Houses in multiple occupation have become increasingly popular as property investors look to maximise yields on their portfolios.
It is easy to see the attraction – multiple tenants generate more rental income and there is less risk for the landlord if income derives from several sources.
HMOs also make sense for tenants because shared costs are cheaper. Go to any university town and you will find HMOs.
Technically a home becomes an HMO if it is occupied by three or more people forming two or more households, where more than one household shares amenities such as a toilet, bathroom and kitchen.
In student land, large Victorian houses make ideal HMOs so these types of properties are much sought-after by investors. But if the house has three or more storeys and is occupied by five or more people, the property will require a licence from the local council.
Investors need to be aware of the requirement for licensing and planning permission when they decide to convert a property into an HMO. Planning and licencing are not connected, so investors need to cover both bases, especially if they are seeking mortgage funding.
The Town and Country Planning Act 1990 states that any change of use of a property requires planning permission unless it is “non-material” or permitted by General Permitted Development Orders, which are based on the following classification.
- C3 Dwellinghouse: A normal house or flat occupied by a single person, couple or family.
- C4 House in multiple occupation: A normal house shared by between three and six unrelated individuals as their main residence. They will share facilities such as a lounge, kitchen and bathroom.
- Sui Generis HMO: These are larger properties that cannot be classified as C3 or C4 and they accommodate seven or more unrelated individuals.
For HMOs it is permitted to change use from C3 to C4 (and back again) unless an Article 4 Direction is imposed by a local authority, which removes the permitted development rights.
Change of use to a Sui Generis HMO requires planning permission. The planning rules can quickly become a minefield and clients should take professional advice if in any doubt.
As already mentioned, licensing is a different issue and if a property is let to five or more tenants and has three or more storeys with a shared kitchen, bathroom or toilet, then a mandatory licence will be required – unless the building has been converted into fully self-contained flats, in which case the property is not classified as an HMO. Some local authorities limit the number of HMOs in a particular area, so it is worth checking before a client commits to buy. Again, if in doubt, ensure clients get professional advice.
There are also regulations covering everything from fire and gas safety to electrical checks.
Managing the property may also be best undertaken by a specialist letting agent used to dealing with HMOs and the investor should expect higher maintenance costs than a standard buy-to-let property.
Most lenders will want investors to have experience of managing HMOs and have the financial means to cover rental voids.
Lenders will ask for evidence of planning permission and licensing and investors need to understand how a lender values a property. Some value HMOs as a standard residential property and others value on a commercial basis, using rental income to calculate a capital value. Expert intermediaries can advise brokers on this.
Finally, experienced investors may buy property on a short-term loan and then, when it has been converted into an HMO, re-leverage the property against the additional value that has been created.
HMOs are growing in popularity and demand looks set to remain strong for some time to come, especially for larger properties.