Houses in multiple occupation (HMOs) are in high demand by both landlords and tenants. For tenants, they provide a shared rental opportunity for those who are unable to afford rented accommodation on their own. As a landlord, you can reap the rewards of a higher rental income than you could with a standard buy-to-let property.
If you’re new to HMO investments, however, you should be aware that taking on this type of project is complex to set up and time-consuming to manage. Due to the nature of HMOs, there are strict standards and legal obligations to adhere to. At Trinity Finance, we’re highly experienced in dealing with HMOs. We have provided this guide to help you prepare for what’s ahead with your new venture.
HMOs vs standard buy-to-let properties
There are some distinct differences between HMOs and standard buy-to-let properties. A normal buy-to-let property is rented out to a single household, such as a family, couple or individual. One tenancy agreement is signed and one rental payment is made each month. The tenants are responsible for the utility bills.
An HMO, on the other hand, is inhabited by three or more unrelated tenants who share facilities, such as a kitchen, toilet and bathroom. Separate tenancy agreements are usually signed unless a joint contract is preferred, such as with a preformed group of students. Each tenant pays their own rent and, with this arrangement, you can charge a higher amount per person. This means you benefit from receiving a higher overall amount each month than with a standard buy-to-let arrangement. As an HMO landlord, you will usually pay the utility bills rather than the tenants.
The nature of an HMO property means that you need to adhere to certain standards. You will have increased responsibilities as a landlord and will need a specialist HMO mortgage to fund your investment. We’ll detail everything you need to know below.
Find the right location for your HMO property
Whereas standard buy-to-let properties are popular in any area, HMOs are sought after in specific locations. As HMOs are designed to suit certain types of tenants, you need to choose the right location for your property accordingly. For example, HMOs situated close to universities are popular with groups of students. Working professionals, on the other hand, prefer to live close to transport links and amenities.
Article 4 areas
When searching for a property to convert into a small HMO, be sure to check that an Article 4 direction doesn’t apply to the area. This can be applied by a local council to restrict the development of HMOs. Usually, you can change the use of a single dwelling (property use class C3) to a small HMO (class C4) without planning permission. If an Article 4 direction applies, however, this permitted development right can be overturned by the local planning authority. They can, therefore, insist that you obtain planning permission before creating a C4 HMO. Article 4 directions don’t apply to larger HMOs as they have a different class of property use.
To find out whether an Article 4 direction applies for the area you’re interested in, check the local authority’s website. Alternatively, contact our knowledgeable mortgage brokers – located throughout Kent, London and Edinburgh – who can find out for you.
If you’ve already found a property you’d like to buy in an Article 4 area, do some research to ascertain your chances of a successful planning permission application. Search for similar conversions and look at the planning records, submit a pre-planning enquiry or contact a local planning consultant for advice. Check the density of HMOs in the street as thresholds are set for each area. If the density is already high, your application will probably be refused.
Check whether you need an HMO licence
Another consideration to bear in mind is that some properties require an HMO licence. The need for licencing was introduced under the Housing Act 2004. This was to make sure that certain living conditions and standards of safety were met for this type of property. Mandatory licences are required for properties meeting specific criteria but local councils can insist on additional licences. This may be to control the number of HMO properties in a particular area, for example. It’s mandatory to have an HMO licence if your property is in Scotland or Northern Ireland. However, in England and Wales, it depends on the local council’s licencing requirements and the size of your property.
Properties classed as large HMOs must have a licence and your property will fall into this category if:
- It’s rented to five or more tenants comprising more than one household.
- The tenants share facilities, such as kitchens, toilets or bathrooms.
Smaller properties don’t necessarily need licences and this is determined by the local council. Check their requirements before you either buy a small HMO property or convert the use of an existing property to that of an HMO.
Licence costs and validity
It’s important to understand that HMO licences are issued for individual properties rather than one licence being granted for you as an HMO landlord. Each one is valid for up to 5 years and must be renewed before its expiry date. Scotland is the exception to this where licences are valid for up to 3 years.
