Pro’s and Cons of Houses of Multiple Occupation (HMOs)

Let me guess. You’ve heard about that lady at the end of your street who moved out, split her old home into several rooms and is now letting them to students for a huge profit, and you want to know if you should do the same?

Maybe.

I know you’d love a simple answer, and I’d love to give you one, but it’s not that easy, and while this is a route that can work really well, it’s also not for everyone. This is a huge topic, and I know you’re as busy as me, so here is my brief overview guide to the pros and cons of HMOs.

Firstly, what is an HMO? The Housing Act 2004 defines it as:

“A building or a part of a building meets the standard test if—

(a) it consists of one or more units of living accommodation not consisting of a self-contained flat or flats;

(b) the living accommodation is occupied by persons who do not form a single household (see section 258);

(c) the living accommodation is occupied by those persons as their only or main residence or they are to be treated as so occupying it (see section 259);

(d) their occupation of the living accommodation constitutes the only use of that accommodation;

(e) rents are payable or other consideration is to be provided in respect of at least one of those persons' occupation of the living accommodation; and

(f) two or more of the households who occupy the living accommodation share one or more basic amenities or the living accommodation is lacking in one or more basic amenities.”

In simple terms, if you have 3 or more non-family members living at the property then you have an HMO. This is because any building occupied by the owner has a limited exclusion, meaning that your direct family doesn’t count, and you’re allowed up to 2 extra bodies on top – for instance 2 flatmates.

You would also have an HMO if there are 5 or more people living on 3 or more floors from 2 or more households. This could happen if you slipt your home into two apartments, and then rented to two different families who had children, for instance. In this case your property will be classed as an HMO and you will be subject to mandatory licensing.

Pros:

  • Yields are higher.
    • You could reasonably let a 4-bedroom family home for, say, £1000pcm to a family.
    • If you split it into individual rooms for let, and turned the dining room and living room into bedrooms, you’d have 6 individual rooms to let, with a shared bathroom (preferably two) and kitchen.
    • These rooms could be let individually for £300pcm, perhaps to students if you are near a university, potentially giving you a £1800pcm income.
  • Void periods cost less.
    • If your £1000pcm family moves out, you are down £1000pcm until you get new tenants in.
    • If a HMO occupant moves out, you’re only down £300pcm, and you’ve still got £1500pcm coming in.

Cons:

  • You really don’t want to get your licensing wrong.
    • Penalties for failure to comply with a duty set out in the Management of HMO Regulations 2006 is a criminal offence and liable to a £5,000 fine per individual duty. Operating an unlicensed HMO is a criminal offence and a fine of up to £20,000 is payable. And a breach of any conditions of the licence is fined at £5,000 per individual condition.
    • This doesn’t have to be a con if you do it right, really, but it’s too important not to highlight it!
  • This will be more work.
    • If you are managing yourself, then you need to expect to have more problems with tenants (because you now have more of them, the law of averages says you’ll get more complaints)!
    • Listing and relisting your places for rent will be much more common, as HMO tenants (such as students) tend to move around more often. This is a cost that you should remember.
    • Tenants who do not feel much ownership of the place they live in tend to cause more damage – so budget more for maintenance.
    • Know your immigration law – penalties for not complying with the Right to Rent scheme are high, and you’ll be doing this a lot with the high turnover of tenants.
    • Remember when I told you not to let tenants leave their possessions/trash behind? Multiply your problems – because they will leave junk, which legally you must store etc….
  • Insurance and repairs will cost more.
    • More tenants, more chance of problems…. More insurance premiums. And a normal Landlord policy probably won’t cover you – you’ll need to let the insurer know it’s an HMO.
    • A family house might have 2 adults and 2 kids in it, wearing it out in the normal way. You've now chosen to put 6 adults, and their 'guests' through it - so it will wear out/break faster. 

A good lettings agent can take most of the hassle out of this for you, but they will of course need to be paid for their time. When deciding whether to use an agent, think about how often you will be happy to take a call at dinner time, asking you why the pilot light on the boiler has gone out, why the washing machine has stopped working, where to buy a spare light-bulb or why the toilet doesn’t flush. All this and more is in the life of a landlord – and for a HMO landlord, multiply so!