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?
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.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
What are the pros & cons of purchasing the HMO via a limited company?
- Can be seen as more tax-efficient than personal income, especially for higher rate earners
- Limited Liability – if the company dissolves it is not forced to sell other personal assets (unless guarantees or other security is given)
- Multiple shareholders on title deeds can make it easier to manage proportions of ownership and share of profits etc
- Other lenders for new personal mortgages may not take these into account as commitments and therefore allow increased personal borrowing.
- Can be more expensive than the equivalent deals for individuals.
- Potentially increased legal costs & paperwork
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 requiring 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 their 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.
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.
- Birmingham Midshires
- Hampshire Trust
- The Mortgage Lender
- The Mortgage Works