Affordable rental properties are in high demand and with growth in the rental sector exceeding all expectation over recent years, this trend is set to continue. HMOs offer tenants a more financially friendly option when it comes to renting a property privately, and so HMOs are set to play a progressively substantial role within the rental sector for the foreseeable future.
Demand for HMOs is set to increase over the coming years, and here we investigate precisely what is driving this demand, the planning rules surrounding HMOs as well as what a HMO actually is.
HMO – what is it?
Specifically a HMO is a property which is shared and rented by three or more individuals who are not related to one another. While these people live in one house independently of each other, they do share all of the amenities in a property as well as some areas of the house such as the kitchen, living room and perhaps the bathroom. In essence a HMO is the name given to shared accommodation and this accommodation can be anything from a house or apartment to a bedsit or boarding house.
Who are HMOs designed for?
In effect, HMOs are designed for anyone looking for an affordable place to rent on a short or long term basis. Typically one could associate students and those with little or no income to HMOs, however, with a surge in the rental markets pushing the costs of private rentals higher, HMOs have become a popular housing alternative for young professionals.
HMOs – The legal side
While the concept of HMOs is simple enough, a landlord cannot simply ‘set up’ a HMO and reap the benefits. In 2006 HMO licencing was introduced and clearly states that if a property is a minimum of three stories high and has five occupants or more, then it is legally obliged to carry a license. Each local authority has its own specific HMO guidelines and this so called selective licensing is to ensure the HMO market is not saturated with these kinds of shared rental properties.
In addition all HMOs, without exception, must adhere to the property management regulation standards which cover gas, fire and electrical safety, obligatory property repairs as well as amenity provisions.
Do HMOs make a good investment?
Having several occupants under one roof can provide landlords with quite a substantial investment yield. Letting a property on a per room basis in a house of multiple occupancy holds its financial advantages and research conducted by Paragon shows that an average yield for a HMO generates an average yield of 7.8% over the course of a year which is more than any other lettings type. These statistics also suggest that HMO accommodation which directly targets students and young single adults are likely to produce the highest returns on investment. With this in mind, we can safely say that HMOs do offer an attractive return for landlords do make an excellent investment.
But what are the downsides to HMO investment?
While the potential to make substantial profits is a viable one, all landlords need to go into HMO investment armed with some vital information. Firstly, landlords need to understand that HMOs can come with a lot of maintenance issues, more so than the standard buy to let properties in wh9ich they are familiar with. Another thing to remember is that HMO rentals are usually only based on a short term rental agreement, so landlords need to be perpetually on the lookout for new tenants to fill rooms and subsequently convert into profits.
How do landlords fund HMO accommodation?
The first thing to question when it comes to financing a HMO investment property is the mortgage; because of its unique attributes, there are only very few lenders that deal with the specifics of HMO properties however, we at The Mortgage Broker have a number of products that cater to the HMO audience.
Secondly, any landlord would need to consider the insurance aspect of HMO accommodation. The vast majority of existing landlord insurance policies will cover HMOs providing there are eight tenants or less in one particular property. If you would like more information on HMO landlord insurance please feel free to contact us.