In This Article
What is an HMO?
An HMO which stands for House of Multiple Occupancy is a dwelling that is occupied by more than one family, usually under one roof.
For example, this may be a four-bedroom house with all four bedrooms let on an individual basis each with their own tenancy agreement in place.
When this is the case, the tenant is only responsible for paying the rent as per their individual tenancy agreement rather than all tenants having a joint obligation to make sure the rent for the entire property is paid on time.
HMO properties usually have extra restrictions and often require licenses from the local council.
An HMO may need a different type of mortgage that may have a higher interest rate than that of a single occupancy buy to let. A qualified mortgage adviser would be able to confirm this. Here is more information about what is an HMO and HMO Mortgage.
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Who lives in an HMO?
Different HMO properties who house different types of people. for example, some HMO investors may focus on the student market. This would mean that they buy HMO properties located close to universities for them to be occupied during term times.
Other HMO investors may focus more on the professional market. An example of this could be an investor who buys an HMO property in London, letting to four individuals that have professional jobs in the city.
Some investors may prefer this type of tenant as they may be expected to earn more and have a different lifestyle to a student.
There are investors that look for HMO properties close to a place of work such as a hospital knowing there will be demand from the people working there such as the nurses.
There is no fixed rule though and some may contain a complete mixture of people. Information from Shelter about owning an HMO.
What is a single occupancy buy to let property?
A single occupancy buy to let property is one that is let under one tenancy agreement. This may be to a person living there on their own or to a family.
This type of buy to let property is more common than an HMO and is more likely to be easier to run having just the one tenancy agreement in place.
Like an HMO, there are still rules and restrictions regarding the rental of the single occupancy property but there are generally less guidelines than there are with an HMO.
Single occupancy versus HMO for profit?
A common question is ‘what is more profitable, an HMO or a single occupancy buy to let property?’
The answer to this is usually the HMO. This is because with all rooms let on an individual basis and the property being full, you can generate more rental income than what you could on a single occupancy basis.
For example, if you had a five-bedroom house in Sheffield that would usually attract £1,400 per month when let as a whole, it may be a completely different subject when the rooms are let one by one.
If it was decorated to a standard that each room could attract £500 per month, this would mean a gross rental income of £2,500 per month as opposed to the £1,400 so and extra £1,100 per month in rent.
This is of course only the gross rent though so costs would likely be higher when you factor in the management, bills and of course, any empty rooms.
So, to summarise, with single occupancy versus HMO for profit, HMO is usually the winner but there is more to take into account than just the extra rent.
What are the positives of renting out an HMO?
The most obvious positive of renting out an HMO property is that it can attract a higher yield than standard single occupancy buy to let property.
This because the rooms are left individually at a higher price than what they would be if they were all under one tenancy agreement.
Another advantage is that even if the property was not completely full, you may still be getting more rent than what you would if the property was on an individual basis and empty.
For example, if you had a 5-bedroom HMO that would attract £500 per room, you would need to be quite unlucky for all five of these bedrooms to be empty. If one more room was empty, you would still be bringing in £2,000 pounds per month in rent.
That same property if let on an individual basis may only attract £1,400 per month and with only one tenancy agreement in place, the chance of it being completely empty bringing in no money at all is significantly higher.
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What are the downsides of renting out an HMO?
Although we have established that renting a property as an HMO would likely bring in more money than what it would on a single occupancy basis, there are definitely downsides to owning HMO’s. Some examples of these are as follows:
More time consuming
HMOs are considered harder and more time consuming to run. This is because rather than have one individual or set of tenants (e.g. a family) you will likely have four, five or more tenancies in place for the same property. Collecting rent from them all in time can be more of a challenge than just dealing with a tenant on a single occupancy basis.
More red tape
There is usually more red tape with an HMO. Due to the number of people living in the property, there are often more rules and guidelines to meet in order to be legally allowed to let the HMO property. You will need to deal with the local council who will tell you what you need to do in order for your property to be let as an HMO, this could be arranging things such as fire doors on all rooms and wide in smoke detectors.
If you are renting out the property on an HMO basis and the property has not met the guidelines, you may land yourself in trouble.
Higher level of tenant management
If you have a tenant in one of the rooms of your HMO property that is causing problems in the house, this may result in all of the tenants being unhappy and wishing to look for a new home.
For example, if one tenant likes to play loud music and do recreational drugs, this may cause problems if the other tenants dislike this behaviour and the person doing it will not stop.
Although it will likely be a breach of their agreement, unless they are willing to be considerate to others in the home, it could cause a toxic environment if there is friction between your tenants. Here is a useful link from the government about owning an HMO.
Where can I look for an HMO?
HMOs are located all over the country. When you are looking for your HMO, decide what kind of tenants that you want to attract as that will tell you what you need to be close to. For example, if you want to let to students, you need to be buying a property close to a university.
Your budget will also likely dictate where you buy your HMO. For example, if you have £150,000 to spend, you are unlikely to get an HMO in London although one in Yorkshire somewhere may be possible.
Some landlords choose to convert a standard residential to an HMO, you can find HMO Architect information here.
Can a first-time buyer buy an HMO?
Most lenders will not allow a first-time buyer to buy an HMO property as they feel they may be inexperienced as landlords so want them to either own their own property that they live in first or own another investment property.
There are however exceptions with a few lenders willing to consider an HMO mortgage for a first-time buyer. In this scenario, it’s best to speak with an experienced mortgage adviser that can give you tailored advice telling you whether you would get an HMO mortgage and what the costs and terms would be.
Would I get an HMO mortgage with bad credit?
It may be possible to get a mortgage for an HMO if you have bad credit. Adverse Credit is a complicated subject so it will depend on a number of factors. For example, whether it’s related to bankruptcies, Individual voluntary arrangements, debt management plans, defaults, county court judgements or something else.
Your mortgage adviser will be able to get a full understanding of what the bad credit consisted of and tell you whether there is a lender that can accommodate your situation.
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Should I use a mortgage broker when buying an HMO?
It is highly recommended that you use a mortgage adviser when you are looking to take a mortgage for an HMO property. HMO mortgages are more specialist than a normal buy to let mortgage so we would recommend finding a mortgage adviser with the relevant experience to be able to help you.
Not all lenders will offer mortgages on HMO properties so an experienced mortgage broker will be able to locate a Specialist Lender that can lend taking into account your individual circumstances.
They will be looking at your deposit, your experience, your income, your credit file, the property in question, the licence and types of tenants that you wish to rent to in order to find you the most suitable lender.
To conclude, for the argument of single occupancy versus HMO for profit when deciding which type of property will make you more money, HMO will usually come out on top.
Running an HMO property value is harder work than that of a single occupancy property.
Make sure that you do plenty of research before buying your investment property and are completely sure that the route that you are taking is right for you.
With both types of rental, you will need to declare your rental income to HMRC.
When looking to take a mortgage for an HMO or a single occupancy buy to let property, always take professional advice from a mortgage adviser.
If you would like to talk to a qualified mortgage adviser that can give you bespoke advice match to your scenario, I NEED ADVICE can arrange this for you if you complete the contact form.