The complete guide to letting an HMO property

Investing in and letting a property has never been a straightforward process. But in recent times, landlords have had to navigate their way through increasingly frequent and complex changes to legislation, on top of restrictions on mortgage interest tax relief, which have pushed many landlords into a higher tax bracket.

Over a quarter of landlords warned that they are likely to exit the sector by 2021, according to a study carried out in early 2020, highlighting the pressure felt by some landlords. And that was before the coronavirus hit. With a significant proportion of landlords now also suffering financially due to rent repayment problems brought about by the pandemic, being a landlord at the moment is looking like a particularly stressful business.

But for landlords who are prepared to look to the future, there are opportunities. The current affordable housing shortage combined with demographic shifts have led to increasing numbers of people in the UK turning to private renting.

 

Are HMOs the way forward?

As renters look for affordable options and landlords seek to maximise the profits from their portfolios, perhaps HMO properties could be the answer.

The opportunity offered by HMOs to rent out individual rooms and therefore increase rental yields from a single property is leading some landlords to consider adapting their single-let property into an HMO property, or investing in the HMO market.

While letting out an HMO property does involve managing more occupants and complying with specific HMO legislation, HMO Hub reports that HMOs are growing in popularity amongst investors.

The statistics may explain why – the gross yield of an HMO property increased from 8.6 per cent in Q2 of 2018, to 9.6 per cent in Q2 of 2019, whereas during this period a standard buy to let increased by only 0.3 per cent.

But are the extra responsibilities associated with being an HMO landlord worth the risk?

In this complete guide to HMOs, we’ll look at the different types of HMO property, whether you’ll need an HMO licence and what you’ll need to do to comply with the specific regulations that apply to HMOs.

We’ll also weigh up the pros and cons of investing in an HMO property and explore how you can minimise the risks of being an HMO landlord. Finally, we’ll offer some useful tips to help you if you’re thinking of converting an existing property into an HMO.

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What is an HMO?

HMO stands for house in multiple occupation and is most commonly known as a house share.

An HMO is a rented property with three or more tenants from different households who share common facilities. For the purposes of HMOs, a household is considered to be a single person, or members of the same family living in the same property.

HMOs are often a shared property occupied by tenants who are not related to each other. They can also take the form of a house which has been split into several rooms. HMOs are a popular option for young professionals and students, nicknamed ‘generation rent’ due to their reliance on multi-share rented housing, as it is usually the most affordable option. To be considered an HMO, a property must be the tenants’ main residence and rent must be paid.

 

What is the difference between an HMO property and a bedsit?

For more detailed information on the differences between HMOs and bedsits, read our article, What is an HMO and a bedsit? What are the differences?

 

What is a large HMO?

There are HMOs and large HMOs. Generally, rented properties with three or more tenants and shared facilities constitute an HMO, whereas properties with more than five tenants and three storeys qualify as a large HMO.

One of the biggest distinctions between these two categories of HMO property is that landlords of large HMOs automatically need to apply for a licence to prove that the available facilities are suitable, whereas some HMO landlords do not; this depends on the local council where the property is situated.

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Student tenants and HMOs

Most student houses will qualify as HMOs as they are usually home to three or more unrelated people who are sharing toilet, bathroom or kitchen facilities. The student rental market is generally a reliable source of income offering some of the best rental yields for many UK landlords.

However, the student market is different from the traditional private rented sector. There are additional legal, regulatory and tax implications of renting your property to student tenants, and hefty fines for non-compliance. Find out more about renting to students in our guide, Successful student letting: everything you need to know.

 

The complete guide to letting an HMO property

Council tax

Tenants in full-time education and their landlords are exempt from paying council tax on rental properties. However, it is your responsibility to prove that all of your tenants are in full-time higher education. If you can’t or don’t prove that your tenants are exempt, you may be left responsible for the bill. Find out how to apply for an exemption here.

It is also important for landlords to know that when a property is classed as an HMO or when tenants pay rent for individual rooms on individual tenancy agreements, the landlord is responsible for paying council tax. Landlords letting out an HMO property therefore need to know whether to include council tax in the rent and this will vary depending on whether or not the tenants are students.

For more information on managing student HMOs, read From HMOs to anti-social behaviour – here’s the regulation student landlords need to know.

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What are my rights and responsibilities as an HMO landlord?

The legal regulations around HMOs are complicated, and inconsistencies between councils and exceptions to the rule don’t help. But it’s very important that landlords keep up to date. The Government is trying to raise standards in HMO properties and introduced new legislation in 2018, which meant more properties could be classified as HMOs. It’s a criminal offence not to have an HMO licence if one is required and offending landlords can face an unlimited fine. Read more in our previous post Rogue HMO landlords hit with huge fines.

