HMO Property
Investing in HMO property can be a great way to generate additional income and increase your property portfolio. To learn more about HMO property investment, read our complete guide and contact us if you need any help.
What is an HMO Property
HMO property stands for House in Multiple Occupancy. It refers to a residential property with multiple households. Usually, the property is a single house with one legal freehold title. It is divided into multiple rented rooms with shared facilities like a kitchen, living area, or bathroom.
A household is either a single person or members of the same family living together. When three tenants with more than one household live together, it is classed as an HMO. If there are five or more tenants from different households, it becomes a large HMO. Large HMOs must be licenced. This is a compulsory requirement. However, other HMOs may need to be licenced, depending on the local authority where the property is located.
The main benefit of investing in HMO property is the ability to charge rent for each bedroom. This often results in a higher potential return for investors.
Besides financial benefits, investing in HMO property offers other advantages. Renting multiple rooms reduces the risk of full vacancy compared to single-family homes.
Benefits of Investing in HMO Property
Investing in HMO property can boost your income and expand your property portfolio. Here are some key advantages.
Higher Returns – HMO properties yield higher returns than single-family homes because you can rent multiple rooms. Additionally, there are fewer void periods and a lower entry point usually ensures strong tenant demand.
Tax Treatment – You can often deduct business expenses, such as marketing, maintenance, and repairs, from taxable income when investing in HMO property.
Less Risk of Vacancy – There is less vacancy risk since HMO properties are rented to multiple tenants. Single-family homes are more likely to have vacant periods.
Diversified Portfolio—Investing in HMO property lets investors diversify their portfolios and help various tenant types. Moreover, HMOs effectively address the housing shortage.
Buy-to-let Affordability—The higher rental income from HMO properties ensures affordability for the required loan size, which can be advantageous for property investors.
What Types of Accommodation are Considered to Be an HMO?
HMO property is a building rented to three or more tenants with shared facilities. Various types of accommodation can be considered an HMO. Here is a list of the most common types:
Firstly, houses or flats with individually let bedrooms and shared facilities. Secondly, student accommodation. Thirdly, a building is converted into flats, but not all are self-contained. Fourthly, a building converted into self-contained flats that did not meet building regulations. Also, less than two-thirds are in owner occupation.
However, other freehold properties with more than one self-contained flat without shared facilities would not be classed as an HMO. These types of properties are called Multi-unit blocks (MUB) or sometimes Multi-unit freehold blocks.
What is Multi-Unit Freehold Block
A Multi-Unit Property, known as ‘MUB’ or ‘MUFB’, contains self-contained flats with their own entrances. There are no shared facilities. All the flats sit on one legal freehold title. Thus, even if there are four flats, the land registry shows one property.
When selling the flats, it is one legal transaction for all of them. Similarly, mortgaging the flats requires just one mortgage.
Multi-unit properties, similar to HMOs, offer higher income possibilities. Some investors buy large freehold houses and convert them into self-contained flats.
This increases the property’s rental value. However, selling individual flats requires creating long leaseholds. These must be registered with the Land Registry. A solicitor can assist with this process.
What are the Main Differences Between HMO Property vs Multi-Unit Property?
HMO Property
- HMOs typically refer to a property with multiple tenants sharing facilities.
- HMO properties generate higher returns for investors due to the ability to rent out multiple rooms in the same building.
- Due to the shared facilities, HMO property requires more management than traditional rental properties.
- HMO property may require the landlord to obtain a licence.
Multi-Unit Property?
- Multi-Unit Blocks have multiple units but only one tenant per unit.
- Multi-Unit Blocks have no shared facilities
- Converting a house into a multi-unit block can be a good investment for both income and capital.
- Multi-Unit Properties can require less management as there is usually only one tenantcy per unit.
- Most multi-unit properties do not require a licence.
Are there Mortgages for HMO and MUB property?
Many lenders will consider lending on HMOs and also on Multi-Unit Blocks (MUB). When a property needs an HMO licence, specialist lenders mainly consider it, not mainstream lenders. Moreover, commercial lenders can consider the largest properties.
