6 Things to Consider When Investing in an HMO Property

So, you want to invest in an HMO property. 

Did you know that in 2016, Roma Finance is said to have dealt with more HMO conversion cases than ever before?

Why?

It could have to do with the tax increases affecting the buy-to-let market. Many landlords are scrambling to convert their properties to houses in multiple occupation (HMOs) so they can beat those tax hikes and increase their earning potential.

Yes, that means HMOs are seen as good investments at the moment. However, you should know that there are lots of factors at play. But don’t worry. We’ve put together a list of six things you should know before you jump on the bandwagon.

#1 Registering an HMO can be a bit complicated.

There are three main points that determine whether a property can be used as an HMO:

  1. 5 or more people renting in one space
  2. At least 3 storeys high
  3. Contain communal areas like bathrooms and kitchens.

During registration, you could also have to answer questions like: Does the conversion comply with the Building Regulations 1991 or later? Is occupation of the living accommodation the only use of that accommodation? For a more thorough HMO definition, we recommend you click here.

Signing a documentation
Signing a documentation

#2 Clearly, there are some rules involved.

In fact, in 2016 the UK Government announced they would be adding to the legislation. The reason? There have been calls to limit the number of HMOs, as they have become more popular. Plus the fact that in the past these properties were not of the best quality, and there is a need to protect tenants.

Needless to say, the regulations ensure that all HMOs are suitable for the number of people living there. Not to mention other things, such as whether the landlord or property manager is fit for the role i.e has no criminal record.

Also, all HMO properties need to be licensed.

There’s a Mandatory licensing of large HMOs that fit the perimeters we’ve already mentioned. The council also has the right to apply Additional HMO Licensing where they choose to and there are sometimes Selective licenses that a borough can put in place.

Contact your council for a licence to rent out your property as a HMO

#3 There’s a buy-to-let market slump. 

“Britain’s biggest buy-to-let landlord, Fergus Wilson, says future investors will never be able to match the financial success he has enjoyed – and that landlords’ days in this country are numbered.” The Guardian 

What Fergus is referring to is the call for a change in legislation. Landlords in the buy-to-let market now have some hurdles to jump like stricter affordability checks for their mortgage applications and, of course, the dreaded tax hikes that came into effect this year.

As we mentioned, many landlords have realised that there can be a higher income yield from HMOs which will help offset those tax increases. So, new investors may have some competition.

#4 London is currently a tenant’s market. 

That could be because rents have been falling or that the number of properties on the market has increased and also, that there are simply fewer people looking to rent at the moment.

What we know is that tax hikes could bring down property speculation and create a fairer market for tenants. That could mean more tenants entering the market. It could also mean less landlord competition.

That may soon change though.

“Savills has forecast that while across the UK rents will rise by 2.5% in 2017, in London the increase will be 3%. It said this would be supported by higher earnings growth and households made up of more sharers to pay the rent. Across the UK most commentators predict rent rises of 2-3%.” The Guardian

Rental growth in London stalls as letting market falls.

#5 The pros of investing in an HMO property?

We know that there are currently fewer investors in the buy-to-let market and that landlords are converting to HMOs, meaning there is a lot more competition out there. That said, the HMO market is still seen as a lucrative one with many benefits:

  • The maths speaks for itself – 5 extra people living under one roof means more rent
  • If one tenant moves out, you still have the others paying rent
  • If one tenant is late on a payment, you still have some rent coming in and so are somewhat protected
  • An HMO property has more tax deductible costs.
investing in an HMO Property
Licences for each HMO will be specific to the landlord as well as the property.

#6 The cons.

As with any property investment, there are always hurdles that can act as barriers. One major factor is the new legislation, not to mention the amount of planning it can take to set up a house-share living area.

Here are some other negative factors:

  • Lending criteria like deposits and higher rental income requirements are getting stricter
  • Resale might be harder because HMO properties are a niche product
  • There are strict legislations that can be cumbersome to deal with
  • Not many letting agents are available to work on HMO properties, and managing the property yourself can be time-consuming
  • It’s more difficult to get a mortgage for an HMO property.

An Informed Choice

Perhaps you’re a landlord seeking shelter from the tax storms or a new investor looking to maximise profits on your investment?  There is always a lot to consider with any property investment and HMOs are no different. From a turbulent market climate to interesting speculations, one thing is certain, we’ll be keeping you informed so you can make your smart money choices for 2017 and beyond.

Have you recently invested in an HMO? We’d love to hear how your journey has been so far. Mail us at info@propertydivision.co.uk