The cost of these licences depends on each local council. Some have fixed prices while others base their fees on the number of bedrooms in a property. The fees can vary from hundreds to over a thousand pounds. Therefore, be sure to include this cost in your HMO investment calculations.
Penalties for not having a licence
If you need a licence for your property but rent it out without one, it’s considered a serious offence. You may be subject to an unlimited fine. Tenants can check whether HMO licences are in place for properties that require them. If you rent out an unlicensed HMO, your tenants can apply for a Rent Repayment Order to claim back the rent they’ve paid to you.
Approval for an HMO licence
Not all licence applications are approved. Local councils check the suitability of a property for HMO purposes as well as whether a landlord or agent is deemed to be ‘fit and proper’ to manage the property. The property must also meet strict safety requirements. These include having fire doors, adequate smoke alarms, a gas safety certificate and an Electrical Installation Condition Report. As part of the approval process, the local council will carry out an inspection of your property. Once the licence has been approved, they will make inspections throughout the licence term to ensure the property remains up to standard. If these inspections highlight a failure to adhere to the licence conditions, you can be fined and possibly have your licence revoked.
Don’t worry if you’re not sure whether or not you need a licence for your property. Our mortgage experts can advise you on the licencing requirements for the area in question and determine whether the type of property you’re interested in warrants the need for a licence. Just give us a call on 01322 907 000 and we’ll be happy to look into it for you. Alternatively, send your enquiry to us at email@example.com or via our contact form. We will reply to you as quickly as possible with more information.
Arrange your HMO mortgage
Due to the nature of HMO properties, lenders consider them to be more of a risk than standard buy-to-let properties. This is because they rented out to groups of unrelated tenants and the rental payments are made separately. There’s a higher turnover of tenants, more void periods and more wear and tear on the properties. There are also numerous legal obligations to comply with, certain standards to be met and possible licencing requirements. To mitigate this risk, lenders insist that a specialist HMO mortgage is used to fund this type of investment. As you may expect, HMO mortgages have stricter lending criteria plus higher rates and fees than normal buy-to-let mortgages.
Types of mortgages
Depending on your project requirements, there are different types of HMO mortgages available.
HMO mortgages and remortgages: These are for existing multi-let properties. Interest-only options are popular as this keeps the monthly repayments lower. Most lenders set a maximum loan-to-value (LTV) ratio of 75% for these mortgages. This means you need to have a substantial deposit available. Don’t worry if this may be a problem — we work closely with HMO lenders and can approach one with more flexible lending options if preferred.
HMO refurbishment mortgages: These are suitable for light or heavy refurbishment projects. If you have a property that you wish to convert to an HMO or an existing HMO property that needs to be upgraded, we can search for a suitable HMO refurbishment mortgage to meet your needs. Lenders tend to provide funds up to 75% of the property price or value. They expect the works to be completed within a specified time frame. We can try to arrange a deal for you that has a lower LTV while the works are in progress but allows you to switch to a higher LTV when they’ve been completed.
HMO development loans: If you’re planning an extensive build project, such as building a property from scratch or doing a large-scale conversion, you will need an HMO development loan. You can also use this type of short-term development finance for part-completed projects. For example, a building that has been partly constructed or a stalled development. Funds will be provided to you in advance to purchase the building or land. Additional funds will then be released in prearranged stages to cover the works needed.
Applying for a mortgage
Each type of HMO mortgage has different criteria to be met. For example, an HMO development loan is usually secured against the building that’s to be developed, you need an exit strategy and lenders prefer you to have experience with HMO properties and development projects. For an HMO refurbishment mortgage, on the other hand, lenders usually prefer you to be a homeowner or have had a buy-to-let investment for at least a year. Some may expect you to have refurbishment experience or own a certain number of properties as an investor.
