What is an HMO & Are They a Good Investment?

Investing in property is a great way to diversify your income and is a great way to create passive earnings; but which type of property should you choose? In this article, our property investment consultants discuss HMOs. We deep dive into what they are, their legal requirements, and whether or not they are a good investment. 

So, what is an HMO? An HMO, also called a house share, means a house of multiple occupations. This essentially means at least three people live on the property who aren’t from the same household, but all share living areas. Common examples of HMOs include shared student houses, flat shares, and property guardianship. 

Is an HMO a good investment? In short, yes, they are a good investment. They allow you to get a rental income from multiple tenants from the same property, which you can’t do with a traditional single-tenant property. This increases your average rental yield, whilst keeping your costs and time investment low.

Read on to find out more about the legal requirements for HMO property owners, or to find out more about why they are a great choice for property investors.

What is Meant By an HMO?

A HMO means a house in multiple occupations. They are properties that are rented to three (or more) individuals that aren’t a single family. This means that they will all have separate rental agreements with the landlord.

HMOs aren’t a block of flats with single living units, but instead tenants living in houses in multiple occupations share some facilities, like a kitchen, bathroom, or living room, but also have their own space to enjoy. 

The most common types of HMOs include:

• Student housing
• House or flat shares with young professionals

Is an HMO a Good Investment?

Houses of multiple occupations are a good investment for most landlords. They come with several benefits, with the most important, of course, being the higher ROI (return on investment). The rental yield for a single unit is usually around 5-7%, however the return on a HMO is between 8-12%. 

There are more costs to consider when dealing with multiple tenants, which are usually students, however you can rent each room of the house separately, meaning there are multiple sources of income, all from the same property!

Below, we list some of the positive and negatives of investing in a house of multiple occupation:

The advantages and disadvantages of HMOs

The Pros

The Cons

Rental yield, which can be as high as 10% per annum You are less impacted by void periods if a tenant moves out, as you’ll still have rental income coming in from everyone else Often a high demand for HMOs, even during times of economic uncertainty Greater economies of scale – although there will be more wear and tear due to multiple occupants, generally you benefit from having only one kitchen or bathroom to take care of.

Some HMOs may require more time from an investor as they are much larger & complex to manage HMOs are usually more expensive than a single-family unit If an HMO is your first investment, you may struggle to get financing You typically attract students and younger people who can sometimes cause problems (like being noisy, causing damage etc.) If your HMO is rented to students, you may have void periods during the summer months.

HMOs: The Legal Requirements

If you are considering an HMO property as your next investment, you must consider the following legal aspects, which we outline in more detail below:

Minimum Room Sizes

Not all spare rooms in your property can be rented, and you cannot rent out a room that is less than 4.64 m2 (and you can’t include areas in your measurements that are less than 1.5m high).

The Houses in multiple occupation and residential property licensing reform from 2018 states;

The minimum sleeping room floor area sizes are:

• 6.51 m2 for one person over 10 years of age
• 10.22 m2 for two persons over 10 years
• 4.64 m2 for one child under the age of 10 years

HMO Licences

If your property is let to five or more tenants from two or more households then you are legally required to have an HMO licence. If you own multiple HMO properties, separate licences are required for each. HMO licences will need to be renewed once every five years.

Do You Need an HMO Licence for Three Tenants?

You may still need a HMO licence if you have three or four tenants from different households. These are called Additional HMO Licences, and have been introduced by some (not all) councils. 

How Much is an HMO Licence?

The cost of a HMO licence will vary from council-to-council, with some costing as little as £397 going up to £1,300. Some local councils may require you to pay both an application fee and a grant fee on top of your HMO licence cost. If you want an exact figure for your HMO licence, check with your Local Planning Authority or get in touch with our team for help

HMO Safety Requirements

As with any rental property, you are responsible for the health and safety of your tenants. This includes:

• Compliance with the Fitness for Human Habitation Act of 2018 (avoiding damp, providing a clean water supply, offering plenty of drainage & ventilation)
• Ensuring gas appliances are checked by a Gas Safe registered engineer each year
• Installing fire doors and only providing furniture that meets fire-resistant regulations
• Getting an Electrical Installation Condition Report (EICR) and certificate for all electrical appliances

These are just some of the health and safety that you must consider as an HMO landlord. It is important to note that specific requirements may differ between local authorities so it is always best to do your own research. 

These are just some of the things to consider before buying an investment property. Find out more in one of our recent blogs: 10 Things To Consider Before Buying an Investment Property

Final Thoughts – Are HMOs a Good Investment?

Although houses of multiple occupations may seem like a lot of work at first, they are generally a safe (and very lucrative) investment. You’ll benefit from greater economies of scale whilst having the safety net of multiple sources of rental income from the same property. 

If you don’t have the time on your hands to manage an HMO, you should consider a property management company like Valor Properties. We’ll manage everything from tenancy agreements to cleaning, electrical certificates, renovations, repairs and more. Get in touch with us today to find out more or read our ‘Property Investments For Beginners’ guide.

Tailored Investment Advice From Valor Properties

If you aren’t sure if an HMO is right for you, or if you don’t know where to start with your next property investment, why not get in touch with us? We have a team of property experts, with a wealth of experience in renting multiple properties, sourcing off-market houses, renovations, development and much more. 

Not just that, but we guarantee a 15% return on investment when you choose to invest with us. 

To get started, book your free consultation by completing our contact form. Alternatively, get in touch with our team via phone or email.

Related Questions

Is an HMO Worth More Than a House?

An HMO is usually much bigger than a standard house, however, this isn’t always the case, and size isn’t the only factor considered when deciding a property’s value. A property valuer will also look at the amenities, the location, and street name, as well as the property’s age and condition. 

HMOs are usually worth more to property investors and landlords as they can earn much more rental income compared to a standalone family home or flat.

Are HMOs More Profitable?

Compared to a standard family home, yes, HMOs are more profitable. Instead of renting a three-bedroom house to one family, for example, paying £1000 per month, you could instead rent the three bedrooms to three individuals who would be willing to pay £500 each per month for the same space.

It is also well known that banks and lenders see houses of multiple occupations as less of a risk because they generate more income, so they would be more likely to offer you financing for your property.