Unlocking the Power of HMOs: The Ultimate Guide to Maximising Your Property Investments
Expert advice and knowledge on how the HMO property investment strategy works in the UK, here we show you the pros and cons of what to look out for considering this type of UK property investment.
What Is An HMO Property?
An HMO property, also known as a House in Multiple Occupations, is a type of rental property that is occupied by more than one household. A household can be defined as either a single person or members of the same family living together.
In the UK, some certain regulations and requirements define what constitutes an HMO property. One key distinction is the size of the property. If a property is occupied by five or more individuals from more than one household and has three or more stories, it is classified as a large HMO. In this case, the landlord must obtain a licence from the local council to legally rent out the property.
Landlords of large HMO properties have additional standards and obligations to meet. These can include providing adequate fire safety measures, ensuring that the property is in good repair, and ensuring that the common areas and shared facilities are clean and well-maintained. Additionally, there may be specific regulations regarding the number and type of facilities required, such as bathrooms and kitchens, depending on the number of occupants.
It's important for landlords considering converting a property into an HMO to familiarize themselves with these regulations and obligations to ensure compliance. This will help to provide a safe and comfortable living environment for tenants while also protecting the landlord's investment.
The Benefits of Investing in an HMO Property
If you're considering investing in property, then HMOs (House in Multiple Occupations) could be a game-changer for you. HMO properties offer a multitude of benefits that can make them incredibly lucrative investments.
First and foremost, HMOs have the potential to provide high rental yields. With multiple tenants sharing the property, the rental income is significantly higher compared to a traditional buy-to-let property. HMOs can generate three times higher profits, making them a desirable option for investors looking to maximise their returns.
The returns can be incredibly profitable, with net yields from 8-15% of the value of the property. For example, a property worth £100,000 can provide an annual income of £8,000 to £15,000, or £666 to £1,250 per month - a significant increase compared to what a bank can offer or traditional buy-to-lets.
Another advantage of investing in HMOs is the tax advantages they offer. In the UK, certain tax reliefs and deductions are available for HMO landlords, such as claiming expenses for repairs, maintenance, and management costs. These tax benefits can help increase your overall profitability and make your investment even more attractive.
The demand for HMOs is on the rise due to the increasing costs of living and energy bills. Many individuals and families are seeking affordable housing options, and HMOs provide a more cost-effective solution. As a result, HMOs often experience fewer rental void periods, meaning your property is occupied for longer periods, ensuring a steady rental income stream.
Additionally, HMOs can mitigate the risk of rental arrears. With multiple tenants contributing to the rental payments, the likelihood of one tenant falling behind on payments is reduced. This decreased risk of arrears can provide peace of mind for landlords and help ensure a stable cash flow.
Investing in an HMO property can be a smart move for any property investor. With higher rental yields, tax advantages, increased demand, and reduced risks, HMOs offer an attractive investment opportunity. So, if you're looking to maximize your profits and build a successful property portfolio, exploring the world of HMOs may be the right path for you.
Step-by-Step on How to Convert a Property into an HMO
To legally rent out your property as an HMO, you'll need to obtain a separate license for each HMO you own. These licenses are valid for five years and must be obtained from your local council. In addition, you'll need to provide a valid gas safety certificate to the council each year, install smoke alarms throughout the property, and have safety certificates for electrical appliances available upon request.
Keep in mind that different authorities may have additional criteria that you must meet, so it's important to familiarize yourself with the specific requirements in your area. Depending on the extent of the work needed to convert your property into an HMO, you may also need to obtain planning permission.
When converting your property, consider the number of tenants that will be living there and how much space they will need. Providing furniture and appliances can be a great selling point for potential tenants. It's also important to ensure that your HMO is habitable and provides enough space for tenants to live comfortably. The council will conduct a Housing Health and Safety Rating System risk assessment to ensure that your property meets the necessary standards.