For standard HMO mortgages, the property often has to have a minimum value or a maximum number of bedrooms. Some lenders will insist on an HMO licence. You are usually expected to be an experienced landlord before tackling an HMO investment. However, our mortgage specialists can help secure a mortgage for you if you’re a first-time landlord. Some lenders may insist that you use a third party to handle the management of the property on your behalf. Your affordability will be assessed and the expected rental income will usually be taken into account. As with standard buy-to-let mortgages, it usually has to be a certain percentage higher, such as 25%, than the amount due for your monthly mortgage payments.
Whichever type of mortgage you require, you can apply for the loan in your own name or via a limited company, a special purpose vehicle (SPV) or a limited liability partnership (LLP). If you choose one of the latter options, you can enjoy tax benefits. Our financial advisers can discuss this with you in detail to help you make the right decision.
We’ll find the right mortgage for your HMO needs
Whether you’re hoping to buy an HMO property, to convert an existing property for use as an HMO, to get started with refurbishment works or you have an extensive build project in mind, we can help secure the right HMO mortgage for you. Not all lenders offer HMO mortgages and those who do often only provide them via brokers. At Trinity Finance, we are highly experienced in HMO investments and have good relationships with lenders who specialise in this type of funding.
Our mortgage brokers, located throughout Kent, London and Edinburgh, are available to take an in-depth look at your HMO requirements and tailor your application to the right lender. We have access to flexible lending options that can suit you whether you’re an experienced or first-time landlord, prefer criteria without a minimum income requirement or need a high LTV. Simply give us a call on 01322 907 000 to get started with your application. If you prefer, send an email to us at firstname.lastname@example.org and one of our mortgage specialists will reply to you as quickly as possible.
Have the correct insurance cover in place
The higher risk factor of HMOs compared with standard buy-to-let properties means you need to have specialist HMO insurance cover in place. This type of insurance has different terms to standard landlord insurance cover. It is tailored to offer the right protection for the specific types of risks associated with HMOs. You need to register your property as an HMO before you can benefit from this cover. Be aware that when you apply for an HMO mortgage, your lender may require you to have insurance cover in place before agreeing to a loan.
HMO insurance costs
As HMOs vary considerably, insurance policies are tailored to account for this. The cost will depend on factors that include the size of the property, where it’s located, the number of tenants and more. One element that can increase your premium is if you allow the tenants to cook in their rooms. Instead, ensure there are suitable kitchen facilities for the tenants to share. By removing that extra element of risk, you’ll benefit from a cheaper rate. If you have more than one HMO property in your portfolio, you can arrange for them to be covered under the same insurance policy. That way, you can take advantage of a more favourable rate than if each property is insured separately.
What is covered under HMO insurance?
Whether your HMO property is purpose-built or a conversion, an entire house or flat, a house that’s been converted into bedsits or a building that’s been completely converted into flats, it can be covered with this type of insurance. Cover is also available for different types of tenants. These can include working professionals, students, those paying rent using housing benefit and asylum seekers.
In addition to providing the basic cover you’d expect with an insurance policy, such as buildings insurance, there are other options to consider too. You may want to opt for protection against loss of rent, legal protection, public and property owners’ liability cover as well as alternative accommodation cover. These are described in more detail below:
This is the main consideration for your HMO insurance. It covers you for the costs needed to repair or rebuild your property and can cover many aspects, such as damage caused by flooding, fire, storm damage and theft. You may also want to include additional cover for damage caused by your tenants, whether malicious or accidental. You need to base your buildings insurance cover on how much it would cost to rebuild your property from scratch rather than basing it on the property’s value. A surveyor can give you an indication of this sum.
This covers the contents you have provided in the property should they be damaged or stolen. For example, the furniture in each bedroom as well as any furniture and furnishings you’ve supplied in the communal areas. Each tenant is responsible for insuring their own possessions.
Loss of rent:
Should your property become uninhabitable – for example, if there’s a fire – this insurance reimburses you for any rental income you lose as a result of this.
If your property becomes uninhabitable, this insurance covers the costs needed to rehouse your tenants.
