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It’s no secret among property investors that running a successful house in multiple occupation (better known as an HMO) can be a highly profitable venture.
HMOs tend to generate a higher rental yield than your standard buy-to-let. Why? With an HMO, you rent out individual rooms to multiple tenants rather than renting the whole property to one person. This strategy allows you to charge more rent than you would if you were renting the property as a whole.
Of course, with greater rental yield comes greater responsibility! Managing an HMO can be more time-intensive than a traditional buy-to-let as you have multiple tenants to look after and additional compliance responsibilities. But is it worth it? Most HMO landlords would say yes.
If you’re thinking about investing in your first HMO, it’s important to go into your new venture with your eyes wide open. While HMOs offer the potential for increased profits, they also come with additional costs.
In this article, we’ll explore the real cost of investing in an HMO, breaking down the associated expenses to help you make an educated decision about whether HMO investment is a viable option for you.
How do HMOs differ from your standard buy-to-let?
Before we break down the costs of buying, developing, and managing an HMO, it’s important to understand how they differ from your standard buy-to-let. These differences, particularly in how they’re structured and regulated, explain why the cost of investment can be significantly higher.
What is an HMO?
An HMO is a type of shared housing where the property is let out to three or more people who aren’t from the same household. Typically, each tenant rents their own room, and communal areas like the bathroom, kitchen, and living spaces are shared. The most common type of HMO is student housing, although HMOs have become increasingly popular as an affordable housing solution for young professionals and other people looking for flexible, cost-effective living arrangements.
What are the benefits of investing in an HMO?
Aside from generating a high rental yield, HMOs also offer a more consistent rental income. Unlike a standard buy-to-let, where losing a tenant means the entire property becomes vacant, an HMO spreads the risk across multiple tenants. If one tenant leaves, you may experience a drop in rental income until you fill the vacancy, but you’ll still receive rent from the remaining occupants.
Additionally, demand for HMOs, particularly student properties, tends to be high and consistent, meaning fewer void periods to contend with.
Legal requirements for managing an HMO
While this all sounds positive so far, the legal requirements for managing an HMO are more complex than those for your standard buy-to-let. Let’s explore some of the additional compliance requirements faced by HMO landlords.
- Mandatory HMO licensing.
- Minimum room size requirements.
- Strict fire safety regulations.
- Council inspections.
- Waste disposal and management rules.
Many of these additional requirements come at an additional cost, which we’ll explore in more detail later in this article.
HMO initial investment costs
The initial cost of investment covers everything you need to spend to acquire and set up an HMO property. These upfront costs are often higher than for a standard buy-to-let because HMOs usually require larger properties and significant modifications.
Initial investment costs include:
Property acquisition costs
If you’re buying a property to convert into an HMO, size matters! The most profitable HMOs usually have at least five bedrooms, as more tenants mean more rental income. Many investors choose properties with an additional reception room, which can be converted into an extra bedroom to boost profitability further. Of course, the larger the property, the higher the purchase price.
Stamp Duty Land Tax (SDLT)
The Stamp Duty due on your property depends on whether you buy it as an individual or through a company. The standard SDLT rate for additional properties is 5%. However, if you’re buying the property through a limited company, you may be subject to a higher rate.
Conveyancing and valuation fees
There are two main types of property surveys to choose from: the Lender’s Valuation Survey and an RICS Survey. Mortgage lenders typically require a Lender’s Valuation Survey, which focuses primarily on the property’s market value. While it’s the cheaper option, it won’t provide a detailed assessment of the property’s condition. The RICS survey provides a more comprehensive assessment of the property’s condition and structural integrity. It can identify potential issues that may otherwise go unnoticed. For HMO investments, where signifcant sums are at stake, opting for a full RICS Survey is a wise decision that provides peace of mind that the property is structurally sound.
Renovation costs
Converting a property into an HMO is often far more expensive than refurbishing a standard buy-to-let. This is because HMOs are subject to far stricter regulations surrounding minimum room sizes, fire safety, and tenant facilities. Common renovation costs include reconfiguring layouts, fire safety upgrades, utility upgrades, architect fees, and project management costs.