Some lenders normally have a maximum number of letting rooms or units of 4 to 8. Commercial lenders often do not have a limit. Therefore, a property with 20 letting rooms can be mortgaged. A commercial lender can also finance a block of 20 individual flats on one freehold.
- Are there any locks on the internal doors?
- Will there be one tenancy agreement that all tenants sign, or will each tenant get an individual agreement?
- Does the local authority still require one if the property does not require a mandatory licence (5 or more tenants)?
It is worth also noting that not all lenders will consider properties with more than one kitchen.
These factors will determine the lender’s available choice. Our mortgage adviser at Connect will then be able to guide you to the best lender options for your MUB or HMO.
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Thinking of getting a mortgage? Our experienced team of skilled mortgage advisers are here to offer the essential guidance you require. Relying on our comprehensive understanding of the mortgage market, we’ll ensure you secure the perfect mortgage to suit your specific situation.
Mortgage Advice..
Thinking of getting a mortgage? Our experienced team of skilled mortgage advisers are here to offer the essential guidance you require. Relying on our comprehensive understanding of the mortgage market, we’ll ensure you secure the perfect mortgage to suit your specific situation.
HMO Property Requirements and Standards
HMO property requirements and standards may vary from one local authority to another depending on the regional legislative framework in place. Investors and landlords need to become informed about the requirements for their area to ensure that their property is compliant.
It is also important to note that HMO properties require more stringent management than traditional rental properties due to the multiple tenants living in the same building. Thus, landlords and investors must take the necessary steps to ensure their property meets all safety standards, legal requirements and tenant regulations.
This includes conducting regular inspections of the property, ensuring fire safety measures are in place and up to date and providing tenants with a written tenancy agreement detailing the rights and responsibilities of both parties.
A HMO licence may also be required, subject to the number of tenants and the local authority. For very large HMOs planning permission may also be required.
HMO tenancy agreements
All tenants of an HMO property must have a tenancy agreement that details both parties’ rights and responsibilities.
With a HMO, it is possible for all tenants to be listed on one single tenancy agreement together. This is often used for student lets or lets to groups of friends. Each tenant is equally responsible for the tenancy, and if the tenancy ends, it usually finishes for everyone at the same time. Some, but not all, HMO mortgage lenders will only lend where all tenants are on one agreement.
The other option for a HMO is for all tenants to be on one separate tenancy agreement. This means tenants do not need to know each other and can move in and leave the property at different times. It is mostly specialist HMO lenders that will consider this type of tenancy. This is because should the lender have to repossess the property, evicting multiple tenants on differently-dated agreements is more complex.
Tax implications should always be taken into account when investing in property. For example, in the UK, profits from rental properties are subject to tax, and landlords must declare any rental income to HMRC.
Depending on your financial situation, you may be eligible for certain reliefs such as mortgage interest relief or a Wear and Tear Allowance which could reduce the amount of tax you owe.
Higher-rate taxpayers cannot fully offset the cost of the mortgage payments, as rules introduced in 2017 restricted the offsetting to the basic level of tax. In turn, this has made purchasing a buy-to-let via a limited company more popular, as the changes only affected properties in individual ownership.
Speaking with a Tax Adviser or accountant to discuss the potential tax implications before taking out a HMO buy-to-let mortgage is essential.
It is also important to note that landlords must adhere to certain standards when it comes to managing their HMO properties. This may mean obtaining a HMO licence or in some cases planning permission.
Safety checks should be out regularly and that tenants are provided with adequate living conditions.
Does My Property Need an HMO Licence?
It is mandatory that all HMO properties with 5 or more tenants that form more than one household hold a licence.
All other HMOs may require a licence, depending on the local authority. This is because local authorities can use their powers to insist that smaller HMOs have a licence using ‘additional’ or ‘selective’ licencing powers.
Investors should always check with their local authority on their specific requirements. It’s worth noting that some HMO mortgage lenders will lend on properties needing a licence, and some won’t.
HMO licences are based on the property, but issued to the landlord, and are not transferrable. If you are buying an existing HMO, you will need to apply for the licence yourself.
