We’ll help you track down the best finance deal for your HMO rental property
Many landlords consider Houses in Multiple Occupation (HMO) investments to be the golden egg of the property investment space. While it’s true that these kinds of arrangements can be more profitable than standard Buy to Let (BTL) setups, managing HMOs can be tricky if you’re new to the concept.
Let’s talk you through what it takes to find and finance HMO properties, and the key things you need to consider when going through the process. We’ll also go into a little more detail about how to find the best HMO mortgage rates with the support of our specialist in-house mortgage brokers, who have a wealth of experience in navigating deals for new and seasoned landlords alike.
What is a House in Multiple Occupation (HMO)?
A House in Multiple Occupation (HMO) is generally considered to be a property that is rented out to three or more unrelated tenants – so, multiple households. Tenants share main facilities, such as the lounge, bathroom and kitchen, but have access to their own private room.
Landlords charge each tenant for their use of the space. Depending on the building’s layout, they normally ask for a rental fee per room or per section of the property. To make things simpler for their tenants, HMO landlords will normally pay the property’s utility bills out of the rental ‘pot’ and account for these costs in their rental prices.
Sometimes, HMOs are referred to as multi-let properties. A multi-let can be classed as an HMO, but it will depend on whether it meets the appropriate criteria as set out by its local authority.
Do I need a license to set up an HMO?
To prove that your HMO meets acceptable standards, you may need to apply for an HMO licence from your local authority.
An HMO licence will definitely be required if:
- The property is rented to five or more tenants who form more than one household
- The property is at least three storeys high
- All tenants have shared usage of communal facilities, including the lounge, kitchen and bathroom(s)
However, some local councils ask landlords to arrange licences for smaller HMOs that do not meet these criteria. It’s always a good idea to check what the requirements are in your local area before committing to an investment.
HMO licences will only be issued if:
- The manager of the HMO is considered to be ‘fit and proper’ for the job – ie, they do not have a criminal record, and they have not breached landlord laws or codes of practice in the past
- The property is fit for use by a number of occupants and provides safe and acceptable facilities
- All bedrooms meet a certain minimum size (decided by the council)
- the landlord agrees to provide an updated Gas Safety Certificate to their local council on a yearly basis
- Smoke and fire alarms have been installed and are adequately maintained, and appliances have been tested and certified, in line with all electrical and fire safety regulations
If you have more than one HMO in your portfolio, you will need to apply for separate licences for every property that needs one.
To apply, you will need to request a form from the council that’s responsible for the area your HMO is in. As long as you fill out this form correctly and provide all the necessary details, you should expect your license to be processed within 8 weeks.
How much does an HMO license cost?
HMNO licence fees vary from council to council. You can expect to pay at least £500, and the price will normally increase according to the size of the property. Again, check with the relevant authorities to see how much you will need to set aside to cover your HMO license costs.
Are HMO properties more profitable than standard Buy to Lets?
As you can imagine, HMOs can generate much better yields than traditional single household Buy to Let properties, as their setup ensures that landlords can receive rental income from multiple tenants at any given time. If the property and its tenants are managed correctly, HMO landlords can expect their rental yields to be as much as three times higher than so-called ‘vanilla’ Buy to Let investments.
That said, HMOs draw higher running costs and are more challenging to run. So, though the longer-term gains can be very attractive, any budding HMO investor needs to consider all the pros and cons before deciding whether it’s the right way forward.
Can I get an HMO BTL mortgage if I’m a first-time landlord?
Because HMOs demand more from whoever oversees the lease, they are often not the ideal first Buy to Let venture for new landlords. This doesn’t mean that there isn’t an array of HMO mortgage deals for first-time investors on the market, though. Many lenders are offering products with more flexible lending criteria to account for those who want to get their first leg onto the HMO property ladder. Talk to our HMO mortgage lenders today to explore your options and see if you might be eligible for HMO finance.
Can I arrange an HMO mortgage through my limited company?
There are certain tax benefits to putting an HMO mortgage through a limited company, a limited liability partnership, or a Special Purpose Vehicle (SPV). For example, thanks to changes in legislation, landlords who put their HMO property through a limited company can receive a basic tax rate reduction on their income tax liabilities.
It’s definitely worth checking with our HMO mortgage brokers to see if running an HMO through a business might be the most cost-efficient option.
Bear in mind that some lenders will accept applications from existing trading companies, while others will be keener to offer finance to landlords who have set up an SPV that’s designed solely to hold and rent properties (and doesn’t carry out any other related or non-related business activities).
What is a void period, and what does it mean for my investment?
With high house prices often placing homeownership out of reach, HMO arrangements are the ideal option for students, couples and young professionals who want to rent their own space as cost-effectively as possible, without committing to long term leases. This means there’s a healthy demand for rooms in HMOs, and spaces can often be filled quickly.