Lastly, consider converting any spare rooms into additional bathrooms and any reception rooms into extra bedrooms. This will help maximise the rental potential of your HMO. With careful planning and attention to detail, you can successfully convert your property into an HMO and take advantage of the many benefits this type of investment offers.
It is important to know the step-by-step process of converting a property into an HMO. First things first, you'll need to determine if your property meets the criteria for an HMO license. In the UK, a property is classified as an HMO if it is let to five or more tenants from more than one household, is at least three storeys high, and the tenants share toilet, bathroom, or kitchen facilities.
What Would It Look Like?
This was a stunning HMO property we were involved in dealing with, already converted with the necessary license and fully tenanted, perfect location to attract students being close to Keele University, due to these factors and luxury finishes, all the right reasons we had to get involved with our investor clients, did not take long to be listed sold.
We have created a chart based on HMO rooms available to let within certain areas of the UK.
Most major cities seem somewhat above actual demand for HMO type of accommodation, whereas others lack supply. When considering this type of property strategy it is wise to calculate the student and young professional population since they are going to be your target tenants vs your competition.
HMO ROOM SUPPLY UK - 2022
Common Challenges Faced by HMO Property Owners and How to Overcome Them in 2023
UK inflation is currently at its highest level in nearly 40 years, sitting at 10%. This means that the cost of living is increasing, and tenants are feeling the financial strain. A recent survey found that 80% of tenants are worried about how they will be able to pay their rent. This presents a significant challenge for HMO property owners, as they rely on consistent rental income to maintain profitability.
Additionally, the Renters Reform Bill is set to bring about significant changes in the private rented sector. This legislation aims to scrap Section 21 evictions, establish a decent home standard, and introduce the ability to cancel fixed-term tenancies. These changes can impact HMO property owners, requiring them to adapt to new regulations and standards.
To overcome these challenges, HMO property owners must implement effective strategies. One recommendation is to require every tenant to have a UK-based guarantor. This provides an added layer of security in case a tenant falls behind on rent payments. It is also important to have a clear process in place for addressing rental arrears promptly and efficiently.
In addition to these immediate challenges, HMO property owners need to focus on making their businesses sustainable and future-proofed. This includes diversifying their property portfolio to reduce risk and staying updated on industry trends and regulations. By being agile and adaptable, HMO property owners can navigate challenges successfully and ensure the long-term success of their investments.
Further information you may need to know
1. What is the cost of converting a property into an HMO?
The cost of converting a property into an HMO can vary depending on the condition, size, and amount of work required to obtain a license. Seeking advice from a builder is a good idea to establish the cost before making any purchase. It's recommended to carry out a full independent survey before investing in any property.
2. Which area is best to start an HMO property in the UK?
Researching the supply and demand for rental rooms within a specific area is a great way to identify where it's best to invest in an HMO. You can look for rental listings on online portals such as Rightmove and Spareroom, and check student populations to determine the level of demand.
3. Are maintenance costs high for HMOs?
The maintenance costs for HMOs depend on the area and tenant profile you are targeting. Expect high maintenance costs if you are renting out to students who are not employed. We recommend conducting a full maintenance check every few years or annually to maintain your property.
4. What are the downsides of owning an HMO property?
The potential downsides of owning an HMO property include higher maintenance costs, choosing the wrong management team and tenant profile, and the risk of tenants not paying rent. We advise landlords to get the appropriate landlord insurance for their properties and to research the market thoroughly before making any investments.
5. What are the management and letting costs for HMO properties?
The management and letting costs for HMO properties can vary, but a rule of thumb is around 10%/12% + VAT on the total rental income achieved. Landlords can also be tied into contractual agreements with their management teams for 6/12 months and a monthly rolling contract.
6. How do I source such property investment options?
You can conduct your research in the market, or you can work with a reputable sourcing agency and management team like ours. A good sourcing agency can help you find fully-operating HMO properties, given that dealing with refurbs, licensing the property and trusting builders can be a risk to you and your reputation.
We hope that these FAQs will help you gain a better understanding of HMO property investments. If you have further questions or concerns, please feel free to reach out to us.