What is a HMO House?

28th June 2022

Put simply, houses in multiple occupations (HMOs) are types of property geared explicitly towards renting. HMOs are flexible rental properties and can be anything from student-specific housing to flat-shares for professionals.

With rents increasing rapidly, many people see HMOs as a good investment. So here we will explore what a HMO is and why this option may appeal to landlords who are thinking of investing.

The HMO Basics

The definition of HMO is defined in UK law under section 254 of the Housing Act 2004. It is specifically defined as a property of three or more occupants, in more than one household, that all share facilities.

There are two ways to determine whether other types of property are/can be HMOs:

1. The self-contained flat test
2. The converted building test

The HMO process for a flat will differ slightly to a house.

The self-contained flat test uses the same criteria for houses and applies them to self-contained apartments. The converted building test applies a few more criteria such as:

• A building where one or more units of accommodation have been converted/built,
• Contains at least one non-self-contained unit of accommodation,
• Occupation as living accommodation is the only use of that property,
• And rent is payable.

A Guide to HMO Licencing

For a lot of HMOs a licence is required from the local authority in order for a landlord to rent it. There are three main types of licencing that are necessary for HMO house operation. These licences are:

1. Mandatory licences
2. Additional licences
3. Selective licences

The process can be lengthy and complicated so working with a property manager is advised.

1. Mandatory licences

Mandatory HMO licences are not required for all HMOs. A landlord will only need to have a mandatory licence from their local authority in England and Wales if the property has over 5 or more occupants from more than one household sharing the facilities.

In Scotland, this applies if 3 or more occupants are sharing facilities. Additionally, a mandatory licence is required if the HMO is 3 storeys or taller in height in all UK nations. 

2. Additional licences

Additional HMO licences are only required by certain local authorities and can cover HMOs not subject to mandatory licences. Depending on the local authority additional licences could be required in an entire borough or only required in specific wards, streets, and postcodes.

Additional licences tend to apply more often in larger cities where the proportion of working professionals to families is higher and so there is a greater demand for safety measures. 

3. Selective licences

Selective HMO licences can be issued by local authorities in order to deal with high levels of anti-social behaviour or a low demand for housing. These licences aren’t exclusive to HMOs and can also apply to commercial properties and standard rental properties.

Since 2015 councils have been required to ask for permission from the Secretary of States approval for any selective licence that applies to more than 20% of a borough or 20% of private rented properties in a specific area.

The Benefits of HMO Housing

Whilst HMOs require a license, there are several benefits for landlords looking to invest in this property type, from a higher rental yield to lower maintenance costs. 

The benefits of HMO housing include:

1. High HMO rental yields
2. Strong & consistent demand
3. Shared facilities

Here are those benefits in more details so you can identify if they apply to your investment goals as a landlord…

1. High HMO rental yields

Higher rental yields are more likely to be achieved on HMO properties due to the fact that there will be multiple tenancies within a property. Especially in the current market where demand is outweighing supply which will also affect rental prices, investors would make a better return on their investment quicker in this scenario.

2. Strong & consistent demand

There is a strong demand for housing due to the current market. However, nowhere is demand higher than in university towns and city centres.

With more students going to university every year, demand for HMO properties in the form of student accommodation is only set to increase over time. Furthermore, this is bolstered by more young professionals looking to move closer to their place of work in city centres.

Student housing can deliver a very positive return on investment in a shorter period of time compared to standard rental.

3. Shared facilities

HMOs also usually have lower maintenance costs than standard rental properties. This is due to them having facilities that are shared between multiple tenants. Over an extended period of time, this can noticeably reduce the outgoing costs for a landlord.

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If you are a landlord looking to invest in a HMO property or need help submitting a HMO licence application you can get in touch with us here to find out how we can help you. Alternatively, you can find all our property management services here.

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