Read the post or clink the links below to scroll to the information you need on HMO Properties.

• HMO Properties
• How are HMO Properties more profitable than regular Buy-to-Lets?
• Pros of HMOs
• Cons of HMOs
• HMO Lenders
• HMO licence and planning permission
• Compliance
• HMO Council Tax and Bills

HMO Properties

An HMO stands for a “House in Multiple Occupation”. It is a house, flat or a bedsit that has multiple tenants, meaning it is a shared household. Those tenants will each rent their own rooms and share the property’s communal areas such as bathrooms and/or kitchens. HMOs are generally popular with students and young individuals looking for cheaper, more affordable accommodation. They are a fantastic investment for landlords and are more profitable than a buy to let property. The reason for that being, each room in an HMO property is let separately. This means multiple streams of income for the landlord.

A property will be deemed an HMO if:

• The occupants are not forming a simple household. Simple households are where family members are living together or single people living alone in the property.
• The property is rented out by at least 3 people who are not from 1 ‘household’ (for example a family) but share facilities like the bathroom and kitchen
• Occupants must have the property as their sole or main residence, and not as a second home.
• The accommodation cannot be used for commercial use.
• At least one of the occupants must be paying rent.

These rules apply for individual flats, but there may be different for converted blocks. However, all the conditions listed above must be present for a property to be classed as an HMO. However, if the local authority has made an HMO declaration then the property may not need all the conditions.

A HMO property can be any of the following:

• Hostel
• Private Halls Residence
• Shared Housing
• Blocks of converted flats
• Buildings containing numerous bedsits with some shared facilities
• Self-contained cluster flats

Just to name a few – the term can be quite broad. Essentially, an HMO is any property with three or more residents living in it, who individually make up more than one household.

So how many people can live in an HMO? There are currently no direct rules. However overcrowding is not permitted. There are a few basic rules around HMO occupation which include:

• No more than two people must sleep in the same room, regardless of age.
• Rooms can only be shared if both of the individuals consent to sharing.
• Nobody over the age of 12 should share a room unless they are living together as a couple.

How are HMO Properties more profitable than regular Buy to Lets?

A standard buy to let property usually accommodates a single person or a family. This means a single rental payment would be due from the household on a monthly basis. Here is a comparison of gross rental income from a buy-to-let and HMO property:

Traditional Buy to Let Mortgage

4 bedroom semi-detached house with 1 big reception room and a garden

Rented to a family of 4, married couple and 2 children

Monthly rental income = £800

Annual rental income = £9,600

Converted HMO Mortgage

Key Criteria & Application Guidance

5 bedroom semi-detached house with 1 smaller reception room and a garden

(1 extra bedroom after converting it from the big reception room space)

Rented to 5 single individuals

Monthly rental income per tenant = £380

Monthly rental income = £1,900

Annual rental income = £22,800

It’s clear to see why HMOs are more profitable for landlords than traditional buy to lets. The difference in overall annual rental income is quite immense. With that being said, it is important to remember that not every HMO is guaranteed to generate almost three times the rental income of a standard buy to let. It’s important to remember that almost 100% of the time, utility bills are paid by landlords in HMO properties. Nevertheless, with the example above, even with an annual £2k-3k utility bill, there is still a lot more rental profit being generated.

The running cost for a HMO is typically higher and requires more time and effort due to more health and safety guidelines. Here are some of the most common pros and cons of HMOs:

Pros of HMOs

1. More profit – just like many property investments, a HMO can bring in high yields. However, because you are renting to multiple tenants, you are a lot more likely to get a larger return on your initial investment.
2. High demand – the demand for shared living accommodation is a lot higher than a sole tenancy due to tenants seeking more affordable rooms to rent.
3. Fewer void periods – If a tenant moves out, not only is it easier to find a replacement for the vacant room due to high demand, but you still have several other tenants paying their rent to you.

Cons of HMOs

1. Licencing – HMO properties are subjected to tighter regulations than standard buy to let properties due to stricter health and safety orders. Many HMOs require a licence to be legally let out, while some may require planning permission.
2. Finance – HMO investors will often purchase a regular family home and convert it into a co-living property, which in itself needs a big budget. This means the property cannot be classed as HMO until it is fully converted and the investor will have to consider a different form of bridging finance until then.
3. Higher costs – As stated above, investors are expected to have a bigger budget for converting normal properties into HMOs. Since they are let on a room-to-room basis, they are almost always fully furnished and ready for a tenant to move in. With that being said, more funding is required up front to prepare the HMO for the rental market.

