Seen by many as a sure fire way to make money from property, setting up and managing an HMO can be hard work. And what lurks around the corner.......
An HMO model
For some time now people have been speculating that HMO’s (Houses in Multiple Occupation) will soon be the only way for people to make money in London. On Monday last week I met with a lady who had given up her career in the city to focus on building an HMO portfolio in North London.
The model she was looking at was to take 3 bedroom houses with two reception rooms, turn the reception rooms into bedrooms and let out each room separately. In theory the numbers stack up – A three bedroom house in Enfield Town may achieve £1,500 - £1,700pcm if let to a family but with the rooms let individually the monthly rent could increase to around £2,500pcm. I could see why she was tempted that's potentially an extra £12,000 per year!
Is there demand?
Now I’m a big fan of a well-run HMO because apart from anything else it’s cheaper than a one bedroom flat and less claustrophobic than a studio.
Demand for large HMO’s (3 storeys, 5 or more unrelated people, shared facilities) is on the rise. Currently there are 143 large licensed HMO’s in the borough (including 15 new applications) while back in January 2015 there were only 54, that’s a 265% increase in two years.
Is it easy?
The basics of turning a reception room into a bedroom are pretty easy. But being an HMO landlord can be stressful for a whole host of reasons:
- Void periods – be prepared for a higher turnover and feeling like you are always looking for tenants.
- Maintenance - with sharers there’s likely to be more damage and the cost of damage to the communal areas will likely be met by the landlord – after all how do you prove who caused the damage?
- Cleaning – Landlords are responsible for cleaning the communal areas
- Gardening – as above
- Utilities – Generally included in the rent and so paid by the landlord
- Council Tax – Paid by the landlord
- Fire safety requirements – more than in a single family let and depends on the property but may include fire extinguishers, fire doors, emergency lighting, linked smoke alarms etc.
- Management – people don’t always get on and you may find you spend a lot of time managing personalities.
Anything else to consider now?
The most important thing is to check out your market. Most people like the idea of creating an uber-professional shared house with flat screen TV’s, remote controlled lights, underfloor heating, Jacuzzi’s, induction hobs etc etc and that’s great if your flat is in the West End but realistically will the people renting in your chosen area pay for those extras? Conversley if you strip your offering back to the bare minimum will people reconsider whether they can afford a little bit more for a little more comfort?
And in the future?
Mandatory HMO Licensing is about to be extended. Later this year, possibly April, all properties with 5 or more unrelated tenants will need a license regardless of the number of storeys in the property. This extension could impact on another 175,000 properties across the country.
Restrictions will also be applied to the sizes of rooms used as bedrooms and if any of your rooms are under 6.52 sqm (one person) and 10.23sqm (two people) you will have to reduce the number of occupants - now that could put a big dent in your profits.
Lastly if you fail a ‘fit and proper person' test and have for example, a conviction for fraud or violence, or have committed a breech of the housing act, you may not be awarded a license. (This test applies to spouses too!!)
And what will this license cost? £130 per let/ tenancy so £650 for a 5 person HMO..
HMO’s can make a lot of sense financially but they’re not for the faint hearted and can take a lot more effort to run than a single family let. If you decide to get someone in to manage for you, you can expect to pay more than you would for a single let.