Rent guarantee insurance:
In the event that your tenants stop paying their rent, this insurance covers the rental income.
This covers your legal costs should a property or tenancy dispute arise. For example, your tenants may have caused significant damage to your property or you may be having difficulty getting them to vacate.
Public and property owners’ liability:
This type of cover protects you against claims of injury to a tenant or damage to a tenant’s belongings that you’re responsible for as the owner of the property. For example, a tenant might trip over loose carpet on the stairs and fall down them, suffering an injury.
One aspect to watch out for is that many insurers won’t cover a property that has been sublet. Make sure that your tenants aren’t planning to do this so that your property is not put at risk.
Prepare the property
Before you rent out your property on an HMO basis, it has to meet certain living standards and safety regulations. First, you have to ensure there are adequate facilities relative to the size of the property and the number of tenants it can accommodate. You need to ensure the property is correctly insulated and that there are no issues, such as damp, that need to be attended to. You also need to fit locks to each bedroom door. Give the property a fresh coat of paint, both inside and out, and tidy up the areas outside. It’s essential that all outstanding maintenance jobs have been completed before anyone moves in. This ensures the tenancy gets off to a good start.
HMO properties are usually let as fully furnished. The furniture must comply with the fire safety regulations and the compliance labels must be visible on every item. You need to remove any item that doesn’t comply with the regulations from the property.
Comply with the fire safety regulations
Every local council has its own fire safety requirements for HMOs so it’s important to check what these are. In general, an HMO property must have:
- Smoke alarms connected to the mains
- Fire blankets and fire extinguishers in communal areas
- Fire doors
- Approved door handles and locks
Some properties may also need a fire alarm system to be installed. It is your responsibility to ensure that all of the fire safety equipment is kept in good working order and that any fire escapes are kept clear. As well as these fire safety measures, carbon monoxide detectors must be fitted in all rooms containing appliances that burn, or can be used to burn, solid fuel.
Carry out gas and electric safety checks
Every gas appliance within the property must be tested annually by a registered engineer who will provide you with a gas safety certificate. This needs to be left in the property but you must keep a copy yourself. If your property needs an HMO licence, you will need to send a copy of the gas safety certificate to the local council.
To comply with the electrical safety standards, all electrical appliances and equipment must be checked for safe installation and correct maintenance. A registered electrician will provide you with an Electrical Installation Condition Report, which is valid for 5 years. You need to give a copy of this to the tenants and keep a copy yourself. You may be asked to provide a PAT certificate to the local council for the electrical appliances if your property requires an HMO licence.
Other legal obligations as a landlord
Another legal responsibility is to ensure that the water in your property is free from Legionella bacteria. You need to carry out a Legionella risk assessment, which will encompass all of the water systems in your property. It’s recommended to do this every 2 years.
You also need to have an Energy Performance Certificate (EPC) for your property. This confirms its energy efficiency rating on a scale of A to G. A is the most energy efficient while G is the least energy efficient. For rented accommodation, a rating of E or higher is currently required. If your property doesn’t meet this minimum rating, the necessary improvements must be made to increase its energy efficiency before any tenants move in. New regulations are expected to come into force that increase the rating requirement to C or higher. It’s proposed that this higher rating should be in place for new tenancies by the end of 2025. For existing tenancies, it should be in place by the end of 2028.
Finding, vetting and dealing with your tenants
We mentioned at the start of this guide that HMOs can be very time-consuming. Part of your workload as a landlord includes finding new tenants. As the nature of an HMO means that tenants come and go at different times, be prepared to advertise the available rooms at varying intervals and allow for the fact that you’ll need to conduct viewings. You may prefer to employ the services of a letting agent to handle this for you. You also need to bear in mind that there may be more void periods than if you had a standard buy-to-let arrangement. Make sure you allow for this in your calculations and have adequate funds to cover your mortgage repayments during those times.