Planning permission costs
Before starting your project, check your local authority’s rules to find out whether you require planning permission. You may need to submit a planning application and pay a fee if your HMO is going to house six or more people or is in an Article 4 area.
Other initial expenses to consider include valuation fees, broker fees, and insurance costs, all of which can be more expensive for an HMO.
HMO compliance costs
Because HMOs house so many tenants under one roof, landlords must adhere to stricter laws and regulations to ensure the safety and welfare of their tenants. Additional costs relating to compliance include:
Licensing fees
In the UK, most landlords must obtain a mandatory HMO licence from their local council before they can legally run an HMO. The cost of obtaining a licence varies from one local council to another and depends on the size of the HMO.
HMO licences typically last for five years and cost anywhere between about £500 for a small HMO and over £1,500 for a large HMO. You can find out the cost and apply for a licence on the .gov website.
Fire safety equipment
HMO fire safety requirements vary depending on the size of your property. Self-closing fire doors should be installed in every bedroom and high-risk area. The property will also need an appropriate smoke alarm system, with very large HMOs requiring a more advanced interlinked system.
Gas and electrical safety inspections
By law, you must also ensure that your HMO always has a valid Gas Safety Certificate and Electrical Installation Condition Report. The gas safety inspection should be carried out once a year, while the electrical inspection must be completed at least once every five years.
HMO management and operational costs
Once your HMO is up and running, it will require more time and money to manage on a day-to-day basis than your standard buy-to-let. With multiple tenants under one roof, landlords must account for higher utility usage, more frequent maintenance, and additional management expenses. The main ongoing costs to budget for include:
Utility bills
In a traditional buy-to-let, tenants usually cover their own utility bills. However, with an HMO, it is more common for tenants to be charged rent that is inclusive of bills. This means that it is the landlord’s responsibility to manage and pay utility bills like gas and electricity, water, broadband, and TV licence. Bear in mind when calculating the price of all-inclusive rent that utility bills in HMOs tend to be significantly higher than in a single-let property.
Council tax
HMOs are considered single dwellings for tax purposes. Therefore, it is the landlord who is responsible for paying council tax. The price of council tax depends on the council tax band the property is in. Costs usually vary somewhere between £1,500 and £3,000 per year.
Property maintenance and repairs
When managing an HMO, it’s important to expect more wear and tear to the property and furnishings than you would expect with a traditional single-let rental property – particularly in shared spaces like bathrooms and kitchens. Budget for more frequent repairs and maintenance to plumbing and kitchen appliances. Flooring is also likely to experience faster deterioration due to the high number of occupants. It’s recommended that HMO landlords set aside 10-15% of the annual income for property maintenance and unexpected repairs.
Cleaning and gardening
HMO landlords are responsible for keeping the communal areas of their property clean and well-maintained. If necessary, you may need to hire a professional cleaner to come and clean hallways, kitchens, and bathrooms weekly or biweekly.
Letting agency fees
Whether you choose to outsource property management to a letting agency is a personal decision that largely depends on your circumstances. If you are in full-time employment or are managing a large portfolio of properties, then paying for a full property management service may be unavoidable. Otherwise, if you can self-manage the property, this will save you a significant amount of money.
Void periods
Due to the nature of shared living, HMOs often have higher tenant turnover than your typical rental property. Every time a room stands empty, this means a loss of rental income. It’s important that landlords budget for these void periods to help manage cash flow risks and ensure that they always have enough money to cover mortgage payments, bills, and council tax.
Is HMO investment worth it?
Investing in an HMO can be highly profitable, offering excellent rental yields and reliable rental income. However, it’s not a get-rich-quick scheme – success depends on finding the right property in the right area, understanding the higher upfront and operational costs, and being prepared for increased management responsibilities.
Before jumping into the HMO market, take time to understand the financial and regulatory commitments involved. Planning ahead and budgeting for these expenses will put you in the best position to succeed.
With the right knowledge, preparation, and strategy, an HMO can be a valuable and rewarding addition to any property portfolio.
