HMOs can be a great investment for landlords. However, if it is your first time getting one they can be difficult to navigate.
In this blog, we will discuss some of the key things to consider before you buy an HMO. This includes the advantages and disadvantages they can bring and how you can apply for a licence.
What are the benefits and risks?
Before buying an HMO, it's crucial to consider the pros and cons:
Pros:
- Higher returns: HMOs typically offer higher returns than traditional rental arrangements. For example, converting a 3-bedroom house into an HMO could potentially raise monthly rent if you let out each room for £600. However, actual returns may vary depending on factors such as location.
Income protection: HMO properties offer a degree of income stability. Even if one tenant defaults on rent or a room is vacant, you will still be getting income from the other tenants.
Property value: Turning a property into an HMO may increase its value because of higher demand and the possibility of earning more rent.
Cons:
- Complex setups: Setting up an HMO involves more regulations than traditional rentals. Therefore, it may take longer to set up.
- Higher maintenance costs: Having multiple occupants may mean there is increased wear and tear. This could mean more frequent repairs are needed. Due to this, maintenance costs may be higher.
- Initial investment: Furnishing the property and buying essential appliances may lead to large initial costs.
Am I ready to invest in an HMO?
Owning an HMO comes with a range of responsibilities. This may include:
- Following strict fire regulations, such as installing fire doors, ensuring clear exits, and educating tenants on fire procedures.
- Installing emergency lighting throughout the property and providing locks for each bedroom.
- Maintaining pest control treatment records.
- Getting annual gas safety certificates.
- Installing, servicing, and testing smoke alarms and carbon monoxide detectors.
- Providing safety certificates for electrical appliances.
With various responsibilities at hand, it's important to ensure you're fully informed and confident in your ability to follow the rules before buying. To find out more about these rules, read our blog on how to become an HMO landlord.
How difficult is getting an HMO mortgage?
The difficulty varies based on your situation. Typically, the criteria for this type of lending is stricter than a standard buy to let mortgage, so getting approval might be a bit more challenging. However, if you have experience as a landlord, you may find it easier to get accepted.
What rates can I expect?
HMO mortgage rates are usually higher than standard buy to let rates due to the increased complexity and risks. However, the actual rate you get depends on your circumstances. Using online comparison tools can give you an idea, but for accurate results, it's best to talk to a mortgage advisor.
How much can I borrow?
The amount you can borrow depends on the rental income the property could generate. Each lender has their own calculation to determine how much an applicant can borrow. Generally, lenders will want the rent to exceed the monthly mortgage cost. This is to ensure if there are any changes in the monthly cost the borrower can still afford the payments.
How do I get an HMO licence?
Applying for an HMO licence varies depending on your local council. Some councils allow online applications, while others require submission by post or in person. You can find out which council handles your licence and how to apply online.
Usually, councils will require documents confirming:
- Property facilities, like the number of bedrooms and sizes of bathrooms and kitchens.
- Safety equipment and relevant certificates.
- Property structure details, such as floorplans and surveys.
- Information about individuals or companies with an interest in the property.
Once you've submitted the necessary documents, the council will probably carry out background checks on you or the house manager to ensure compliance with landlord laws. They may also set conditions for the licence, like requiring facility upgrades, and conduct inspections as necessary. If your application is approved, you'll receive a licence valid for up to 5 years. Remember to renew it before it expires, and keep in mind that each HMO needs its own licence.
Summary
To sum up, investing in HMO properties offers both opportunities and challenges. While higher returns and increased property value are appealing, dealing with regulations and maintenance costs can be overwhelming, especially for beginners. However, with the insights provided in this guide, new investors can approach HMOs with confidence.
Any property used as security, which may include your home, may be repossessed if you do not keep up repayments on your mortgage.
