Expanding your portfolio – the pros and cons of investing in an HMO

The private rental sector remains on a growth trajectory however it is universally accepted that the number of new homes being built is lower than it needs to be. The reality is that some larger properties are often converted into shared homes.  Where there are three or more people (that are not family) sharing a property, these properties are classed as Houses of Multiple Occupation (HMO).  If you’re planning to increase your portfolio, would investing in an HMO suit you?

We’ve taken a look at some of the ups and downs of being an HMO landlord.

PROS

Student rents guaranteed
One of the most common types of HMO is student accommodation.  Properties close to universities are very popular for groups of young people wishing to share a home.  As students don’t typically have an independent source of income, they usually have a guarantor guaranteeing their rent will be paid.

Good yields
Shared living is attractive to tenants seeking a degree independent living, made affordable as bills are split between everyone. However, because an HMO often makes best use of room, they often produce impressive yields – sometimes as high as 10%.

Popular with young professionals
A further attraction for tenants is it often means they can afford to live in in a city centre for a fraction of the cost of renting a place of their own.  This is appealing for young professionals, particularly if the lower living costs help them to progress their career.

However, owning an HMO can provide some challenges.

CONS

High tenant churn
A shared house is seen as a less permanent base for some residents.  This means it’s likely that you’ll see a higher churn of tenants than you may see for other types of rented property. 

Deposit protection
As a landlord, you still have obligations to place your tenant’s deposit into an official Deposit Protection Scheme. However, as tenants have access to shared areas, this can make the negotiation about the return of a deposit at the end of an individual tenancy more complicated.

Licensing Conditions
Where a property is class as an HMO, it needs to be licensed by the local council. A fee is usually payable, and the property needs to be inspected to ensure there are no health and safety risks before the license is granted.  The landlord (or their agent) has to provide the council with copies of annual gas safety certificates, conduct electrical safety tests and install smoke alarms on each floor.  Meanwhile, any rooms that have a coal fire or wood burning stove must have a carbon monoxide alarm.  Breaching licensing conditions is a criminal offence, and the penalties can be high. 

So, in summary – a landlord can often expect high returns but in return for more effort. It is important to note that there could be further conditions applied to a license, as individual council rules may vary. Therefore, this guide should in no way be treated as comprehensive advice and should be treated a summary of the ups and downs of investing in an HMO.

If you want to speak to our experts about whether an HMO is the right investment choice for you, speak to our Investor Services Team on 07960 120267.