How to reap the rewards of a successful rental business

HMO stands for ‘Houses in Multiple Occupation’ – a dwelling leased out to multiple people or households, comprising single occupants, families or cohabiting couples. Becoming an HMO landlord can be an incredibly rewarding experience and with careful planning, you’ll reap the rewards of a successful rental business.

However, it’s important to understand that HMOs operate differently from traditional single lets. Letting to multiple tenants on a per-room basis can yield to two to three times the rental income compared to letting the same property to a single household.

ESSENTIAL QUESTIONS AND TOPICS YOU SHOULD CONSIDER

Before investing in your first HMO, there are essential questions and topics you should consider. These include: What regulations do I need to follow? What additional costs do I need to factor in? How much time will need to dedicate to this investment? What kind of tenant mix is best for an HMO property? How often will I need to inspect my property?

Answering these questions will help ensure you’re well-prepared for the unique challenges of being an HMO landlord and get the most out of your investment.

TRADE-OFF BETWEEN RENTAL INCOME AND CAPITAL GROWTH

When considering whether to convert your property into an HMO, you will need to take into account the following factors. Your expenses may increase due to increased wear and tear from multiple tenants, as well as higher mortgage costs and additional safety requirements. This means that not all of the extra income will be profit.

Properties located in areas where HMOs are permitted and room rentals are in demand might not appreciate in value as much as single-let properties. This could mean making a trade-off between rental income and capital growth.

SPECIALIST MORTGAGE AND INSURANCE

Managing an HMO takes more effort than managing a single-let property. Tenancy agreements need to be drawn up for each tenant and they tend to move in/out at different times. As they usually don’t know each other, more time may need to be spent ensuring a harmonious living arrangement between them.

Investing in an HMO requires a specialist mortgage and insurance as mortgage providers consider having multiple unrelated tenants in a property to be  a higher-risk investment than letting to one household. HMO mortgages have different lending criteria and usually come with higher interest rates compared to traditional buy-to-let mortgages.

MEET ALL RELEVANT REGULATIONS before letting it out.

HMOs are subject to more legislation than ‘normal’ lets due to the higher risk associated with having multiple unrelated tenants living in one property. So ensure that your HMO meets all relevant regulations before letting it out.

Licensing your property is required if you have five or more tenants that form multiple households. However, each local authority may require additional and/or selective licensing for smaller HMOs. If the property you purchased was not an HMO when it was bought, you may need to obtain planning permission from the council in order to make a change of use.

ROOM SIZE REQUIREMENTS MUST ALSO BE MET

Fire safety is a major responsibility as well. Fire doors must be placed on escape routes, fire extinguishers must be provided on each floor level, and mains-powered interconnected fire alarms (including smoke alarms in every bedroom and heat alarms in the kitchen) must be installed. Room size requirements must also be met – if two people are sharing a room, it has to be at least 10.22 m² with minimum height regulations applied.

When it comes to renting out your HMO, including bills in the rent is a great way to make the process easier for both you and your tenants. You’ll be able to keep track of their usage with a smart meter and decide on a fair price that won’t overcharge them – especially in today’s energy crisis.

ENSURE THAT EVERYONE PAYS THEIR SHARE OF THE EXPENSES

It is better to have your property fully let at a slightly lower rate than have rooms sitting empty, so make sure you include all relevant bills such as council tax, electricity, gas, water, WI-FI and TV license. This will also help ensure that everyone pays their share of the expenses. Maximising your HMO investment success requires working with a buy-to-let expert possessing a good understanding of the local market.

When dealing with multi-lets, it’s particularly important to consult an agent experienced in this area and well versed in what to purchase, legal requirements, and effective property and tenant management. Regularly reviewing rental costs is essential for increasing profits over time.

Don’t forget, our professional friendly advisers are on hand to support you and can help you explore all of your options.