Vetting your tenants
Your role as a landlord will be much easier with the right tenants. This means finding tenants who will pay the rent on time, look after your property and not be a nuisance to the other tenants or the neighbours. It’s imperative, therefore, to vet them carefully. You need to:
- Check their right to rent, which is a legal requirement in England.
- Take references. If they’ve rented before, a previous landlord’s reference will confirm how they conducted themselves during that tenancy. An employer’s reference will confirm their ability to pay the rent.
- Check their credit history. If a prospective tenant has an adverse credit rating, you can ask them to provide a guarantor or pay extra rent in advance.
Holding a tenant’s deposit
As with any rental arrangement, you need to place each tenant’s deposit in a government-approved deposit protection scheme. A deposit must be returned to a tenant at the end of their tenancy unless they owe you rent or have caused damage to your property.
The tenancy agreement
A contract must be signed between yourself and each tenant. Usually, an assured shorthold tenancy (AST) agreement is used for this type of tenancy. If you have the time, you can download a template for this from an online portal and handle the contracts yourself each time you have a new tenant. If you prefer, a letting agent can draw these up for you instead.
Disputes and a lack of care
One thing to be aware of with this type of tenancy is that disputes may occur between the tenants. There may be times when you need to intervene to help settle these disputes and maintain harmony within your property. There also tends to be a lack of care in HMOs compared with tenants belonging to a single household. This is because single households tend to regard a property as their home and take more pride in it. Individual tenants sharing communal areas don’t always feel the same way. If something needs doing, for example, they may feel that it’s someone else’s responsibility and just leave it.
As the landlord, you’re responsible for the maintenance of your property. This means you need to have the time as well as extra funds set aside to handle this. While there may be easy jobs that are quick and cheap to fix, there may occasionally be larger tasks that need to be tackled. For example, you may need to deal with an unexpected roof leak or have to replace the boiler.
As an HMO property, the frequency of maintenance requirements is much higher than for a standard buy-to-let property. This is partly due to the lack of care taken by some tenants, as mentioned above, but you’re also responsible for maintaining the cleanliness of the property and ensuring the outside areas are kept in reasonable condition. Unless you have the time and the know-how to handle these issues yourself, it’s recommended to find a trusted handyman who can carry out any repairs on your behalf.
As the management of the property includes finding tenants and dealing with references, contracts and disputes as well as the maintenance jobs, it’s worth considering using the services of a managing agent to handle everything for you. Not all managing agents look after HMOs but we can recommend those that do if this is the route you prefer to take. Some lenders actually insist on you using the services of a third party to handle the management of your property.
We can help you get the most from your HMO investment
Despite the complexity and costs of setting up and maintaining an HMO property, this is a popular choice compared with a standard buy-to-let investment. This is because affordable shared accommodation is in higher demand by tenants and this type of arrangement can yield high returns. At Trinity Finance, we can help with every aspect of your HMO investment. We make the process as straightforward, stress-free and rewarding as possible.
Our mortgage specialists, located throughout Kent, London and Edinburgh, can advise you on the legal requirements for this type of property. They can guide you on your tax liabilities, assist you with an HMO licence application and arrange your HMO insurance. They can also recommend a solicitor and managing agent if you’re not sure who to use. Your dedicated mortgage broker will tailor your mortgage application and approach the lender with the right products and flexibility to suit your needs. This takes your circumstances into account, such as your experience as a landlord, the loan-to-value ratio you need, whether you prefer criteria without a minimum income requirement and whether you intend to have the loan in your name or via a legal entity.
We have formed close relationships with lenders offering HMO mortgages and remortgages, refurbishment mortgages and development loans. So whether you’re a first-time landlord or are adding to your portfolio, you want to buy an HMO property or convert an existing property’s use to an HMO, or you have an HMO development project in mind, get in touch with us on 01322 907 000 and our mortgage specialists will be ready to help you. If it’s out of office hours, send your enquiry to us at email@example.com or via our contact form. We will reply to you at the earliest opportunity with more information.