This article provides a guide to Houses in Multiple Occupation (HMO). It will define a HMO and provide information for landlords and managers who own or manage a HMO and tenants who reside in one.
1. What is a HMO?
A HMO is defined in The Housing Act 2004 but, determining whether a property is a HMO is not straight forward and this article will attempt to provide a simplified definition. A more detailed definition is included in the K&G Lettings Limited article A Landlords guide to Houses in Multiple Occupation Legislation.
The designation of a property as a HMO is determined by the number of households occupying the property; the number of individuals occupying a property, and the number of storeys the property consists of.
There are two types of licensable HMO as defined by The Housing Act 2004, these are:
- HMOs that require mandatory licensing: A three storey property being occupied by 5 or more persons forming two or more households. These HMOs must be licensed according to the Housing Act 2004.
- HMOs that require additional licensing: A two storey property occupied by 5 or more persons forming two or more households is an HMO. Licensing of these HMOs is at the discretion of the local council.
1.1 Number of storeys
For a house to be defined as a HMO the property must be 3 storeys or more high. The following properties are defined as consisting of 3 storeys or more:
- A habitable basement and two other floors.
- A mezzanine floor and two other floors.
- A ground floor, rear annex and stair to the front part of the property e.g. a traditional Victorian mid terrace property.
1.2 Number of households
In addition to three or more storeys, a HMO property must have two or more households living in a property. A household is loosely defined as being a family, couple, or single person who are related to one another, or in the case of a couple, are living together as man and wife. A relative is defined as: Parent, grandparent, child, uncle, nephew, niece, brother, grandchild, sister, aunt, cousin.
According to this definition, two unrelated, single individuals living together would comprise two households. A family comprising of a married couple and two children who rent a room to an unrelated individual would be considered two households. However, two related singles living together would be deemed a single household.
1.3 Number of individuals occupying a property
The number of individuals occupying a property is simply the number of individuals living in a property. For example a property consisting of two single people would have 2 people occupying the property. A family comprising of a married couple and two children who rent a room to an unrelated individual would be considered as comprising 5 people.
1.4 Examples of HMO
In line with the definition of a HMO (three storey propery, occupied by five or more individuals, forming two households), the properties most likely to fall within its definition are:
- A house consisting of bedsits.
- A house or flat share with the occupiers having separate tenancy agreements.
- A hostel.
- A bed-and-breakfast hotel used not just for holidays, for example includes longer term residents.
- Student accommodation. This excludes student accommodation owned by educational establishments, such as halls of residence.
2. Added responsibilities of a HMO landlord
If a property has been designated a HMO, the landlord will have more responsibilities than with a traditional rental property. These responsibilities include:
- Ensuring the property is not overcrowded.
- Communal areas are well maintained.
- Adequate cooking and washing facilities are provided.
- Adequate facilities for removing refuse.
- Fire safety measures are in place and being followed.
A landlord can be reported to the local council by a tenant should they not fulfil these responsibilities. If a landlord is found to have breached one of the requirements of their licence they will have committed a criminal offence and are liable to be fined. More details on the costs to a landlord of breaching the HMO licensing can be found in the K&G Lettings Limited article ‘A Landlords guide to Houses in Multiple Occupation Legislation’.
3. Reporting landlords for not complying with their licence
Tenants can report landlords who do not comply with their licence and meet their added responsibilities by contacting the council who granted the license. Complaints are usually directed to the Environmental Health Department who are normally responsible for enforcing the licenses granted by a council.
4. Investing in HMOs
Investing in HMOs is one sector of investing in residential property and one that can produce a high cashflow. When investing in HMO property, the cliché of location, location, location is key, more so than with single dwelling properties. This is because the demand for this type of property is usually concentrated in a smaller geographical area.
In the instance of student accommodation, which form a significant number of HMOs it is essential to be located close to a University or college. Additional demand for HMOs exists in areas with high house and rental prices (e.g. London), where young professionals are unable to purchase or rent affordable property. The demand for HMOs let to young professionals is not as geographically concentrated when compared to student accommodation, however, proximity to transport links is an advantage.
When compared to traditional let properties HMOs have a number advantages:
- Greater income: In comparison to a rental property occupied by a single person/family, HMOs provide greater income. This is due to the greater number of people paying rent who live in a single property. This is by far the greatest advantage of HMOs.
- Guaranteed rent: If renting to students (which form the majority of HMO tenants) you are likely to rent the property for an entire year.
- Fewer evictions: If renting to students they are more likely to move in for a year and you are therefore less likely to have to deal with evictions.
- Spread risk: In comparison to a rental property occupied by a single person/family, you are at a lower risk of rental voids. This is because you are likely to have a tenant(s) providing you with rental income whilst advertising any unoccupied room.
However, HMOs have several disadvantages; these include but are not limited to:
- Higher mortgage rates: HMOs are usually required to apply for a specialist HMO mortgage, which often have a higher interest rate. It is recommended a mortgage broker is consulted for expert advice.
- Higher insurance rates: HMOs are usually required to purchase more expensive specialist insurance to cover the additional occupants when compared to a single rental property.
- Additional costs, time and bureaucracy: Additional costs, time and bureaucracy of getting the property licensed and complying with these licenses.
- Higher levels of maintenance: Due to the added wear on the properties shared facilities.
- Greater levels of management: As a result of a greater number of tenants and probable high frequency of tenant turn over.
- Costs to convert to, or from a HMO: There are stricter requirements on the construction of HMOs and conversions must meet more restrictive building regulations. It is recommended the local council is consulted to determine the exact requirements.
The disadvantages above appear to outweigh the advantages but, HMOs remain one of the best ways to maximise the rental potential of a property and ensure the highest possible cash flow. This factor alone can help investors to quickly build up a portfolio of rental properties.