A Guide to HMOs
Jack Waterfield, Legal Assistant
What is an HMO?
HMO stands for ‘House in Multiple Occupation’. It is defined as a building that is occupied by three or more persons in two or more households who, while each having their own private living spaces, share facilities such as kitchens and bathrooms with the other tenants. As there are shared facilities, HMOs can be distinguished from, for example, individual units such as self-contained flats. Further, while the property itself comprises of several individual rooms with shared areas, they are distinct from family households. This is because an HMO will often be let to three or more non-family members living in separate rooms. Each tenant from a separate family is classed as a separate ‘household’. Common forms of HMO would be student accommodation or accommodation for workers.
Should I Consider an HMO?
As HMO properties are distinct from self-contained flats, a prudent question that property investors should ask is which of the two is best suited to them. While a self-contained flat will generally yield the highest rent per tenant given that each will have access to their own private facilities, HMO properties are arguably easier to manage. Because facilities are shared between households, there are fewer kitchens and bathrooms to maintain. Further, HMOs are a more cost-efficient option for tenants. In an area with many self-contained let properties and few HMOs, investors can capitalise on the high demand for low-cost accommodation.
HMOs of course have the added benefit of housing multiple tenants in one property, which can be a more cost and space-efficient method of yielding the greatest amount of rent. They are also less susceptible to the effect of ‘void periods’, which is any length of time in which a rental property is left empty without tenants. Many HMOs are let to several tenants, each with their own tenancy agreement. As such, when one tenant leaves, you as the landlord will still benefit from the rent received from the remaining tenants. If you had chosen to let a flat, once the tenant leaves, there will be no rental yield until a new tenant can be found. There is no guarantee that this will be soon after the previous tenant was evicted, during which time you will still be required to pay for the maintenance of the property.
What Regulations Do I Need to Consider?
Prior to purchasing an HMO, or converting an existing property into one, an investor should consider governmental requirements and restrictions. For an HMO that houses five or more tenants from two or more households, ‘mandatory licencing’ applies. This is a nationwide regulation requiring the landlord to hold an HMO licence for the property before they can legally let it out to tenants. Generally speaking, if the property houses fewer than five tenants, it is exempt from needing a licence.
However, in some areas ‘additional licencing’ can apply. This means that even HMOs with fewer than five tenants may still need to be licenced, at the discretion of the Local Council. There is also ‘selective licencing’, which allows the Local Council to target individual properties as needing to be licenced. Property investors looking to purchase HMO properties should carefully consider whether the property will require a licence and, if being bought rather than converted, enquiries should be made with the vendor as to whether they hold a current and valid licence. The investor should also make enquiries with the Local Council as to what will be required to let their property to tenants.
What About Planning Permission?
A property investor should also carefully consider the planning implications of managing an HMO. Ordinarily, the conversion of a single dwelling house (Planning Use Class C3) to a small HMO (Planning Use Class C4) is a ‘permitted development’. This means that there is no restriction on converting your residential dwelling house into an HMO. However, the Local Council may impose an ‘Article 4’ direction. If an area is subject to an Article 4 direction, this means that conversion from Class C3 to Class C4 is no longer a permitted development and will require planning permission.
Being in an Article 4 area does not necessarily mean that planning permission will not be granted. Such a direction is intended to merely restrict the free conversion of properties to HMOs at the discretion of the Local Authority. Therefore, a property investor should consider whether the property they are intending to purchase or convert to an HMO is in an Article 4 area. If it is, the property will require planning permission, if it does not already have it.