Market Insight

HMO Investment Guidelines

What is a HMO Property? Why are HMO's so attractive to investors? How does planning work for HMOs?

Hugh Gibbs
March 1, 2023

House in Multiple Occupation or HMO for short, defines accommodation that is owned by a private landlord and shared among a number of people. The types of accommodation that fall under this definition depending on how many people are residing there.  In this article, SearchLand explores HMO properties, their investment potential and intricacies around the investment decision-making process;

Table of Contents

What Is A HMO Property?

Why Are HMO’s Attractive To Investors?

How Does Planning Work For HMOs?

Are There Any Associated Costs That Come With HMOs?

What Is A HMO Property?

A HMO is a building or part of a building that is occupied by three or more people forming two or more households. Occupants of HMOs typically share one or more amenities such as a toilet, bath and shower room, or kitchen. The types of accommodation that could constitute a HMO include;

  • Multiple bedsits in one building
  • Private halls of residence
  • Shared housing
  • Individual shared self-contained cluster flats
  • Converted flats
  • Hostels

As you can see, the application of the word HMO can be quite broad, but generally where there are three or more tenants in a property who make up more than one household with shared toilet, bathroom or kitchen facilities would constitute as a HMO.

Why Are HMOs Attractive To Investors?

The clearest benefit of investing in HMOs is that they can provide much higher returns and cash flow than most single lets and rental yields can be as much as three times higher.

With a single let a void period will mean an empty property, with a HMO, you may still have one or two tenants residing in the property, which is less impactful financially.  With multiple tenants, you're less exposed if a tenant falls behind on their rent as there are still other tenants that are still paying.

It’s largely known that tenant demand for flexible, affordable housing in the UK is on the rise, which also sees demand in cities for the average typical ‘household’ declining. At the same time, the overall population is increasing. These trends together are understandably leading to increased demand for HMOs in specific areas.

SearchLand is a great tool for investors looking at entering the HMO market.  It can be used to locate HMO’s in a certain area with information coming directly from the Land Registry, so you can be sure that your property data is as accurate as possible.

How Does Planning Work For HMOs?

Generally, property owners will need planning permission to change the use from a single dwelling to a house of multiple occupancies, however this is not always the case. 

Smaller dwellings that will accommodate a single household, or two unrelated individuals living together as their only main residence will not usually need planning permission. This would be considered as Class C3.  A smaller HMO would be defined as Class C4.  This is a small shared property occupied by 3-6 individuals as their main residence.  It is permitted development right to move between C3 and C4 classes and back without planning permission in most cases.  Larger HMOs do need planning permission.  A large HMO is defined as houses or flats which are occupied as a main residence by 7 or more unrelated people who share amenities such as communal kitchen and bathroom areas.

It is always advisable to check with the local planning authority, as additional limitations and conditions may well apply.  More information can be found on licenses and planning for HMOs on the website. 

Common investor pitfalls

Conducting thorough research is standard for property investors, but it isn’t entirely uncommon for things to get overlooked now and then.  SearchLand provides a low cost way to research planning applications submitted to local councils and make informed investment decisions based on Land Registry data.

  • Not applying for planning and operating as ‘rogue landlords’ and vulnerable to unlimited fines
  • Article 4 designations restricting permitted development pathways
  • HMO saturation thresholds where Councils set a maximum percentage of residential dwellings being HMOs within a set distance of a target property/planning app 
  • Can vary between 5-15% and use a 50-100 meter radius
  • Milton Keynes has a 35% threshold at 100m compared to Portsmouth City Council using a 10% threshold at 50m. 

Are There Any Associated Costs That Come With HMOs?

HMOs are very complex investment models and there are many risks involved. Without the right guidance and knowledge you could easily face unexpected costs.  Some commonly overlooked costs for your HMO can include;

  • Insurance - A necessity for protecting your occupants and property investment.
  • Void periods - As an investor be prepared to face a void period at some point.  Planning an estimated two to three weeks of unrented periods per year is a recommended contingency plan. 
  • Maintenance - To cover any renovations or repairs.  On average, 2% to 5% of the annual rental income can be estimated to cover HMO maintenance for a year
  • Management - A completely optional service depending on your personal approach.  The market rate for a specialist agency to fully run and manage an HMO typically ranges from 10% to 15% of the gross rental income.

The private rental sector now offers more HMOs than ever before and are ideal for students, professionals and are often a top choice for people who want affordable accommodation and the chance to meet somebody new. If you’re an investor and considering renting a property, consider using SearchLand to instantly access historic and current market value data for HMO’s and all property types in England. Start your free trial today to start making informed property and land decisions today!

Hugh Gibbs
May 9, 2024

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