Many properties are being converted to HMOs to increase profits for landlords
Buy-to-let landlords have been hit by a barrage of changes in the past year, facing tax reliefs cuts, stamp duty bills hikes and a consequent clampdown on mortgage availability.
For many, particularly in London and the South East, the sums no longer add up on conventional property lets.
But some are finding ways to maximise rental income and improve profitability despite these headwinds – by converting family homes into shared accommodation.
Usually landlords rent a property on the basis that one person or household is responsible for paying the rent, even where there may be a family of five residing in that home.
But increasingly, more experienced investors are recognising the opportunity to raise the overall rent earned from a property by renting to each individual or household living there separately.
An arrangement like this is more complex to manage, can require a licence from the local authority and generally incurs higher maintenance costs for landlords.
This type of buy-to-let is known as ‘houses in multiple occupation’ and while yields on a standard buy-to-let averaged 5.8 per cent in the first three months of the year, data from Mortgages for Business showed HMOs yielded an average of 10.2 per cent.
An HMO usually has four to six bedrooms, although the classification of this alters from council to council.
BUY-TO-LET PROPERTY TYPES
These are standard buy-to-let transactions. Properties in this category tend to be normal two or three-bed houses and flats. Both borrowers and properties fit the general lending criteria for off-the-shelf products offered by the mainstream buy-to-let lenders.
Average yield in Q1 2016: 5.8 per cent
Houses in multiple occupation
An HMO is when unrelated tenants have exclusive access to their rooms and share part of the accommodation, such as the kitchen or the bathroom. Examples include bedsit style housing or student shared housing. An HMO may require a licence based on the number of storeys and/or the number of tenants, depending on the local authority.
Average yield in Q1 2016: 10.2 per cent
Multi-unit freehold blocks
This is a single building with multiple, separate, independent residential units owned under a single freehold title. Examples include purpose-built blocks of flats or Victorian houses converted into flats.
Average yield in Q1 2016: 7.8 per cent
Also known as mixed investments, as both names suggest these properties are made up of part-commercial and part-residential elements, typically shops or offices with flat above.
Average yield in Q1 2016: 8.1 per cent
Government regulation states that an HMO is at least three tenants living in a home forming more than one household, sharing a toilet, bathroom or kitchen facilities.
It becomes a ‘large HMO’ if it has more than five tenants and is over three floors.
Large HMOs automatically need a licence from the council and usually other rules also apply.
Chris Bramham, director of specialist mortgages and buy-to-let at adviser Brightstar Financial, said: ‘For example, each bedroom will be let as a separate room and each will need a separate lock and a fire door, amongst other things.
‘The biggest difference for the landlord between a property with multiple tenants and an HMO however is the way the tenancy agreement is constructed.
‘With a shared occupancy in a building, there is one tenancy agreement covering all the occupants, no matter how many rooms a house has.
‘An HMO on the other hand requires individual short-term tenancy agreements with each of the tenants.’
Understanding what is required of you as an HMO landlord is not always straightforward.
Ying Tan, of adviser The Buy to Let Business, said: ‘There is still some confusion amongst landlords surrounding HMOs and I think this stems from the fact that not all HMOs require a licence.
‘There is a general misconception that a property let to five or more people forming two or more households is an HMO while anything less is a multi-let but this isn’t actually the case.
‘A property with just three tenants can be an HMO if those tenants form two or more households – in other words if they’re not related.
‘HMOs with five or more tenants or where the property consists of three or more storeys require an HMO licence and I think there is where the confusion lies.
‘A good guide is if there is more than one household and some facilities are shared it’s an HMO.
‘There’s also a mistaken belief that only properties with individual tenancy agreements for each tenant are HMOs. Again this is not the case. An HMO can be let on a shared tenancy or individual tenancy basis and there are benefits and disadvantages to both.’