HMO properties are a popular choice for landlords looking to maximize their rental income. HMOs are typically comprised of multiple bedrooms, shared living spaces, and shared facilities like kitchens and bathrooms. Tenants in HMO properties, in London, are typically students or young professionals, who are looking for affordable, co-living living arrangements.
Certain HMOs are legally obligated to obtain an HMO Licence. When a HMO Licence is required, it is mandatory to comply with HMO Standards, and HMO Management regulations.
Meanings and Definitions
Firstly, let’s look at the meaning of “House” in the context of HMO. The term “House” in HMO refers to any building or part of a building that is used as living accommodation. It is worth noting that the term “House” in HMO does not necessarily mean a detached, semi-detached or terraced property, but can also flats and apartments, if they meet the criteria of having three or more unrelated occupants sharing common facilities.
Next, let’s explore the meaning of “Multiple Occupation.” “Multiple Occupation” means that more than one household is occupying the same property or building. In the context of HMO, it refers to three or more unrelated people living together in the same property and sharing common facilities. This definition distinguishes HMOs from other types of rented accommodation, such as single households or shared flats.
Finally, we come to the meaning of “Household.” A household is defined as a person or a group of people who live together as a single unit in the same dwelling, sharing common facilities such as the kitchen and bathroom. In HMOs, if unrelated or not in a relationship, each occupant is considered a separate household. You can read more in detail about the definition of a household here.
Benefits of Investing in HMO Properties
HMO properties offer numerous benefits, including higher rental income, less voids, lower risk, and higher capital growth potential. Additionally, investing in HMOs offers greater flexibility, as you can adapt the property to suit the needs of different tenants. Below, we’ll explore each of these benefits in more detail to help you decide if investing in HMO properties is right for you.
Higher Rental Income
HMO’s are all about maximizing rental income, and this is one of the key benefits of investing in a HMO property. By renting out multiple rooms in a single property, you can generate much higher rental income compared to a traditional rental property. This is especially true if you invest in a high-demand area with a large population of students or young professionals. If you are looking for steps to maximise your HMO profit, check out our HMO Investment article.
Another benefit of investing in an HMO property is that you’re less likely to experience long void periods. This is because HMO properties are typically rented out to multiple tenants, which means that if one tenant moves out, the others rooms will still be occupied and you will still be receiving rental income.
Similarly to the above, investing in an HMO property can often be less risky than investing in a traditional rental property. This is because you have multiple tenants who are each contributing to your rental income. If one tenant fails to pay rent unexpectedly, you still have other tenants who are contributing to your rental income, reducing your risk.
Higher Capital Growth Potential
HMO properties often have a higher potential for capital growth compared to traditional rental properties. This is because HMOs are typically located in high-demand areas, such as city centres or near universities. These areas tend to have a higher rate of population growth and rising property prices, which can lead to significant capital growth over time.
Investing in an HMO property can offer greater flexibility compared to investing in a traditional rental property. This is because HMOs can be adapted to suit different tenant needs, such as offering furnished or unfurnished rooms, renting out a room or area as an office to a tenant, renting rooms out for short periods such as on Airbnb and Booking.com.
Diversification of Portfolio
Investing in an HMO property can also help to diversify your property portfolio, reducing your risk exposure. By investing in different types of properties, such as HMOs and traditional rental properties, you can spread your risk and generate a more stable rental income.
Family BTL vs HMO Property
Here, we aim to analyse and compare two different types of rental properties: a traditional family rental property and a House in Multiple Occupation (HMO) property. A traditional family rental property typically refers to a dwelling that is rented out to a single family or household, while an HMO property is designed to accommodate multiple unrelated individuals who share communal areas such as kitchen and living spaces. We will compare the same property and same value of property.
By examining the differences and similarities between these two types of rental properties, we hope to provide valuable insights for potential landlords and tenants alike. We will explore factors such as rental yields, management requirements, tenant demographics and legal obligations associated with each type of property. This analysis can help investors and property owners make informed decisions about which type of rental property would be most suitable for their needs and goals.
