The term HMO stands for houses in multiple occupancy and by their nature are usually quite large and expensive structures that offer the experienced property investor the opportunity to obtain much high rental yields than would normally be expected from individual flats and houses.

Investment attractions of HMO’s

  • Student accommodation – Investors would seek out large properties in close proximity to universities and colleges where there is always a high demand for accommodation during term time. These are usually situated in City centres and are equally sought after out with term time as temporary visitor accommodation.
  • Young Professionals – These properties will be of high standard and located in cities will where units contained in the building will be suitable for couples or small families. The Tenants will often be young professional types starting out in their careers.
  • Bedsits – A bed sit is usually defined as a one room unit of accommodation typically consisting of a combined bedroom and sitting room with simple cooking facilities. They are basic but with this arrangement the tenant retains full privacy while while living on a low budget.
  • Mixed accommodation units – This is where the building contains a mix of accommodation units and commercial units such as shops or offices.

Investor licensing requirements for HMO investment

Local authorities will require any investor in HMO’s to apply for a license if the proposed HMO will incorporate any of the following:

  • Three or more unrelated people in occupation.
  • If it contains three or more rooms that are self-contained units. This applies if these rooms have a separate lock on the door and some form of washing facility.
  • If three or more separate tenancy agreements exist for the property.
  • A building of three storeys or more could be classed as an HMO but not in all cases.

Regardless of the specific terms of licensing required by a particular council authority, most lenders will treat any property with more than one tenant as an HMO for mortgage lending purposes.

Licensing of mixed accommodation HMOs

Where the HMO is a mixed use building it will still be licensable by the local authority and subject to the licensing criteria stated above. However for the purposes of calculating the number of storeys any business/commercial floors are included (whether they are above or below the residential accommodation).  However, the business accommodation is not included in the part of the property which is licensed.

General Lending criteria for HMO’s

All Lenders will all have differing criteria for HMO’s but here are some very general guidelines.

  • Maximum age 70 at application
  • Minimum property value £100,000
  • Maximum LTV 65%
  • Maximum loan size £750,000
  • Investor experience: at least 2 years with normal rental property and or 1 year with an HMO
  • Rental cover will be assessed on a multi-tenanted basis
  • All let properties will be subject to an Assured Short-hold Tenancy agreement of a minimum of 6 months.

Expect interest rates on mortgages for HMO’s to be higher than normal rental property but not as high would apply to commercial mortgages.

Advantages and disadvantages of investing in HMOs

Investors considering purchasing an HMO should consider the advantages and disadvantages this may give, particularly if the investors experience has only been with normal rental units.

HMO advantages

  • Shorter void periods – As it is very unlikely all your tenants will leave at the same time, you should always have some tenants in place even if you’re not at full capacity
  • Higher investment returns – Being able to let the HMO by the room rather than as a whole, will normally generate a higher monthly rent and consequently a better overall yield.

HMO disadvantages

  • Investor experienced – With the additional regulations and safety requirements required for HMO’s the investor will have more work to comply with the licensing rules and with a much higher turnover of tenants, a lot more paperwork handle.
  • Higher Investment Requirements – HMOs are much larger than single lets and will be much more expensive to buy. Where you are converting a suitable property into an HMO, there will be the additional renovation costs to consider.
  • Increased Work and Maintenance – Tenants don’t tend to stay as long in HMO’s and finding a constant flow of new tenants requires effort. Maintenance will be higher as tenants who know they probably won’t be staying very long are generally less careful about looking after the property.
  • Disposing of HMO’s – Unless someone views an HMO as being ideal to convert into a residential home, HMO’s are only likely to appeal to other investors. This limits your available market and may lengthen the time taken to realise your investment.