HMO on HMOs – Hear Me Out on Homes in Multiple Occupation

SheffieldIf you are interested in property as an investment then one route that you might consider is that of HMOs. And, of course, HMOs are very topical, not least because they have recently featured in the Channel 4 show, ‘Britain’s Benefit Tenants’.

An HMO is, by definition, a ‘House in Multiple Occupation’. (Though apparently in text-speak it also stands for ‘Hear Me Out’.) It’s a term employed in the housing acts of 2004 and 2006. Essentially an HMO houses 3 or more people in at least 2 households that are not self-contained. So there are shared facilities (such as kitchens, bathrooms and toilets) under 1 roof. Importantly these are the main residences for tenants who are on short-term tenancy agreements which may well have no minimum term.

HMOs are not simply suitable for benefit claimants, although that certainly is a market for them. Many are used by professionals who are on short-term contracts, and they include everyone from military officers to radiologists and from chefs to engineers. Some are foreign nationals who have come to the UK to work on finite projects, whilst others might be in their first career appointments having graduated. Since many HMO owners do not require deposits and take tenants on a ‘flexible licence’ basis, this suits lots of residents who are finding their feet in a locality and not yet ready or able to commit to purchasing their own property.

Many HMO properties are classified as ‘C4’ or ‘Sui Generis’ (i.e. ‘in a class of its own’) by town planners. And anybody investing in such a property would need to establish if it has – or will require – an HMO licence. In any event an HMO needs to be kitted out for use by its residents in respect of personal and communal facilities, which means everything from beds and bedding to TVs and items like tumble-driers. And it must comply with any applicable fire, electrical and safety requirements.

It always makes sense to ensure that any HMO in which you might invest is easily convertible to a large family home. Indeed that’s what many of them were originally. By doing this you ensure that you keep your options open because it could subsequently be sold as a commercially viable HMO or alternatively as a large home. That flexibility in respect of exit routes is useful if your circumstances change and you wish to recoup your investment more immediately.

Lastly we should emphasise that HMO operators should view their investments as a double-whammy because they ought to generate constant rental revenue yet their property values should perform well if there is strong underlying house-price growth. Some landlords will take advantage of that growth in equity too, by remortgaging to fund further HMO purchases with the aim of expanding their portfolios. So there are multiple routes to taking profits, and in combination it may be quite possible to realise gross returns of 15% or so pa on the cash invested (this means that HMOs could well be double or more the return on more conventional buy-to-let investments). But HMOs have a greater churn in respect of tenants and obviously require more hands-on management, which is something that intending landlords need to consider. With some tenants there may also be increased risk.

11 bed LondonWith that in mind our first property, in Leyton E10, has already been converted to an HMO and boasts a mighty 11 bedrooms. It’s currently on the market for £650K. Given that most HMOs charge around £100 a week for single bedrooms, were a landlord able to ensure full occupancy then it could easily pay for itself within a decade.

 

 

HMO prestwichThis next property, in Prestwich near Manchester, is currently a family home but the vendor has identified its potential as an HMO. Right now it has 4 bedrooms but it has 3 spacious reception rooms too – and quite possibly more sleeping accommodation could be squeezed from the space. It is not in bad decorative order but needs some work, so there’s a further opportunity to add value to it. And, of course, many HMO owners will have their own ideas about how to set up low-maintenance properties like this one so that they are easier to manage and generate lower overheads.

 

HMO lutonLastly we’ve deliberately chosen a property with enormous potential on account of it having a lot of work to do before any owner has a realistic chance of capitalising on it as an investment. This one is in central Luton. Until recently the premises were used by a removals company and for offices. But we understand that there are currently 6 licenced HMO units there as well as communal rooms and that the owner has secured some approval to create 3 more bedsits subject to planning permission. Work has started and yet the property is for sale. Clearly it would appeal to potential buyers with the gumption and contacts to get it shipshape and occupied.

Are HMOs for you? Well, certainly, they can be very profitable. People need to be housed and HMOs offer a cheap and flexible option. Would-be landlords need to be able to screen potential occupants and some tenants could be tricky (whether or not they are students or on benefits). But with proper and prudent management HMOs can make a valuable contribution to the housing mix.