Value of Property = £650,000
Rental income per year = £36,000 (based on £3,000 per month)
Voids per year = £2,769 (based on 4 weeks voids)
Net rental income = £33,231
Yield = 5.11%
Value of Property = £650,000
Rental income per year = £51,200 (based on 5 beds at £850pcm)
Voids per year = £1,566 (3% voids based on our experience and research)
Rental income = £49,634
Monthly bills = £4,800 (approximate cost of bills)
Net rental income after bills = £44,834
Net Yield = 6.9%
In this example, it is clear that the HMO property generates a higher net yield compared to the family property. The higher rental income and reduced void periods more than compensate for the additional monthly bills, leading to a significantly higher net yield for the HMO property.
Another way to look at this is the net rental income:
Family Property Net rental income = £33,231
HMO Property Net rental income = £44,834
After one year the increased income of an HMO is £11,603
After five years the increased income of an HMO is £58,015
The management requirements of a traditional family rental property and an HMO property can differ significantly due to the different types of tenants and the nature of the rental agreement.
In a traditional family rental property, the landlord is typically responsible for maintaining the property and addressing any issues that arise. This type of rental property tends to have lower management requirements since there is usually only one tenant or family to deal with, and the landlord can handle most issues on their own.
In contrast, HMO properties require a higher level of management due to the presence of multiple tenants sharing communal areas such as kitchens and living rooms. The landlord must ensure that the property is compliant with HMO regulations, which include fire safety, health and safety, and facilities such as adequate kitchen and bathroom facilities. The landlord must also manage the tenancy agreements and ensure that each tenant pays their rent and respects the rules of the property. HMO properties may require additional maintenance and cleaning due to the shared spaces, and landlords may need to hire a decent HMO property manager or letting agent to handle day-to-day operations.
In a traditional family rental property, the tenants are usually a single family or household with children. These tenants are typically looking for a stable and long-term rental arrangement that can accommodate their family’s needs, such as access to schools, parks, and community amenities. They may be more focused on finding a property with a good location, ample living space, and a yard or outdoor area for their children to play.
In contrast, HMO properties typically attract a younger demographic of students or young professionals who are looking for affordable, social and flexible accommodation. These tenants may be studying or working in the local area for a limited period and are more focused on finding a rental property that is close to their place of study or work. They may be willing to share communal areas and facilities to reduce their living costs, and they may prioritize amenities such as high-speed internet access and convenient transportation options.
Another difference in tenant demographics between these two types of rental properties is the level of turnover. In a traditional family rental property, tenants may stay for several years or even longer, while HMO properties tend to have a higher turnover rate typically staying in a property for between 6 months and 2 years.
The legal obligations of a traditional family rental property and an HMO property can differ significantly due to the different types of tenancy agreements and the regulatory requirements associated with each type of property.
In a traditional family rental property, the landlord is generally responsible for providing a safe and habitable living space for the tenant. This includes maintaining the property in good condition, addressing any issues that arise, and complying with local building codes and safety regulations. The landlord is also responsible for protecting the tenant’s security deposit and complying with relevant tenant protection laws, such as those related to eviction and fair housing.
In contrast, HMO properties have additional legal obligations due to the communal living arrangements and the presence of multiple tenants. Landlords of HMO properties are required to comply with specific regulatory requirements related to fire safety, health and safety, and the provision of adequate facilities such as kitchens and bathrooms. HMO Landlords must almost always register their HMO properties with the local council and comply with any licencing requirements.
Additionally, landlords of HMO properties may have additional legal obligations related to tenant behaviour and disputes. They may need to mediate disputes between tenants or provide additional security measures to ensure that tenants are safe and secure in the shared living spaces.
Understanding the HMO Meaning and Investing in HMO properties offers a higher return on investment compared to traditional family rental properties. With a growing demand for shared living arrangements, HMO properties are an attractive option for landlords looking to maximize their rental income and minimize void periods. With careful planning and management, HMO properties can be a profitable investment for those looking to diversify their portfolio.