Sunday, February 25, 2024
Real Estate

HMO property investment UK

property investment

Investment in UK property continues to deliver high returns that makes it one of the most popular investment options. Property investment UK is popular due to many reasons which include, investment security in times of global trade and economic uncertainty, high rental yields, capital appreciation on exit, protection against inflation and better returns than bank interest rates. Property investment UK offers a range of opportunities to investors as the UK is home to varied demographics which include overseas business professionals and students, apart from the local population looking to rent a property as affordability remains an important factor.

Property investment UK offers a range of investment options and one of them is HMO or House of Multiple Occupation. These are more lucrative than the traditional buy to let properties. Since the rental demand is high across the UK, the significance of HMOs has increased even more.

What is an HMO?

An HMO property is one with multiple residents or multiple tenants. HMO allows landlords to rent a property to two or more than two people or households at the same time as against a traditional buy to let property which is let to a single household. Such properties have a common area meant to be used by all the different tenants or tenant households residing at the property.

Also known as multi-lets, the HMOs are a lucrative option for property investors as landlords can charge rents according to the number of tenants or households which may be per room, flat or section of the property, usually resulting in an increased cumulative rental income out of the property. Under this type, landlords pay the utility bills for the property.

Although, HMO properties are lucrative due to their potential of generating higher yields, setting up an HMO is relatively complex as it requires a license to set up an HMO which are provided by the local councils. Usually, all HMOs may not require a license to operate as it depends on the size and nature of the setup. While large setups often require licenses, smaller ones may be exempt. Licenses are valid for a period of five years, if approved. Moreover, local council have their own terms and conditions for HMO licensing. Licenses are provided for each property and not for each landlord.

What is a large HMO property in the UK?

An HMO property is deemed large if:

  1. The HMO is rented to five or more people who form more than one household.
  2. The property is at least three storeys high.
  3. Tenants share facilities such as toilets, bathrooms or kitchens.

But, even if all these conditions do not apply to a potential HMO property, a license may still be required. Similarly, small setups may also require a license in some cases depending on the council local to the property. Overall, it comes down to the local council which may classify an HMO property to be small or large according to its terms and conditions. Likewise, the licensing fee as well as the time duration it takes to process an application, varies from one council to another. Licensing fee also depends on the number of HMOs a landlord runs.

HMO property licensing

HMO Property Licensing, enacted in 2006 through the Housing Act of 2004, is the legal system used in the UK, by a local authority or council, to prescribe standards of safety and amenity, and decide the suitability for occupation, of a licensable HMO property.

Councils won’t approve HMO licences to every landlord or every HMO. Councils evaluate the suitability of an HMO and whether it can facilitate the proposed number of tenants. Councils will also assess landlords themselves to ensure they haven’t previously breached landlord laws.

HMO property licensing types

  1. Mandatory HMO licensing
  2. Additional licensing

Mandatory HMO licensing: This covers the whole of England and Wales.

Additional licensing: It covers some parts of England and Wales. Under this scheme, the local authority may impose a license on other categories of HMOs in its area which are not subject to mandatory licensing.

HMO tenancy

Most tenants in an HMO will have a lease, otherwise known as an Assured Shorthold Tenancy (AST). Landlords can draw up a single AST for a group who will all sign it and be recognised as one tenant, or individual room AST’s. A license gives a tenant, fewer rights in the event of an eviction, and would usually only apply if you are a live-in landlord and they are a lodger.

HMO amenities

All HMOs are required to provide certain amenities to tenants. The HMO Property Amenity Standards define the number and type of amenities that must be provided in Houses of Multiple Occupation according to the size and type of the property.

Council tax

The landlord is responsible for council tax payments, which the landlord can recover through the rent. In case all of the property is rented to a group, they will be responsible for paying the council tax, except for groups such as students.

HMO property insurance

A good HMO property insurance is wide in scope and covers financial risks associated with letting a house in multiple occupation, apart from the building itself. The cover may include the building, rent guarantee, contents, public liability, malicious damage and legal expenses. The costs will vary according to providers, number of tenants, location of the property, the level of cover, among others. It may include emergency call out and rent protection, depending on the level of cover.

HMO property valuation

The valuation of HMO property may be done by two methods:

  1. Buildings valuation
  2. Commercial valuation

Building valuation: Building valuation is the more common form and it is done if the property is a single dwelling. This is based on the property market, conditions and comparable information.

Commercial valuation: These are comparatively less common as lenders take the view that buildings value gives them greater security based on vacant possession resale value.

Therefore, HMO is a lucrative option for investors only if implemented after careful consideration of personal requirements and risks.

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