Investing in a HMO: What You Need to Know

Rent in the UK

Average rent prices are still on the rise virtually everywhere in the UK. House of Commons library rental figures show that rent prices have risen by as much as 11.5% in just one year; with rent in London increasing by 27.4% since the general election in 2010.

In addition to this, competition for available accommodation is fierce. In London and Glasgow each room in a HMO (house of multiple occupancy) receives about 10 applicants – demonstrating the strength of the current rental market.

HMO Opportunities

In light of this information, it’s easy to see why so many investors are choosing to place their money in property – particularly in HMO, where rental yield is potentially significantly higher. However, it’s a competitive market, and in order to generate good returns, it’s important to understand what’s involved with purchasing and maintaining a HMO property.

What is an HMO?

A HMO (House of multiple occupancy) is classed as a property where there are:

• Three or more tenants (not related) who come from more than one household.

Purchasing an HMO – A Guide

When purchasing a HMO, you’ll need to consider the following:

1. A Property cannot be occupied as an HMO until a licence is granted. It is an offense to operate without a licence. Each council issue the HMO Licence, Glasgow is usually valid for 3 years from date granted, it may be issued for a lesser period if there were concerns over neighbours or failure to satisfy fire inspections.

2. Every landlord, regardless of the type of property they’ve invested in, must comply with government safety regulations. Councils have the right to assess your property for potential risks, and if you fail to comply with the safety regulations, you could face criminal prosecution. As a result, it’s imperative that you make sure your property is completely compliant before renting.

3. Number of tenants. You’re only legally allowed to rent to as many people as your licence permits. Your property will also be assessed to ascertain how many people can comfortably live within it. If you go over the specified number of tenants, you could face a substantial fine.

4. As landlord of a HMO, it’s your responsibility to manage and maintain the property and ensure your tenants safety. This includes:

• Being a registered landlord
• Ensuring your certificates are up-to-date
• Quarterly inspections and fire training
• Ensuring all communal areas remain in a good state.
• Keeping track of occupancy
• Ensuring there are smoke alarms fitted on every storey, plus making sure that fire escapes remain unobstructed.
• Ensuring waste disposal facilities are in place.

You are, of course, legally allowed to pass these responsibilities on to a property management company if you choose to do so.

Choosing the Right HMO Property

It’s a good idea to think first about who you want to rent your HMO to. This will have significant influence not only on what sort of property you want to invest in, but where in the country to base your search.

Maximising Rental Yield

When viewing properties, think about the following:

1. How many rooms? The number of rooms the property has will determine how many tenants you can realistically offer accommodation to. In theory, the more rooms you have, the higher the potential rental income.

2. Option to convert living space? There’s no law in place stating that you have to offer your tenants a lounge or dining area. If appropriate, you may be able to convert these spaces to create further bedrooms. You may also be able to sub-divide larger rooms. However, demand dictates that students like a separate living area.

3. Room requirements. Each bedroom, according to the law, must have an opening window and offer a minimum floor space, subject to the length and width of the room.

4. Appeal. It’s important to invest in a property that will appeal to your target market. For example buying close to universities.

Property Management

Managing a HMO property is more complicated than managing a straightforward buy-to-let however the greater rental yield is proving an attractive investment. This is especially the case if you’re building a property portfolio – as property management can be time-consuming.

Our team at Cairn are experienced in HMO Investment from taking you through sourcing the correct property, due diligence on HMO history, licence application, development to moving in the tenants and educating them on living in an HMO.