What defines an HMO property and what are the benefits of investing in one?

Property Forum’s HMO series covers everything you need to know about sourcing, renovating, financing and managing a successful HMO (House of Multiple Occupancy) property. As well as being jam-packed with helpful links, facts, and guidance, our articles also contain professional tips from Property Forum’s CEO Nicholas Wallwork, as he draws on his 20+ years as a multi-millionaire HMO investor and developer.

What exactly is an HMO?

An HMO is a property that’s rented to multiple tenants, with separate tenants renting separate bedrooms (as opposed to a standard buy-to-let property where the whole property is let to one person or family). In other words, you’ll have a separate tenancy agreement with each tenant living in the property, and you’ll be charging on a room-by-room basis.

For example, a three-bedroom house could be turned into an HMO, with the bedrooms rented to three separate tenants. (Even better if you could use one of the reception rooms as an extra bedroom and rent the property to four separate tenants…)

In the UK, this model is becoming increasingly popular with investors because it usually achieves a significantly higher rental yield than a traditional buy-to-let. That said, there’s usually more work involved than a standard buy-to-let, and there are important planning and licensing rules to consider.

What defines a HMO?

In England, an HMO is any building or part thereof which meets one of the following criteria:

  • A house or flat with at least three tenants living there, forming more than one household (a household being a single person, couple or family), where occupants share one or more basic amenity (a basic amenity being a toilet, bathroom, or cooking facilities). This is known as the ‘standard test’. Note that this means a self-contained flat may count as an HMO if it meets these occupant/amenities criteria, and this is known as the ‘self-contained flat test’.
  • A building that has been converted and is not entirely comprised of self-contained units (the ‘converted building test’).
  • A converted block of flats where the standard of the conversion does not meet Building Regulations, and where fewer than two-thirds of the flats are owner-occupied. This is known as a ‘section 257 HMO’.
  • A building that is declared an HMO by the local authority (known as an ‘HMO declaration’).

  • A property does not count as an HMO if:

  • It is occupied by an owner/occupier, members of their household, and no more than two tenants.
  • It is only occupied by two people who form two separate households.
  • It is a converted building that entirely consists of self-contained flats, where the flats each have their own self-contained toilet, bathroom and kitchen facilities. (But remember, a self-contained flat in itself may count as an HMO if it’s rented to three or more separate tenants who share amenities.)

  • Various other properties, such as care homes, prisons, boarding schools, halls of residence, or properties occupied by religious communities are also excluded from HMO definitions.

    If you are not sure whether your rental property classes as a HMO, ask a question in Property Forum’s HMO chat forum using this link.

    Why invest in HMOs at all?

    There are some big advantages to investing in HMOs:

  • Because you’re charging on a room-by-room basis, you usually earn more than you would with a regular buy-to-let model. In some areas, you may even be able to double your rental income.
  • HMOs are a pretty low-risk investment. This may seem counter-intuitive when you’ve got more tenants to manage, plus the added complexities of licensing and planning restrictions, but many consider HMOs a lower risk than buy-to-lets. In an HMO, even if one bedroom sits empty for a while, a landlord will still be earning money on the other rooms in the property – plenty to cover the bills and mortgage. (Compare this to a property rented to one household; if the property sits empty for a month, you have no income coming in at all and will have to cover costs yourself.)

  • However, there are some downsides to consider:

  • There’s a fair bit of red tape around HMOs. Mandatory licensing and planning rules mean HMOs are less straightforward than renting out a property to one household. If you’re going to manage the HMO yourself (and you probably will in the early days), expect to put in plenty of time and effort on finding tenants and managing the property.
  • As you scale up your HMO portfolio, you may eventually want to outsource some or all of this work to a managing agent or your own team.
  • Your costs will be higher. Even if you manage everything yourself, you’ll still have plenty of costs to cover. Utility bills, insurance, ongoing maintenance – the more people you have sharing a property, the higher these costs will be. However, this is offset by the higher rental yield.

  • Use the catagory search menu at the top right of the page to see all other HMO articles in this series. You can also download our free HMO ebook (written by our CEO Nicholas Wallwork) and ask any questions in the HMO forum.

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