However, as an HMO landlord, you will inevitably encounter a void period – aka, a time where one or more of your rooms are laying empty. The increased flexibility of HMO arrangements can sometimes mean a higher turnover of tenants, too, so there may be more gaps in between occupancies than with standard Buy to Lets.
Void periods will not necessarily spell disaster for your HMO investment, but you will need to make sure you have enough funds to maintain the property and pay its bills even if you’re missing out on rental income from time to time.
Do I need to provide furniture for my tenants?
You are not legally obliged to provide furniture for your tenants – but fully furnished options are often more attractive to HMO tenants who don’t want to buy their own goods or move bulky belongings between properties.
If you are pitching your HMO to students, contractors, overseas workers and other tenants who are likely to value flexibility over physical possessions; kitting out your property with all the essentials might make more practical and financial sense.
What happens if my tenants fall out?
One of the risks of running an HMO is that you have little control over the relationships between your tenants. In a traditional Buy to Let scenario, all tenants will usually know each other, and be on good terms – but due to the nature of the property, the same can’t always be said about an HMO.
The best way to avoid falling outs is to design your HMO to cater for a certain type of tenant – for example, students or young professionals. Mixing tenants with wildly different lifestyles rarely works well.
You cannot usually evict a tenant on the grounds of them not ‘fitting in’ with the rest of the household. If there is friction and it’s having an impact on house relations, the best thing to do in the first instance is to sit down with all your renters and act as a mediator with a view to resolving the situation yourself.
If things have gone really sour between yourself and a tenant or tenants, you can take steps to evict them at the end of their agreed rental term. However, it can take weeks to get your order for possession, meaning the tenants will remain in situ until they are legally obliged to leave. You can also specify terms within your assured shorthold tenancy (AST) agreements that set out the penalties that might follow disrespectful behaviour or behaviour that puts other tenants at risk.
How do I find the right HMO mortgage rate?
HMO Buy to Let (BTL) mortgages are growing in popularity, which means more lenders than ever before are willing to offer specialist HMO deals to investors. Increased competition in this sector has also pushed prices down, meaning HMO mortgages are becoming much more attractive to those looking for a viable longer-term investment option.
However, HMO mortgage rates are still typically higher than those for average Buy to Lets. This means it’s incredibly important to find a mortgage service offering the right finance agreement; one that will be affordable and sustainable in the months and years to come, taking into account all the other legal and maintenance costs involved in running a House in Multiple Occupation.
You could approach lenders directly. But do you really want to spend your precious time finding deals and going through the HMO mortgage comparison process, when you could rely on our experienced HMO mortgage lenders to guide you through everything instead?
What’s the advantage of using an HMO mortgage broker?
Because they have access to the whole of the market – not to mention many years’ experience in securing similar HMO mortgage deals for BTL investors – our HMO mortgage brokers can often track down deals from suitable mortgage providers much faster. They are HMO market specialists, and know which lenders are likely to accept those HMO cases; they also understand how to manage your application for the quickest results. The HMO mortgage market is a speciality area, and our partners are experts in the field.
Our HMO mortgage advisers are also a vital source of support for landlords who are new to HMOs, or who are trying to invest in more complex circumstances and therefore navigating stricter lender criteria.
What are the typical lender criteria for HMO mortgages?
In order to offer you finance for an HMO property, most lenders will ask that you have at least one or two years of landlord experience behind you. However, as we mentioned earlier, there are companies out there that are willing to offer HMO mortgages to new investors – so if this is your first foray into the Buy to Let arena, there’s every chance our brokers will be able to find a deal that meets your needs.
Your HMO mortgage lender will need to know:
- How many let-able bedrooms there are in the property
- The location of the property, as this will affect the availability of potential tenants
- Whether you will be managing the property yourself or using managing agents
- Whether the property has, or needs, an HMO license
- How much you expect to make in terms of actual rental income on a monthly and yearly basis
- Whether you will be issuing one or multiple AST agreements
- What kinds of tenants you are looking to attract – for example, students, contractors, couples or young professionals
- How much do you want to borrow
- Whether you would prefer a tracker or fixed mortgage
- Whether you will be investing via your personal name or a limited company
As with any mortgage application, your HMO mortgage lenders will also carry out a credit check. If you have a history of bad credit, your options may be more limited. Learn more about applying for a mortgage with a poor credit profile.
Let’s see what’s possible!
Contact us to learn more about becoming an HMO landlord and get advice on securing the best possible HMO BTL mortgage. Our HMO mortgage brokers offer free, no-obligation consultations and offer evening and weekend appointments, so you can book in for a chat at your convenience.