You can apply for a licence at GOV.UK.

Although councils have different definitions of what constitutes an HMO, as previously mentioned, in general rented properties with three or more tenants who share facilities, like bathrooms and kitchens, are classed as HMOs.

In this next section we’ll take a closer look at the different types of HMO licence. We’ll then move on to how landlords can make sure that they are compliant with the specific regulations that apply to HMO properties.

 

When do you need an HMO licence?

Under The Housing Act 2004, larger HMOs with three or more storeys and five or more tenants from at least two households need to be licensed.

From October 2018 mandatory licensing of HMOs was extended so that smaller HMO properties with five or more tenants from two or more households often require a licence.

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What are the different types of HMO licence?

When it comes to HMOs, there are three different types of HMO licence: mandatory licensing, additional licensing and selective licensing. Landlords should know that they need a separate licence for each HMO property they run, as the licence relates to the property rather than the landlord. A licence is valid for a maximum of five years and it must be renewed before it runs out.

 

Mandatory licensing

HMOs that are occupied by five or more people who make up at least two households require a mandatory licence. There is however an exception to this rule and that applies to large self-contained flats (containing five or more tenants) within a large block. For the exception to apply there also need to be three or more self-contained flats within the block.

Under mandatory licensing the HMO property is required to meet strict criteria relating to room sizes, the number of shared facilities, safety measures, and the number of people living in the property. Local councils also carry out checks to make sure landlords are ‘fit and proper’ and do not have criminal convictions.

 

Additional licensing

The additional licensing category of HMOs is at the discretion of the local council and as a result there are lots of exemptions and a lack of standardisation. Additional licensing was put in place to help tenants in HMO properties that were not covered by the mandatory licensing scheme so often applies to smaller properties, such as those with three or more people making up two households. Contact your council directly to find out whether your HMO property requires an additional licence.

 

Selective licensing

Similar to additional licences, selective licenses are down to the discretion of the local council. While it is therefore not possible to generalise, a council can decide to apply a selective licence to any rental property, regardless of size, for example, if the council is concerned about a particular property or a specific area within its remit where there may  have been complaints about standards.

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How can you check if an HMO property has an HMO licence?

You will need to consult your local authority housing department to find out whether an HMO property already has a licence.

HMOs that require a mandatory licence are the easiest to identify and you must apply for a licence if your property constitutes a large HMO in England and Wales. As a reminder, your property is a large HMO if it fits the following criteria:

  • Five or more people rent the property, forming more than one household
  • Tenants share common facilities like bathrooms and kitchens
  • At least one person pays rent

The licensing process for smaller properties is more complicated and dependent on local council rules. Contact your council to find out if your property requires a licence and how much it will cost. You can check your HMO property postcode and find out more about HMO licensing on GOV.UK.

Councils may deploy an inspector to visit your property in order to ensure that it is suitable as an HMO, and if all conditions are satisfied a licence will be issued.

 

How much is an HMO licence?

Prices vary depending on each council and the number of HMOs under your jurisdiction. Input your postcode on the GOV.UK website to find the price in your area.

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Complying with HMO legislation

In addition to having the correct licence, if applicable, HMO landlords must also comply with specific HMO property requirements, as well as the general private rented sector legislation which applies to all landlords. This includes the Homes (Fitness for Human Habitation) Act 2018, which came into force for all tenancies in March 2019 and provides tenants with greater powers to hold their landlord to account if their rental property does not meet a good standard.

GOV.UK stipulates that landlords of HMO properties must make sure:

  • The house is suitable for the number of occupants (this depends on its size and facilities)
  • The manager of the house – the landlord or an agent – is considered to be ‘fit and proper’, for example they have no criminal record or breach of landlord laws or code of practice

Landlords must also:

The council may add other conditions to the HMO licence, for example improving the standard of facilities.

In this section we’ll look at some of the extra responsibilities HMO landlords have in more detail.

 

HMO property safety requirements

There are a number of safety requirements that HMO landlords must be compliant with.

 

Gas and electrical safety

HMO landlords must ensure that an annual gas safety check is carried out and that the electrical systems are checked at least once every five years. They must also obtain gas and electrical safety certificates for all provided appliances.

