Houses in Multiple Occupancy (HMO) can be more lucrative than regular Buy-to-Let properties. What are the pros & cons of purchasing a HMO property?

HMO Mortgages

YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE

What is a
HMO property?

A house or flat is likely to be a HMO (House in Multiple Occupation) if the property is rented out to 3 or more individuals who are not part of the same household and share a kitchen, bathroom or toilet.

Advantages

Higher Rental Yields
HMOs typically generate significantly higher rental income compared to single-let properties, as rent is collected from multiple tenants.
Diversified Rental Income
If one tenant leaves, you still receive income from the others, reducing the impact of void periods on your cash flow.
Strong Demand in Urban Areas
In university cities or large towns, there is usually a strong demand for shared accommodation, particularly among students and young professionals.
Tax Deductible Expenses
Interest on HMO mortgages and property management costs are often tax-deductible, potentially reducing your overall tax bill.
More Control Over Rent Increases
With individual room tenancies, you may have more flexibility to increase rents in line with market conditions.
Value Uplift Potential
A well-run HMO can be revalued based on income (commercial valuation), which may be higher than a standard residential valuation, allowing for equity release.

Disadvantages

Higher Upfront and Running Costs
HMOs often require additional compliance (e.g., fire doors, alarms, multiple bathrooms) and higher furnishing/maintenance standards.
Stricter Regulations
Many HMOs require a licence, and local councils impose strict rules on room sizes, amenities, and safety standards.
Specialist Mortgages Required
HMO mortgages are more complex, usually with higher interest rates and stricter lending criteria than standard buy-to-let mortgages.
More Intensive Management
Managing multiple tenants in a single property can be time-consuming, and disputes or maintenance issues are more frequent.
Limited Market for Resale
Selling an HMO can be harder than a standard property, as it often appeals only to investors rather than owner-occupiers.
Greater Exposure to Market Changes
HMO profitability can be affected more severely by changes in regulation, taxation (e.g., Section 24), or shifts in tenant demand.

HMO Licencing

Not every property needs a HMO licence, you will need to check with your local council. It will depend on the location and type of property as to whether a licence would be required.

There are 3 different types of licensing;

Mandatory licensing – New licencing rules came into force in October 2018 making more HMO properties require a licence. The licence applies if 5 or more tenants are living together as 2 or more households and share facilities.

Additional licensing – If the property is not subject to a mandatory licence the council can impose a licence. The licence applies if 3 or 4 tenants are living together as 2 or more households and share facilities.

Selective licensing – Local Authorities introduced this licensing in relation to private rented properties in particular areas. The licencing is introduced if the council believe that there is low housing demand or anti-social behaviour.

How much does a licence cost?

There is no set amount as each council charges a different fee.

Are licences transferable?

Licences are not transferable.

How long does a licence last?

A licence lasts for 5 years. Councils can grant a shorter term in certain circumstances.

Do all my properties require a licence?

Yes – Each property will require its own licence.

Is there a minimum bedroom size in HMO properties?

Minimum bedroom sizes (subject to council variances):

• 6.51 square metres for 1 person over 10 years of age
• 10.22 square metres for 2 people over 10 years of age
• 4.64 square metres for 1 child under the age of 10 years

Any area of your bedroom where the ceiling height is less than 1.5 meters can’t be counted towards the minimum room size.

HMO Valuations

A valuation will be normally be carried out by the Royal Institution of Chartered Surveyor’s Valuation Professional Standards. The valuation standards are a set of mandatory rules and guidelines for RICS Registered Valuers.

There are 2 different types of valuations – Bricks & Mortar or Investment Valuation

Bricks & Mortar – Single dwelling property where the valuer will base the figure on the market value and local comparables.

Investment Valuation – The property will be valued on a commercial basis. This will be based on a yield, the value being linked to the rental income.

Most HMO lenders base their valuation on a Bricks & Mortar valuation.