A house in multiple occupation is a property rented out by at least 3 people who are not from 1 ‘household’ (for example a family) but share facilities like the bathroom and kitchen. It is sometimes called a ‘house share’ – gov.uk website.
A House in Multiple Occupation (HMO) can be considered a lucrative investment as the rent received for multiple rooms will often be more than the equivalent rent of a whole house to a single family. Investors do however need to be aware of the regulation, planning and lending challenges that present themselves with HMO property investment. Here at Aspire Property Finance we are able to assist throughout the buying process, giving advice on suitable lending options and other points to consider to ensure your purchase runs as smoothly as possible.
Typically, any residential house or flat (C3 use class) can be operated as an HMO (C4 use class) under permitted development rights, without the need for a formal planning application. This is up to HMO’s of 6 occupants however you need to check that the local authority has not imposed an ‘Article 4 Directive,’ removing permitted development rights. This is often done in university towns or other large cities to reduce the unchecked sprawl of HMO’s. In the event that the property is in an Article 4 area, a formal planning application to change the use to C4 (HMO) is required and you would need to ensure that your property meets additional criteria or is not too close to other Houses in Multiple Occupation.
With an HMO of 7 occupants or more, permitted development is not possible and you require a planning application changing the use to “C4 Sui Generis.” This is a capture-all planning class for these large HMO’s. Please speak to an architect if you are looking to convert a property to an HMO of this size, and if buying a large HMO please check with your solicitor to ensure that the correct planning exists for the property. Whilst a large HMO may seem daunting (and lenders often only consider these properties for ‘experienced landlords’) they can be quite profitable, especially if you spend the time obtaining the planning and making the conversion yourself (more about valuation methods below!).
Licencing is also important to understand when looking to invest in an HMO. Whilst some local authorities will have their own selective licensing requirements, there is a mandatory requirement for an HMO Licence if all of the following apply:
- The property is rented to 5 or more people who form more than 1 household.
- Some or all tenants share toilet, bathroom or kitchen facilities.
- At least 1 tenants pays rent (or their employer pays it for them).
In terms of valuations, smaller Houses in Multiple Occupation (up to 6 occupants, no Article 4 Directive) are likely to be valued on a “bricks and mortar” basis by surveyors with the valuation being based on comparable sales of ‘normal’ property in the area. As mentioned above, these smaller HMO’s have no specific planning consent to only be used as an HMO and could therefore be purchased and occupied by an owner occupier as well as an investor. Although some changes may have been made to the layout of the property, such as using a downstairs reception room as a bedroom, the property itself could quite easily and cheaply be converted back to a single dwelling. The rent received is therefore unlikely to have a bearing on the valuation of the property. Another investor could just buy a similar, unconverted, owner occupied property and operate it as an HMO for the same returns, so why would the HMO be worth any more?
If lots of additional bathrooms have been added for example, or the property is in an Article 4 area, some smaller HMO’s can receive a yield-based or investment valuation however the works need to have been substantial and offer an obvious benefit to any purchaser. In almost all circumstances, if you have 7 occupants or more (and therefore C4 Sui Generis planning consent) the property will be valued based on the rent received. Whilst the figures will vary hugely by area and property type, the following is the general method that valuers will use:
- Gross rent received for all rooms multiplied by 12
- Deductions made from this (where known or estimated) for landlords’ bills, management and voids
- Net rent divided by the % yield that an investor expects to see on their investment.
In tangible terms; if as an investor you are looking for a 10% yield / return and have £500,000 to spend, you would expect the net rental (after deductions) to be £50,000 per annum. If however you would only expect to receive an 8% yield (a university town or a very well-presented, modern property), you would be happy to pay £625,000 to receive that same £50,000 annual rent. Finally, if you would expect a return of 12.5% per annum (due to higher management costs or greater concerns about voids), you would only pay £400,000 for a property producing £50,000 per annum.
The world of HMO investing can be very profitable, just make sure you do your research and include an expert broker like ourselves to help you through the process.
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