Houses in multiple occupation (HMOs) are an attractive asset class for landlords, but they are not all plain sailing, and it is essential that investors do their research first.
Different rules apply in different places for HMOs.
The old mantra, ‘location, location, location’ particularly holds true for the HMO market.
Some councils, keen to tightly control the supply of HMOs, are introducing additional licensing schemes for smaller HMOs – defined as when at least three unrelated tenants live in the home.
A large HMO – occupied by five or more unrelated people – must always have a licence unless an exemption can be sought, no matter where it is.
But these additional schemes are often in selected parts of a town or city. A council usually introduces additional licensing where it thinks that a perceived over-supply of shared housing is harming neighbourhoods or if landlords have previously been operating small unlicensed properties poorly. This is typically seen in student areas.
Councils can also control HMO stock through implementing an Article 4 Direction.
While planning permission is always required when changing a single dwelling house to a seven-plus bed HMO, it is not normally required for an HMO for up to six people.
However, an Article 4 Direction removes permitted development rights in particular locations. This means that would-be HMO landlords in those areas must apply for planning permission for a change of use for smaller HMOs as well.
Applications are only granted if the accommodation meets a high standard. They may be subject to tests such as the ‘sandwich’ test where permission would not be normally granted where a new HMO would mean an existing residential property would be sandwiched by adjoining HMOs on both sides.
When permission is granted, the property may also require licensing, even if it houses fewer than five occupants.
For example, Coventry City Council introduced an Article 4 Direction last September, covering eleven of its wards. Many other councils have Article 4 Directions covering designated areas, including some London boroughs, Leeds, Exeter, Leicester and Sheffield.
Article 4 directions can cover a whole city, including Birmingham, Manchester and Bath, and some London boroughs.
Clearly, regularly checking when and where an Article 4 Direction is applied is essential due diligence for would be HMO landlords.
This includes any plans by councils to implement or change a direction. For example, Exeter has plans to extend the designation area.
Once the essential research is done, there are plenty of positives for this market which is looking rosier than a year ago.
Utility bills are slowly but surely coming down. HMO rents are usually inclusive of bills. Along with most lenders, we assess an HMO’s value on the gross rental, less an approximation of bills. Lower bills will mean higher net rental which could mean it’s easier to borrow a greater amount against the property’s value.
This is good news for HMO investors looking to raise finance against their property.
In addition, the Government recently committed to single property council tax banding for HMOs.
Under the change, banding for individual rooms in shared houses has been reversed, meaning HMOs will be classed as a single dwelling as before.
The National Residential Landlords Association (NRLA) estimates that the average HMO tenant will save up to £1,000 a year as a result.
With an ongoing housing shortage, HMOS can reduce costs for occupiers as well as having significantly positive social benefits.
Demand is strong for decent and fairly managed house shares.
As long as investors look before they leap, HMOs can give good returns.
Alex Witham is regional account manager at Landbay
Read more in the ‘Buy-to-let 101’ series here.
