Posted by Simon Misiewicz on 24th September 2013
Would you like to know the pros and cons of owning HMOs?
What is a HMO?
Houses in Multiple Occupation (HMOs), are residential properties where ‘common areas’ exist and are shared by more than one household. Common areas may be as significant as bathrooms and kitchens / kitchenettes, but may also be just stairwells or landings. HMOs may be divided up into self-contained flats, bed-sitting rooms or simple lodgings.
Strictly speaking, HMOs are not the same as purpose-built flat blocks, since most will have come into being as large buildings in single household occupation. Some legislation makes a distinction between those buildings occupied mainly on long leases and those where the majority of the occupants are short-term tenants (1), (2).
Increase your rental income
You can increase income of an existing single let property if you let the rooms out on an individual basis.
HMO example: Sarah has a single let property and receives £500 in rent. She then attends a course and is told that she can rent each room out (5 double bedrooms) for £350 per month as there is a strong demand from the local hospital from young doctors and nurses that want cheap accommodation. She uses Spareroom to rent all the rooms out and her estate agent manages the property as before.
HMO (room by room)
Less 10% agency fees
Net rent received
In this example you can see that Sarah has boosted her income from £450 to £1,225. Sarah pays the utility bills to prevent risk of bills not being paid by the tenants.
Please note that there will be additional costs for
- Advertising costs through Spareroom, EasyRoomMate etc
- Refurbishment & licences (to satisfy fire regulations)
- Additional furniture (as most HMOs would be furnished)
- Increase in maintenance due to the volume of people
- Potential communal cleaning fees
Decrease your cost & tax liability of HMO
In my previous article I provided many reasons why it would be beneficial to rent furniture in furnished
If Sarah chooses to buy her furniture rather than rent it then she would be allowed to charge 10% of the net rent (shown above) against her tax. Therefore the tax allowable cost if she bought the furniture would be £125.
If Sarah chose to rent furniture instead of buying it herself then she would be allowed to charge the full amount against her tax as “Hiring equipment”.
Other cost considerations
Managing HMOs is more time demanding because of the number of tenants, especially if you decide to manage the properties yourself. You will have the following costs to consider for you personally:
- Time meeting and greeting new tenants
- Exit inspections
- Travel time and costs
Local Authority considerations
Dependent on where the property is there may be considerations for planning, article 4, and HMO licencing. Please consult with the local authority that the property is in to get their rules and regulations. The below are examples from different Local Authorities.
If you are looking to change the structure of a building such as internal / external walls, roofs, extensions etc you will be required to contact your local authority and submit an application to make changes to the property (3).
This depends on what you want to do. Some minor alterations and extensions, particularly to houses, can often be carried out without the need for planning permission. This is known as ‘permitted development’. It often also depends on whether your house has been extended in the past. Even if you only want to put a conservatory on the back of your house, if your house has been previously extended, chances are you will need planning permission for the conservatory (4).
To give you an idea, here are some examples of the type of extensions that in most cases need planning permission, even if you have had no previous extensions:
- A two storey side extension;
- An outbuilding in the garden for a ‘granny annex’;
- An extension to the front of your house.
Article 4 requires you to obtain planning permission to convert a family dwelling (Use Class C3) to a HMO with between 3 and 6 unrelated people sharing (Use Class C4) (5) (6).
Article 4 was introduced by many local authorities to prevent communities from becoming imbalanced with extreme concentrations of HMOs which can have negative effects on communities (7).
A HMO licence requirements varies between different local authorities.
- Three or more storeys, and
- Five or more tenants in two or more households, and
- Shared facilities such as kitchen, bathroom and toilet.
The council has discretionary powers to widen the remit of licensing to include smaller HMO’s if we feel enough of them in an area are badly managed.
The licence can be granted for up to five years. In some cases the licence may not be granted for the full five years. For example if there are any concerns over the management of the property, or if there has been a history of problems of anti-social behaviour associated with the property.