Houses of Multiple Occupation (HMO) are often a wonderful source of rental income. In comparison to a standard buy-to-let property the rental yields can often be double. However a number of other factors need to be considered before embarking on the HMO route.
One definition of an HMO is: A HMO is a house occupied by more than 2 qualifying persons, being persons who are not all members of the same family. A “qualifying person “is a person whose only or principal place of residence is the HMO. Different councils will often apply different rules when it comes to considering a property as an HMO. An HMO licence is there to protect the safety of the tenants and includes the following: the house is suitable for the number of occupants, e.g. size and facilities and that the manager of the house, you or an agent, is considered to be “fit and proper”, e.g. no criminal record, or breach of landlord laws or code of practice. Failure to comply with these rules can result in substantial fines.
Prior to acquiring an HMO a number of factors should be investigated, such as, the demand for this type of accommodation in the area having regard to transport links and other facilities. HMOs are popular with students and hence acquiring this type of property near a university could be a good investment depending on the supply and demand situation. The location of this type of property is key to the revenue that it can generate. Another important point is to look at the net rental income as well as the gross rental income. The main points impacting this, are the cost of complying with the HMO regulations and the cost of maintaining the HMO including dilapidations.
There are two other major factors that should be considered before embarking on the road of becoming a HMO landlord. The first is the amount of experience that you have managing investment properties. As in most business ventures there are risks and potential problems. These are often more prevalent with HMOs as opposed to standard buy-to-lets and usually experienced landlords are more capable of dealing with them as opposed to the novice landlord. The second is how any potential mortgage provider will value the property. Valuations may be carried out on an investment basis, as a multiple of the rental income, or in accordance with the value of similar properties in the neighbourhood that may be owned by or let out to a single family.
As previously mentioned an HMO can provide a very attractive rental income, but before committing to this investment it is important not to be blinded by this and ignore all the other factors.
The HMO Checklist provides a good starting point to enable you to make a sound commercial judgement.
Guest article from Brooklands Commercial Finance
Brooklands Commercial finance Ltd is one of the UK’s leading brokerages that specialise in property finance. Their area of expertise include all forms of Bridging Finance, Development and Refurbishment Finance, as well as financing HMOs.