How to become an HMO landlord: An introduction

We’re living in a time when house prices are rising, mainstream lender’s criteria are tightening and finding a mortgage offer with a 10% deposit is near to impossible. The Guardian released figures showing that people in their mid-30s and 40s are now three times more likely to be renting compared to 20 years ago. It’s no surprise to the see the demand from tenants soaring. No wonder that so many investors are now looking at houses in multiple occuptions. But how to become an HMO landlord? We will look at the most common questions:

Source: The Guardian

Examples of popular HMOs

• Bedsits
• Hostels
• House shares
• Flat shares
• Student share accommodations (accommodation owned by the university is not counted as HMOs)

Do I need a license to become an HMO landlord?

When becoming an HMO landlord, you need to clarify if you need an HMO license. The most common aspect that will affect whether you need one or not is the amount of people you’re looking to have under one roof.

• HMO (3 people from more than one household living together)
• Licensed HMO (5+ tenants from more than one household living together)

If you’re unsure whether the property you own or looking to convert is counted as an HMO, then you can always check government legislations, or your local council. Whilst a standard HMO do not usually require a license, you should always check with your local council for any additional costings and licenses that they require, as this can differ depending on location. Another aspect that may change the need for a license is the number of floors of the property.

Licenses can take a while to be granted, so leave extra time to ensure you receive your license well in advance. Once passed, an HMO license is valid for a maximum of 5 years and is only valid for one HMO property.

If you’re housing a large HMO, you may need to convert your property to ensure you’re in line with government guidelines. You might need to install additional bathrooms, increase living space and adhere to specific bedroom sizes. In these situations, a refurbishment bridging loan may best suit your needs.

What am I responsible for?

HMO inspections are required for all HMOs that require a license. Your local councils will be required to inspect the property at least once during the 5-year license period, to certify the fire and facility standards and criteria are met. This is to protect your tenant and ensure their safety. However, it is your responsibility as the landlord to secure a license before letting out your property.

Properties need to meet certain living conditions, as a requirement of your HMO license. Those elements include:

• Air Circulation
• Amount of natural light
• Correct heating & plumbing facilities
• Install & maintain smoke alarms
• Update the council with an annual gas safety certificate
• Provide electrical appliances safety certificates, when requested

As part of the Housing Health & Safety Rating System (HHSRS), the landlord has to guarantee that there are no hazards on the premises, such as

• Damp
• Exposed asbestos
• Excessive heat / cold
• Anything that could cause a person to fall and injure themselves like uneven flooring

For more guidelines, please see the government legislation. These can vary between councils.

Things to consider before becoming an HMO landlord

Like any residential investment, you should take the time to consider whether becoming an HMO landlord is right for you. It is also worth to consider your property portfolio.

Here are just a few key factors to consider before becoming an HMO landlord:

1. Research your area

Conducting your own research on an area, before purchasing or converting your property, is vital. It provides you with an understanding of how much renters are willing to pay for their accommodation, and to what standard of living.

It also provides a competitive analysis. You can see how your property will fair when compared against other HMOs in the area. Whilst the demand for tenants is on the rise, your property should remain at a competitive price.

2. Tenancy agreements

To guarantee potential tenants are aware of their responsibilities, they should receive a copy of the HMO Code of Practice. Allow time for the potential occupiers to read this before signing the tenancy agreement. Examples of these include:

• Any damage to items supplied, maintained, or repaired by the manager that are labelled on the inventory list, will need to be replaced or its charge will be deducted from the security deposit
• Storing and disposing of rubbish as per the manager’s arrangements
• Keeping the property grounds clear of any litter
• Follow the landlord’s instructions relating in relation to escape from a fire, including the use of any fire equipment

Should your tenant(s) need to exit their agreement early, instructions and charges need to be clearly stated in the tenancy agreement. In most cases, landlords will ask for a notice period, to allow time for them to find a new tenant; often one-or-two-months’ warning.

3. Finances to consider

When letting out your property, you need to consider the length of each tenancy agreement. Otherwise, you may face months where your property becomes vacant. This is usually an issue faced by buy-to-let landlords.

HMOs are typically rented on a room by room basis, which means that if one tenant exits their tenancy agreement early, the landlord is still covered by the income of the other residents. You should consider including a notice period, should your tenants decide to leave early. In most cases, an exit fee or payment clause will be included in the tenancy agreement (Example: paying until the end agreed letting period, or until a new occupant is found), to ensure that you are financially covered; as the property owner.

You will also be required to pay income tax and class 2 national insurance if your revenues are £6,475+ or if renting your properties is counted as a business. This could be the case if:

• Being an HMO landlord is your main job
• You rent out more than one property
• You’re buying new properties to rent out

4. Time & effort

If time is tight, you can always use an estate agent to manage properties for you, for a fee. On average, estate agents charge 10-15% of the monthly rent, for a full management service. However, many offer ‘tenant finding’ or ‘tenant finding and rent collection’ services, which will reduce the cost.

Source: MoneySuperMarket

When renting to multiple tenants in a constant stream, maintaining high property standards can be difficult. Damage such as wear-and-tear is inevitable with any property letting and should be considered when evaluating the cost of your rental charge. It will fall to the landlord to ensure these standards are maintained and upkept to an acceptable level, ready for new tenants. Other damage caused by tenants, such as a broken door, should be noted in the tenancy agreement – as mentioned above.

Landlords may also be called to resolve any disputes between tenants or fix issues that may suddenly arise, such as a burst pipe. It can be time consuming, particularly if you have another job. This is when estate agent management might be considered.

A helping hand for HMO landlords

Starting out can be a scary process, so we’ve collected a few resourceful websites to help guide you through your life as a landlord:

• National Residential Landlords Association (NRLA)
  This is an organisation and a community made specifically for residential landlords in the UK. It also admits letting agents, who can assist you in renting out your property. They aim to assist and represent all their members.
  They also provide documents for experienced landlords, as well as a starter pack for those looking to enter the trade. Membership costs start from £155.
• British Landlord Association (BLA)
  This is a free national association that provides help and support for residential and commercial landlords alike. They assist both landlords with a singular BTL property, and multiple. They will help provide a lawyer, should you need one, as well as a list of documents that landlords can download in their own time.
• Government Support
  You will always be able to find government advice via the Gov website. This can be for Covid-19 updates, to rules & regulations and tenancy laws.
• Market Financial Solutions
  If you need help with alternative finance to make your property dreams reality, we can help you with bespoke bridging loans and buy-to-let mortgages.