Are you interested in investing in property? If so, you may want to consider House of Multiple Occupations (HMOs). HMOs are properties that are rented out to at least three individuals who are not from the same household. This type of investment can be a great way to generate high yields and reduce your risk.
What is an HMO?
An HMO is a property that is rented out to at least three individuals who are not from the same household. This type of accommodation is often seen among university students or working professionals. HMOs can be egorised into various types, including:
- Student HMOs: These houses are typically located near educational institutions and cater to students.
- Professional HMOs: These properties are often situated near high employment areas with good transport links and are targeted at working individuals.
- Mixed-Use HMOs: These properties are rented out to a combination of professionals, students, and other tenants.
- Retirement HMOs: These houses are designed for retirees and might have on-site staff.
- Affordable HMOs: These properties offer below-market rates for low-income tenants, landlords often receive government subsidies for this service.
- Special Needs HMOs: These properties are designed with accessibility features for individuals with disabilities such as; ramps, accessible bathrooms, and widened door frames.
How to find the right HMO property
If you’re interested in investing in an HMO, there are a few things you need to keep in mind when looking for the right property. First, you need to make sure the property is located in a desirable area with good access to amenities, transportation, and employment opportunities.
Second, the property should be large enough to accommodate at least three tenants comfortably.
Finally, you should consider whether the property is located in an area that is undergoing regeneration, as this could increase its value over time.
There are a few different ways to find HMO properties. You can search online platforms like Rightmove, Zoopla, and OnTheMarket. You can also contact estate agents or letting agents who specialise in HMOs. Additionally, you can attend networking events or ask for recommendations from friends or family.
What Is Article 4 and Its Impact on HMO Investments:
What is Article 4?
Article 4 is a regulation used by local councils in the UK to control the proliferation of HMOs in specific areas. It is designed to address concerns about the impact of HMOs on the character of neighbourhoods, particularly in areas dominated by single-family homes.
When a local authority designates an area as subject to Article 4, it means that property owners looking to convert a dwelling into an HMO must obtain planning permission before doing so.
- Designated Areas: Article 4 is a rule used by local councils in the UK to manage the growth of HMOs (Houses of Multiple Occupations) in certain areas, typically where there are many single-family homes, to maintain neighbourhood character.
- Planning Permission: In these Article 4 areas, you must obtain permission from the local council to convert a house into an HMO, which involves them assessing its suitability based on factors like location and its impact on the local neighbourhood.
- Penalties for Ignoring It: Failure to comply with Article 4 can result in serious consequences, including being required to reverse the property to its original use or facing fines and legal actions.
Why It Matters:
- Limited Options: Article 4 restrictions can limit your choice of investment properties for HMOs, so not all areas allow for such investments.
- Extra Steps: Getting planning permission can be a time-consuming and costly process, which investors need to consider when evaluating the feasibility of an HMO project in Article 4 areas.
- Risk: Not checking Article 4 rules can lead to legal complications and financial setbacks, making it essential to conduct due diligence on local regulations.
- Keep Updated: As rules can change, it’s crucial to stay informed about any updates or changes in Article 4 regulations from your local council.
Converting a property into an HMO
If you’ve found a suitable property and want to convert it into an HMO, there are a few steps you need to take.
First, you need to ensure that the property complies with Article 4 regulations, which dictate HMO conversions.
Second, you need to consider whether you have the local knowledge and experience necessary to manage the conversion process.
Finally, you may want to seek professional assistance, especially if you are investing remotely.
Managing an HMO
Managing an HMO can be challenging, but there are a few things you can do to make the process easier.
First, you should consider working with a trusted letting agent to handle day-to-day operations.
Second, you need to decide whether you want to actively manage the property yourself or outsource the management to a third party.
Legal requirements for HMOs
Running an HMO in the UK entails meeting legal requirements that vary based on property size and location. Key obligations include:
- Adhering to fire safety, electrical safety, and gas safety regulations.
- Obtaining an Energy Performance Certificate (EPC).
- Forming tenancy agreements and, if applicable, securing planning permission.
- Handling council tax, utility bills, and proper insurance coverage.
Financial aspects of HMO investment
Running an HMO involves operational costs, including utilities, repairs, cleaning, and more. Property management services can be considered to alleviate the burden.
Additionally, council tax is a local tax applicable to properties. While required for HMOs with five or more tenants, local regulations might differ.
Here ia a break down of some of the potential costs:
- utilities: This includes gas, electricity, water, and internet.
- maintenance: This includes repairs, cleaning, and pest control.
- property manager: This is optional, but it can be helpful if you don’t have time to manage the property yourself.
- council tax: This is a local tax that you have to pay for all properties in the UK.
- insurance: This is to protect your property from damage and liability claims.
- An HMO licence: This is required if you have five or more tenants. The cost varies depending on your local authority.
Selling an HMO
When it comes time to sell your HMO, it’s important to provide potential buyers with all relevant paperwork to ensure a smooth transaction. This includes:
- HMO licence (if required): This is a legal document that allows you to rent out your property as an HMO.
- Tenancy agreements: These are contracts that set out the terms of your agreement with your tenants.
- Rent payment records: These show how much rent your tenants have paid and when they have paid it.
- Safety certificates: These certificates show that your property meets the relevant safety standards.
- Fire risk assessments: These assessments show that your property is safe from fire.
- Test certificates for fire alarms and emergency lighting: These certificates show that your fire alarms and emergency lighting are working properly.
- Building regulations certificates: These certificates show that any work you have carried out on the property complies with building regulations.
- Floor plans: These show the layout of your property.
- Management contract (if you have one): This contract sets out the terms of your agreement with your property manager.
- EPC (Energy Performance Certificate): This certificate shows how energy-efficient your property is.
- Accounts: These show the financial performance of your HMO.
Pros and cons of HMO investment
HMOs can be a great investment opportunity, but there are also some potential drawbacks to consider. Here are some of the pros and cons of HMO investment:
Pros:
- Higher yields compared to traditional buy-to-let properties.
- Lower risk due to multiple tenants covering expenses.
- Increasing demand due to changing living habits and rising rents.
Cons:
- Higher operational costs, including furnishing and ongoing maintenance.
- Complex management tasks and potentially time-consuming nature.
- Challenges in securing HMO mortgages compared to standard buy-to-let properties.
In conclusion, HMO property investment offers great potential but requires careful planning and management. By understanding the basics, legalities, and considerations associated with HMOs, beginners can embark on a successful journey into the world of property investment. Remember, seeking professional guidance and leveraging available resources can contribute to your success in this rewarding endeavour.
About the Author
Scott Macpherson is the co-founder and Property Acquisitions Director of Think Property, a company that helps busy professionals invest in property without having to do any of the hard work involved. Think Property’s services include property sourcing, financing, renovation, and tenant placement. This saves clients time, money, and energy, allowing them to focus on their careers and other priorities.
Scott is also a passionate educator and regularly shares his knowledge of property investment through his YouTube channel, where he posts educational videos every week!
