Are HMOs the way forward?

As of 1st April 2017, hundreds of thousands of landlords who previously paid basic rate tax have been pushed into a higher tax bracket thanks to new restrictions on mortgage interest tax relief.

Historically, mortgage interest payments were one of a number of expenses that landlords could deduct as a business cost. Now, tax changes, which will be phased in over the next 4 years, mean that landlords are no longer able to deduct mortgage interest payments, or any other finance-related costs, from their turnover before declaring their taxable income.

These recent changes to government policy have put the spotlight on the buy-to-let market and forced landlords to act quickly to mitigate any negative effects on their income. While some have had to seriously consider their future position in the private rented sector, i.e. selling-up altogether, others want to retain property but are having to think of ways they can generate greater income from their single let properties.

Paul Shamplina, Founder of Landlord Action and Brand Ambassador for Hamilton Fraser considers whether Houses in Multiple Occupation (HMOs) could be the way forward?

While existing HMO landlords may look to increase rents over the next 4 years to compensate for monies lost due to the tax changes, there is a growing number of buy-to-let landlords looking to convert their single-let property into an HMO. But why?

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The main reason is the potential increase in yield (12-15%) from renting more rooms, particularly in towns and cities where demand among young professionals and students. With a massive housing shortage and many tenants unable to afford self-contained one bedroom flats, there is an increasing number looking to multi-share rental options as a way to cut costs. The English Housing Survey 2014-2015 reported 46% of 25-34 year olds are renting – this figure is double that of ten years ago.

Of course, there is a fairly high cost involved with carrying out such a conversion. Most have to increase the number of rooms and install additional bathrooms, fire doors and alarms systems etc. which are all required in order to obtain an HMO license. Yet despite this, buy-to-let landlords are looking to the long-term by retaining property which will hopefully increase in value, and with a view to increasing rents. In my opinion, HMOs will become more and more popular as the cost of housing rises and are likely to be a good long term investment.

If a landlord can change from a single-let to renting out five rooms, they can vastly increase their income and yield. Over the first couple of years, this could be used to help cover the cost of the conversion and then support the changes to tax increases thereafter.

However, there are important factors relating to owning an HMO which landlords need to take into consideration. Firstly, it is essential to understand the requirements of renting out an HMO property. HMOs are heavily regulated and at the end of 2016, the Government announced plans to change legislation which will increase the number of properties subject to mandatory HMO licensing. Having the correct up to date information on regulations and health and safety rules is imperative.

Landlords also need to consider where their property is located and where demand for HMOs in that area is coming from, i.e. young professionals, students or local housing allowance tenants? If the property is near to a university, then marketing to students makes perfect sense, as long as there are not too many purpose-built student accommodation blocks already in the area. What I would not advise, is trying to mix tenant types, this generally leads to disputes and you will end up being the mediator.

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Finally, remember managing an HMO property is much more labour intensive than a single buy-to-let, so you need to be on hand to attend to any issues which may arise or be prepared to have the property managed. With more people living in the property, it will be subjected to greater wear and tear, so keeping on top of repairs and maintenance works will be necessary. Also, because the tenants living together often don’t know one another, each will have individual circumstances that will be subject to change at any time, which can lead to higher turnover of tenant so it’s a good idea to work with a reputable local agent who can help find suitable tenants before you have a void.

If you are interested in discussing your HMO Insurance requirements please call us on 0800 63 43 880.