But if your tenants are entirely separate from each other, all on individual assured shorthold tenancies and staying for different lengths of time, typically their rent is including bills, which you’ll pay directly yourself. A great way to keep an eye on spending is to fit a smart meter which will monitor how much is being used.
With the huge number of HMOs we manage, we know that property inspections need to be carried out regularly and rigorous checks made to ensure the property is always being legally and safely let – particularly with regard to fire safety and, although rare, we will also sort out any tenant disputes.
Benefits of HMOs
So although HMOs do require extra work, the benefits are:
- Potentially secure great rental income, with much better gross and net yields than a normal single let
- You pretty much eliminate the risk of voids – if one or even two tenants move out of a 5 or 6-bed HMO, you’re still likely to have enough rental income to cover your costs until new tenants move in
- It can be really rewarding to help younger tenants with their first move away from home
And if you want to earn the extra money without the worry of managing an HMO, then do contact us at scottfraser, we are experts and know what you need to do and when.
Creating your own HMO and then letting us manage it for you can be a great way of securing better income, while not having to deal with all the extra paperwork and hassle that goes with it.
If you need any advice on creating or managing an HMO, do contact your local scottfraser office and we can help make sure your multi-let is a great success.