HMOs – Easy Money or Legislative Nightmare
The concept of HMOs or Houses of Multiple Occupancy was first introduced in the Housing Act 1985, which defined an HMO as “a house which is occupied by persons who do not form a single household”. With little legislation at the time and the prospects of higher rental yields, HMO’s soon became a popular option for the buy to let investor. In the Jewish market too, both seasoned and amateur landlords quickly jumped onto the HMO bandwagon. In addition, wannabe investors could be paired up for shared ownership enabling many young entrepreneurs to climb the first ring of the property ownership ladder.
HMO. The Definition.
In England, an HMO is defined as having at least 3 tenants forming more than 1 household where toilet, bathroom and/or kitchen facilities are shared.
Since HMO’s are not usually purpose built, an investor’s strategy is to find houses sold cheap due to their poor condition and convert them into multiple occupancy rentals.
The Rise of HMO Investments
The obvious draw of HMOs for investors is of course increased profits and a faster return on investment. When banks tightened the lending criteria after the financial crisis in 2008, it effectively ended the golden age of property investment that typified the turn of the century where, for a minimal investment, one could buy to let and expect a 15% yield. More than ever people have began to search for better investment opportunities.
Additionally, the sharp rise in housing prices was driving young investors away from London and big city areas. People were searching for a better alternative, and entered into HMO properties. The calculation was simple; invest in a property, typically in an outer borough of London, convert to room-lets and earn a rental income that could double and sometimes triple a single occupancy rental achieving yields of up to 20%.
Following on the heels of that was the banks’ inclination to value HMO properties based on their rental income, resulting in a far higher release after a refinance. An investor could then take that finance, buy another HMO, and thus continue the cycle, hence the term ‘property ladder’.
With students, recent school leavers, and young professionals working in areas with increasingly debilitating house prices, HMOs or flat shares became the perfect solution. For the migrant worker and seasonal and contract workers, HMOs make an affordable housing option that also proves to be less isolating than single occupancy living. Councils too find HMOs a good option when housing refugees, the homeless, and ex-convicts that are reintegrating into society – something to take note of when choosing tenants!
The Downsides of HMOs
Every landlord will admit that the hassle factor with an HMO is far greater than a simple buy to let. It begins with finding a property suitable for conversion according to Local Authority legislation – something akin to finding a needle in a haystack. Getting a mortgage may be more difficult especially if the property is in poor condition. Start-up costs are typically higher due to the necessary building works.