If a landlord or investor does require an HMO license, they should contact their local authority for more information about how to apply and what is needed for approval. Depending on the area, the application process may take several weeks, and additional safety checks may need to be carried out for a license to be granted.
HMO mortgage lenders will expect you to have at least applied for the licence before your mortgage completes and will ask your solicitor to confirm this.
How Can Connect Mortgages Help?
The Advisers at Connect Mortgages can help you find a suitable HMO lender or Multi-Unit Property mortgage.
With years of expertise in the mortgage industry, Connect Mortgages are the go-to specialists for all types of mortgages. Whether you require a HMO mortgage property or Multi-Unit Block mortgage, we can help you to secure the finance to realise your property ambition! We understand that navigating the complex rules, regulations and requirements when it comes to HMOs can be a challenge, and we are here to help.
We have access to exclusive deals from specialist lenders, which may not be available to you directly, and we can assist with the application process. We also provide in-depth advice on all aspects of HMO property mortgages to ensure landlords and investors can make informed investment decisions.
If you need help finding a suitable HMO lender or Multi-Unit Property mortgage, contact the Connect team and get the right advice for you and your property. We’re here to help make investing in HMO properties as straightforward as possible!
Final Thought
HMO properties can be a great investment opportunity for landlords and investors who are willing to research the necessary requirements thoroughly. By familiarizing themselves with local laws and regulations in addition to any specific rules that may apply, landlords and investors can ensure that their HMO investments are compliant with all relevant legislation.
If you require help finding a lender for a HMO mortgage or Multi-Unit Property Loan, then contact the Connect Mortgages team. We are here to provide you with the right advice and support throughout the process of applying for a loan, so that you can focus on creating successful HMO investments.
FAQs: HMO Property
Most frequent questions and answers about HMO property
Yes, you can check if a property has an HMO licence. The best way to do this is by contacting your local council or housing association office and asking them to verify the status of the HMO license for the property. It’s also important to look into any additional regulations that may apply in your area before investing in an HMO property, such as rent cap laws or legal limits on tenant numbers per unit.
Yes, you can buy a HMO property to live in. In order to do so, you must be aware of the specific criteria and requirements of the mortgage lender you are using. It’s also important to understand any local regulations that may apply when renting out an HMO property. Consider all aspects of the investment including repairs, maintenance, insurance policies, and other administrative fees before committing to your purchase.
HMO properties can be a great investment option, especially if you are looking to increase your rental income quickly. HMOs typically have higher occupancy rates than other types of buy-to-let investments and offer more flexibility with tenants, meaning greater returns both in the short and long term. However, it is important to consider all aspects of the investment before committing, such as insurance policies, repairs and maintenance costs, tenant preparation fees and health and safety regulations.
An HMO is considered a residential property and is not typically classed as a commercial property. It is regarded as a special type of rental property, since it provides accommodation for multiple occupants in individual rooms, sharing some facilities. The Health and Safety Executive (HSE) has introduced specific guidelines to protect the welfare of those living in an HMO. Make sure you are aware of any local regulations that may apply when renting out an HMO property.
What next?
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About the Author
Liz Syms is the CEO and Founder of Connect Mortgages, a specialist in finance for property investment. With over 25 years of experience in mortgages and financial services, Liz has helped countless people get their dream homes and investment properties. She is passionate about giving her clients the best advice possible when it comes to financial decisions relating to mortgages and protection and is dedicated to providing the highest quality of service. With her wealth of knowledge in the industry, Liz is a respected leader in mortgages and financial services and has grown her team to over 300 advisers nationally. She strives to make Connect Mortgages one of the most successful companies in its field.
About the Author
Liz Syms is the CEO and Founder of Connect Mortgages, a specialist in finance for property investment. With over 25 years of experience in mortgages and financial services, Liz has helped countless people get their dream homes and investment properties. She is passionate about giving her clients the best advice possible when it comes to financial decisions relating to mortgages and protection and is dedicated to providing the highest quality of service. With her wealth of knowledge in the industry, Liz is a respected leader in mortgages and financial services and has grown her team to over 300 advisers nationally. She strives to make Connect Mortgages one of the most successful companies in its field.