Why HMOs are a Great Investment

As a landlord, you may be wondering whether to invest in houses of multiple occupation (HMOs) or whether the good money is in ordinary rental properties. Any seasoned landlord will tell you there are multiple benefits of investing in HMOs, both for the landlord and the tenants.

Usually, an HMO property is a house shared by several tenants who aren’t connected. They rent their own room and the communal space in the house on an individual basis. However, HMO accommodation can also include several bedsits in one large building or hostels.

The definition of an HMO is any property that accommodates three or more tenants who are not related and who make up more than one household, sharing kitchen and bathroom facilities.


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Benefits of investing in HMOs

There are some clear benefits to investing in an HMO that can reap rewards for landlords when done in the correct way. First and foremost, they can produce a higher rental yield than any other type of buy-to-let property. This can be as much as three times higher than renting out a house to one family or person.

According to the Buy to Let Index, HMOs produce, on average, a yield of 8.9%. This is by far the highest of all buy-to-let properties.

Keep an eye on the amount of rent that appears in your bank account each month. Although you’ll probably see property prices fluctuating continually in the general market, you will always have a steady stream of income from your HMOs.

You can rely on it going into your bank regularly, as it would be highly unlikely that all your HMO rooms would be vacant at any one time!

Regardless of the economic climate, the demand for HMOs remains constant, even when change and uncertainty are all around us. This is because there will always be tenants seeking affordable rental rooms, and an HMO tends to offer cheaper rooms than other types of rented accommodation.

As a landlord, you will not want your properties to be vacant for too long, as you’re losing money. With an HMO, when one tenant moves out, you will still have numerous others paying their rent, so it doesn’t represent too big a drop in income while you find a new tenant for the vacant room.

Effectively streamlining your portfolio; investing in HMOs is spreading the risks, meaning your income is generated by being shared across multiple occupants. Even if one falls behind, or leaves unexpectedly, others will still be paying their rent and providing your income.

When you have multiple rental properties at different locations, although it brings in greater income, it can also mean more expense. It can cost more in letting agent’s fees or it can take additional time to manage them all.

An HMO provides a solution, as you can benefit from increased income from your portfolio in terms of a greater number of tenants, but without the overheads of renting out multiple different properties.

Headaches that can be part and parcel of being a landlord are reduced significantly by narrowing your portfolio down to a small number of high-yield HMO properties. In short, you will be keeping your life simple.


Should you provide furniture in an HMO?

Although it is not a mandatory legal requirement for a landlord to furnish HMOs, they are generally expected to rent them out fully furnished including the bedrooms, kitchen, dining area and lounge.

Most landlords would agree it’s in your best interests to furnish your HMOs, as this has many benefits. It will attract more tenants when a room becomes vacant, as they can move in without having to spend extra money themselves on furniture.

This means, as a landlord, you will be able to choose the best tenants, rather than being limited to those who are prepared to buy their own furniture. You can also be sure the furniture matches the necessary high safety standards, in terms of fire risks.

You will save money on potentially having to move stuff out at the end of each tenancy if your own furniture is in place. Some tenants, when departing, have a habit of leaving items they don’t want, in order to save themselves money. This means it will fall to the landlord to ship out old items.

Your own furniture and furnishings should be of a suitably high quality to be reused once the tenancy ends. You don’t have to spend the earth on good quality furniture. If you contact a professional supplier of furniture packages and buy-to-let furniture, you can get a good deal on items that meets the required safety standards, without breaking the bank.

The things you should provide for the bedrooms include beds, mattresses, wardrobes, chests of drawers and curtains. In the kitchen, you need to provide a fridge/freezer, oven, hob, microwave, washing machine, dining table and storage area. In the lounge, it’s usual to provide a table, sofa, armchairs and a television.

You should make sure everything is supplied in the relevant quantities. For example, if you have six tenants, you need to supply a fridge big enough to store sufficient food for everyone.


Do you need an HMO licence?

A landlord renting out an HMO occupied by five or more individuals from separate households needs a licence by law. While it is not compulsory for smaller HMOs with less than five individual tenants to have a licence, some local authorities require one regardless.

It is best to check with your own local housing authority to see whether all HMOs, regardless of their size, require a licence in your area, to avoid the risk of breaking the law. The cost of an HMO licence can vary significantly across the UK, so check in advance.


Can you get HMO mortgages?

An HMO mortgage differs from a standard buy-to-let mortgage, as it will permit the letting of multiple rooms to several people. The terms of ordinary buy-to-let mortgages don’t permit this.

There are plenty of HMO mortgages available, dependent on what stage your HMO property is at. These can include a mortgage in the shape of a development loan to construct the HMO; a refurbishment mortgage to carry out works; a re-mortgage for an existing HMO; or a mortgage to purchase a new HMO.

Check with your chosen lender to see what types of HMO mortgage are available to best suit your needs.


What about council tax for HMOs?

There are specific rules relating to council tax payments for HMOs. Where each room is let via an individual tenancy agreement, the landlord is responsible for paying the council tax on the property as a whole.

This can be reflected in the rent that the landlord charges each tenant, as a percentage of the rent represents the fact the council tax is included, making life simpler for the tenants and landlord alike.

There are many benefits to investing in HMOs, so if you’re new to the game, a little research and careful planning can lead to higher yields in the long term.

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