 

Fire safety

Fire safety regulations are possibly the most important safety requirement for HMOs, and HMO landlords need to meet minimum fire safety standards to qualify for an HMO licence. These include:

  • Fitting fire safety doors
  • Supplying fire extinguishers and fire blankets in communal areas such as kitchens
  • Installing mains powered smoke alarms and heat detectors in kitchens
  • Installing at least one smoke alarm on every storey of the property that is used as living accommodation
  • Installing carbon monoxide alarms (landlords are responsible for ensuring these are in working order). In addition, landlords are also required to have a carbon monoxide alarm in any room where ‘solid fuel’ is used – that means stoves and fires that burn wood or coal
  • As a landlord or managing agent, you must ensure the alarms are in working order at the start of every new tenancy
  • Larger HMOs with three or more storeys may need a fire alarm system fitted
  • Fitting specific fire safe door handles and locks

HMO landlords must complete a fire risk assessment and it is advisable to contact your council to make sure this is carried out property. All exits must be kept clear from obstructions and fire exits must be marked. Tenants must be given instructions on what to do in the event of a fire. Read more about Fire safety regulations for landlords.

 

Energy performance certificate

All landlords must obtain an Energy Performance Certificate (EPC) for their properties, and they must achieve a grade E to be fit for rent (this is likely to be increased to a grade C over the next few years), and be renewed every ten years.

 

Legionella risk assessment

HMO landlords must hold an up to date legionella risk assessment.

 

Overcrowding

HMO landlords must ensure that the property is not overcrowded and provide cooking and washing facilities suitable for however many tenants are in the property. This includes providing enough waste bins for the number of tenants in the property.

As of 2018, landlords also need to provide bedrooms of a certain size: 6.51 metres square for single rooms and 10.22 for doubles. There are also specific requirements for children over and under the age of 10:

  • One person aged over 10 years – room must be not less than 6.51 sqm
  • Two persons over 10 years – room must be not less than 10.22 sqm
  • One person aged under 10 years – room must be not less than 4.64 sqm

The complete guide to letting an HMO property

Maintenance and repairs

HMO landlords are responsible for maintaining and repairing communal areas and facilities. They are also responsible for repairs to:

  • the structure and exterior of the house – including the walls, window frames and gutters
  • water and gas pipes
  • electrical wiring
  • basins, sinks, baths and toilets
  • fixed heaters (radiators) and water heaters

Read more about landlords’ and tenants’ repairs responsibilities.

Find out more about landlords’ responsibilities more generally in Legislation for landlords: everything you need to know.

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HMO property tenancy agreements

A tenancy agreement is a contract between tenant and landlord setting out the legal terms and conditions of the tenancy. Assured Shorthold Tenancy agreements (ASTs) are the most used tenancy agreements for HMOs, they can be used for both individuals and groups.

There are no hard and fast rules that dictate how landlords should draw up tenancy agreements, but they are crucial documents without which many insurers won’t be able to offer you insurance cover.

For example, at Hamilton Fraser Total Landlord Insurance we can only provide cover when either an Assured, Assured Shorthold or Regulated Tenancy Agreement is in place (in England and Wales), or a Short Assured or Assured Shorthold Tenancy Agreement (for Scotland).

 

The complete guide to letting an HMO property

 

What to include in the tenancy agreement

Tenancy agreements differ between properties, but some essential elements apply to all tenancy agreements. The names of everyone involved, cost of rent, deposit amount, address of the property, tenancy start and end date, landlord and tenant obligations must always be included. For more information on what should be included in a tenancy agreement, check out the government guidance here.

 

Joint or separate tenancy agreement?

One aspect of HMO tenancy agreements which can differ from single lets is whether to sign an agreement with each tenant individually or as a joint tenancy agreement with the group. Most HMO landlords prefer to have a separate tenancy agreement with each tenant.

This approach, while heavier on administration for the landlord, means it’s easier for each tenant to be responsible for their share of the rent and for taking care of the property.

However, if your tenants all know each other well you may decide to use a joint agreement. This is also more suitable if they plan on moving in and out at the same time.

Whatever you decide to do, make sure it’s noted in the tenancy agreement. Without a tenancy agreement in operation landlords have reduced legal security in the event that landlord-tenant relations deteriorate.

For more information read how to create a legal and binding tenancy agreement and find out more about what HMO tenancy agreements need to include here .

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Advantages of investing in HMO properties

Despite the increased risks and legislative requirements associated with being an HMO landlord, HMOs can be a lucrative investment – you can read more about how to maximise profits on student lets in our guide here.

In addition to rental yields typically around three times higher than standard single lets, other advantages are that:

  • HMOs are in demand due to affordability of single rooms as tenants are priced out of the traditional rental market
  • Collecting rent from numerous tenants separately can lead to improved cash flow – if one tenant leaves or fails to pay the rent, you still have an income from the other tenants
  • There can be tax advantages as there are generally greater costs that you can offset
  • As we enter a post pandemic recession and many peoples’ incomes are unfortunately reduced, renting a room in an HMO is a more affordable option