In 2004, the government introduced the need for an HMO license, and the act came into force in April 2006. This act is meant to help local authorities scrutinize landlords who rent to more than one tenant in their property.
What is an HMO?
HMO stands for Houses in Multiple Occupation, and this means a house occupied by several different tenants, each with their own separate tenancy agreements.
Like many rules issued by various governments and local authorities, the HMO act is caged in lots of ifs and buts. Under the new act, there are two kinds of HMO licenses: mandatory licensing and additional licensing:
- According to a landlord’s guide published by the Department for Communities and Local Government: “licensing is mandatory for all HMOs which have three or more storeys and are occupied by five or more persons forming two or more households”. Two or more households means different families or groups of people.
- Additional HMOs can be imposed by councils for a range of issues including bad management of the property that may cause problems to the tenants or the public.
Although these impositions could seem daunting to would-be landlords, and could put them off investing in HMOs, there are advantages in having a HMO in a property portfolio. This is because it is possible for a would-be landlord to buy a property and let it as an HMO without having to do too much extra work, and the landlord can then benefit from a greater return on their investment due to the rents generated by multiple tenants.
However, there are pros and cons of investing in small or large HMOs.
A small HMO
In theory, a person looking to invest in a property without laying out too much money could buy a three-bedroom house, but instead of letting to one family, the rooms could be let out to different tenants on different tenancy agreements. Converting other rooms, such as dining and living rooms, into bedrooms could generate even more rental income. This is permitted as long as space is left for a communal area.
The advantage of a small HMO is that any conversion work can be carried out speedily and cheaply. The property can then start generating income quickly. In addition, a small HMO may not require planning permission or an HMO license. However, it is wise to check with the local council to make sure there are no local HMO licensing restrictions in place.
A smaller HMO is relatively easy and affordable to revert back to a family home if the landlord wishes to sell the property. However, there are disadvantages to owning a small HMO property. Rental income will be restricted by the limited number of rooms in the property, and landlords will not be able to increase the value of the property by undertaking any major improvements.
A large HMO
There are several advantages of investing in a larger HMO. The main one is the better return on investment from the extra rents. But there is also less competition for properties which are suitable for converting to large HMOs, such as small hotels, B&Bs and large houses with plenty of land. These are ideal for HMOs, and are rarely targeted by owner-occupiers. With these larger properties, there is the opportunity to let to ten or twelve people, and this will generate more income than a small HMO.
But there are some disadvantages. There will be the upfront expense of paying for any refurbishments which might be needed, and obtaining the necessary planning and licensing applications may take up valuable time. This means there will be some delay before the property starts paying for itself. But, despite these obstacles, many investors are taking advantage of the higher income a large HMO property can generate.
So, what is right for you? Like most things in life, there is no right or wrong when choosing what size HMO property to invest in. It all depends on the investor’s long-term goals.