Now a very popular strategy in property investing now is HMOs.
There is a difference between what a HMO is and the strategy of a HMO.
HMOs or Houses of multiple occupation investment strategy is where you have a 4 bedroom house (or more), where instead of letting the property to an individual or family (or business potentially), you rent out on a room-by-room basis.
The most common example people know is a student let. Where there is a big student complex and each student pays for there own room. However does work for different demographics.
The reason this strategy is so great is the much higher cashflow.
You own a 4-bedroom house that costs you £100,000, and you let it out to a family for £600 per month. Instead you could rent each room out to a professional worker at £375 per month and earn £1,500 per month.
Now with a HMO there are additional costs due to bringing up it to licensing standards (coming onto shortly), and normally bills are included so the monthly expenses will be higher.
In this example we could have a single-let house renting at £600, expenses at £400.
This results in a monthly profit of £200.
With a HMO you would have £1,500 of rental income per month, at an estimate of £750 of monthly expenses.
This would equal a monthly profit of £750.
All with the same house just a different strategy.
Higher cashflow, higher profit, it’s perfect… but there is a lot more background work with HMOs. This normally falls into either Planning or Licensing
Normally, the reason planning permission is a popular topic in HMO conversation is that a single buy-to-let and a HMO are classified differently by banks and the government. What this means is that in certain areas there is something called ‘Article 4 Direction’.
What an ‘Article 4 Direction’ area does is, it prevents people from converting their single lets into HMOs without getting planning permission, which normally takes up to 8 weeks to be approved or not.
This causes issues where if an investor purchases a house within an article 4 area with the plan of converting it into a HMO. Having to wait 8 weeks can cause the costs build up with the mortgage interest costs and utilities costs, as well as no tenants to cover those expenses. If the planning permission is refused it may be an issue of having to sell the property quickly or renting as a single-let where the numbers may not be as profitable.
These are the reasons a lot of people avoid article 4 areas, but if you do find an area that does HMOs well and is in a non-article 4 area, you are in a great position. But in the case of living near and wanting to invest in an article-4 area, there is still plenty of chance for potential profit.
The reason article 4 areas exist is so councils can control the number and the spread of HMOs in the area. This is important as a lot of people believe an article 4 area is just an area that stops HMOs and will refuse every application. Best policy is to speak to the council where you are interested in investing and just ask what their appetite towards new HMOs are. Also, if you’re in a non-article 4 area it may be best to check if there are any future plans to introduce it, for instance if you purchase the property and before your refurbishment is complete, article 4 is introduced. Which then may cause issues with planning permission.
So, with an Article 4 area I would look for houses that would still work well as a HMO and check with the council the possibilities therein.
Purchasing an existing HMO also works as since it already exists, planning permission shouldn’t come into it. If it is only a 4-bedroom HMO there’s the possibility of converting it into a 5 or 6 bedroom without need of planning permission.
*Prior to this year, there were occasions where a HMO may not have needed a license, but there is a change coming in soon requiring all HMOs to be up to license standard. If you currently own a HMO but aren’t sure if it is up to licence standards, contact your council to clarify their standards to be doubly sure*
Now HMOs require a license, this means the property must meet requirements/standards as set by the council. These are normally room sizes, amenities, fire safety and sometimes other items depending on where you live, and your local authorities needs on the property.
A standard rule is that room sizes for tenants must be a minimum of 6.52 square metres, or 70 square foot, this is for properties with a communal area. Properties without a communal area must have rooms at a minimum of 10 square metres.
The main one is the number of bathrooms with the standard being 4 tenants to 1 bathroom. Although I do know that there can be 5 tenants to 1 bathroom areas, but I personally feel that’s harsh on the tenants and that sticking to the 4-1 rule, provides a much better experience for the tenants as well as probably attracting better tenants. There is requirements regarding cooking facilities for the tenants in the property e.g. the number of hobs, number of sinks, ect..
Although licences do bring about extra costs both in bringing the property to the correct standard, in addition to the cost of the license. The value this brings to the tenants, especially with fire safety, the need of Grade A fire alarms, fire doors is something that is going to help the market in my opinion.
This need for safety is nothing but good. This will help prevent the number of rogue landlords and properties where there is potential risk to the tenants. Also, providing a higher standard for the tenant. This works well for us in the long term, where people will want to be tenants and reduces void periods as it increases the demand for the property.
Now I’ve mentioned about standards with licensing, but I know they do vary with certain councils e.g. some councils require 7.5 square metres per tenant room.
The councils are the best sources of information when I’m looking into properties and standards, so it’s always good to check especially if the interest is in a property outside your normal living area.
KEEP IN MIND
- If you are unsuccessful with planning permission, there shouldn’t be too many issues just potentially additional costs. For instance, if you have started work and then been refused. But normally nothing too permanent.
- Licensing on the other hand, is different if you are letting a HMO that is not at a license standard there is potential fines of up to £20,000 and/or Jail Time.
This means you must conduct your due diligence on the property properly, and be sure the refurbishment is done correctly which can be checked by talking to the license agent at your local authority.
Or make sure you have an investor who knows their stuff who can do it for you *wink wink*.
In summary, you should now know the difference between planning and licensing, how they are both important and the fact that if you are going down the route of HMOs to be keeping in mind to go through both processes properly.
Thanks for reading.