HMO Lenders

Most HMO mortgage lenders will require landlords to be experienced in letting property, whereas a handful would consider new landlords without any experience with rates offered higher than average. Some lenders may also have a preference in who manages the HMO property, whether it being an agency or a private landlord. The mortgage process is very comprehensive compared to a standard buy-to-let mortgage, which is why HMOs tend to be offered through qualified mortgage brokers and not direct to landlords.

Lenders may request information from the landlord such as the location of the HMO, experience of being a landlord, the number of lettable rooms, rental income, management type and types of tenants (students, professionals, housing association). Lenders may also take additional mortgage assessments, which include assessments of the landlords affordability, the amount wished to borrow and the landlords credit score.

HMO licence and planning permission

Not all HMOs require a licence. However, you may require one if your HMO has five or more individual tenants. Smaller HMOs with less tenants may not, but as many local authorities operate additional licensing, it means all HMOs in the area must be fully licensed too. The average cost of a HMO licence in the UK varies from around £600, but it depends on the authority as some may be as little as £60 and some may even go up to £1000. A separate licence is needed for each HMO property you own. Failure to apply for a licence is a criminal offence and can result in a civil penalty and/or a fine.

Some HMOs also may require planning permission, however not all – it all depends on it’s location and the size. A property that will become a HMO will always require planning permission if it will house more than seven occupants. Smaller HMOs, for three to six people, will usually fall under permitted development, meaning no planning permission is needed.

If your local authority has an Article 4 direction in place which restricts permitted development rights, all HMOs will require planning permissions – no matter what size it is and how many people it is for.

Compliance

As well as licensing, which should be usually renewed every five years, HMO landlords must also follow all of these regulations:

• Make sure all fire safety measures are in place, such as smoke alarms on each floor and fire escapes if the HMO property is a multi floor building (ie. flat, hostel)
• Have carbon monoxide detectors installed in each room with a solid fuel burning appliance
• You must have an Electrical Installation Condition Report (EICR) carried out every five years
• Have an annual gas safety check carried out
• Ensure the property is not overcrowded
• Undertake Right to Rent Immigration checks on each adult applicant
• Make sure there are more than enough cooking and bathroom facilities for the number of tenants
• Provide rubbish bins
• Repair and maintain the structure and exterior of the property, water systems, gas pipes, electrics and sanitary ware

Health and safety standards for HMOs are strict and taken very seriously by the local authorities. Local councils will listen to the tenant’s complaints and ask landlords to address any issues they deem to be below par. Failing to comply may end in prosecution of the landlord and in extreme cases, the council may even take over the managerial duties of an HMO themselves.

HMO Council Tax and Bills

In a sole tenancy, which is a single person or a family renting the whole property, it is usually their responsibility to pay council tax and bills such as gas, electricity and water. Whereas in most HMOs it is a landlords job.

When you have a joint tenancy, which is when a group of tenants are only renting rooms and sharing facilities such as bathroom and kitchen, the landlord would cover the utility bills and council tax in most cases.

In some cases, there can be a group of friends renting out a property which might not be classed as a HMO, and they might have to cover those bills themselves. It all comes down to the tenancy agreement and it’s important to discuss it with your tenant first.

Talk to a Promise Money adviser for more details

Pages which others have found useful…

Buy to Let Overview Landlord Property Investor Loan First time buyer Buy to Lets Electrical Safety Standards

Latest Articles

Whole-of-Market Guidance for Hmo Property Mortgages

Securing competitive terms on hmo property mortgages requires expert underwriting knowledge. In addition, our specialist broker team works directly with over 90 specialist lenders across the UK.

Consequently, reviewing your hmo property mortgages options with an FCA-authorised specialist credit broker ensures whole-of-market access while avoiding unnecessary fees and delays.

Specialist Underwriting & Whole-of-Market Access

Because specialist lending facilities require bespoke underwriting, comparing lenders across the UK is essential. Explore our complete guide to Buy to Let Mortgages to understand how different lending criteria apply to your requirements.

Promise Money is an independent credit broker authorised and regulated by the Financial Conduct Authority (FRN 681423). Our experienced team reviews your specific circumstances to secure optimal terms across 90+ UK lenders.