Along with all the benefits of HMOs, come complexities around licensing and regulations. It's very important to get these right, so in the following article, Foxtons Director of Legal & Compliance sheds light on what you, as a landlord, need to consider.
Carry out a quick google search on how to increase your rental yield and you’ll be hit with a sea of tips about reviewing outgoings, makeovers, maintenance and how to create space for your tenants to work from home. But in recent years one trend on how to maximise yields has gained increasing prominence... the HMO.
An HMO, meaning house of multiple occupation, can produce far higher yields when compared to single household lettings. Essentially, HMOs are properties divided into different living quarters shared between unrelated individuals. Typical classes of occupant include students or young workers. The HMO model works for tenants because it’s a more affordable way to find a place to rent. It works for landlords too because it allows increased occupancy levels.
Higher yields, greater responsibilities
There is a catch, however. Although HMOs are known to generate higher yields, they attract more rules and may not suit every landlord’s appetite. First, HMOs need to be licensed by the local authority. In London, the typical cost of a licence is £700.00.
Where a license is granted, it will contain a list of conditions. These generally set out works the license holder (invariably the landlord) must carry out to their property.
These works are not merely superficial. They will generally focus on compliance with safety laws and can be costly (e.g. installing hard-wired fire alarm systems, as opposed to the simple battery-operated devices you would find in a normal let). Complying can be a sizeable up-front investment that needs to be understood and carefully weighed up.
Read the Housing Act 2004 legislation yourself, or the simplified guidance from the government.
Types of HMO
There are two main types of HMO licensing. The first, ‘mandatory’ licensing applies to properties occupied by five or more persons forming two or more households, regardless of the number of storeys.
Check out our guide to HMO licensing
‘Additional’ licensing applies to properties in an area in respect of which the local authority has in its discretion imposed a licensing requirement because it finds that significant numbers of HMOs not classified as mandatory HMOs need regulating.
The licensing regime doesn’t just apply to HMOs. If a local authority deems it as such, any area within its jurisdiction can be designated as what is known as a ‘selective’ licensing zone. Under these even single-household lettings must be licensed.
HMO licence enforcement
Because of the profile of the occupants and their transience, HMOs are considered a higher safety risk than single household lettings. Occupants of HMOs are also deemed more vulnerable than single household tenancies.
Enforcement is strict and includes civil and criminal sanctions. Local authorities routinely inspect HMOs and where they find incidents of non-compliance, - e.g. the HMO does not have a licence when required, or where licensing conditions have not been met, breaches are actively enforced. Through a system of fixed-penalty notices the fines can be as high as £30,000.00 – with the added risk of being named as a ‘rogue landlord’ on the local authority database. Further, banning orders, where made, prevent the most serious offenders from letting a property at all.
The penalties do not end there. Where the property should have been licensed but was not, tenants can seek rent repayment orders. These are ordered that – as the name denotes – require the landlord to reimburse the tenant with rent paid for the unlicensed period.
Other sanctions also apply, including the inability to serve no-fault (section 21) eviction notices until a property is licensed.
Step-by-step guide for setting up an HMO
Step one: If you’re considering going down the HMO route, speak to your local authority. Find out about the rules and what the costs of complying with any licence conditions are. Make sure they sit within your risk and compliance appetite.
Step two: Budget for the necessary works and adaptions to your property. Find suitable contractors who can carry out the works to the required standard and issue the correct paperwork to prove compliance.
Step three: If you’ve already applied for a licence, make sure that any works and conditions are carried out and met by the deadlines. Licenses are usually granted for five years but local authorities do grant shorter one-year licences to allow landlords time to complete works.
Step four: They may then inspect the property – unannounced – and check if the work has been done. Only after they are satisfied will then they be inclined to issue the full five-year licence. If the works haven’t been carried out, you could face enforcement action.
Summary
HMOs can produce higher yields. But the set-up costs are generally higher and once established they require a more hands-on management approach than ‘ordinary’ lettings. You should anticipate regular and ongoing inspections to ensure that licensing conditions are met and maintained. Any penalties are severe, but know the rules, get it right and you could have a rewarding HMO.
Alternatively...
Get the experts at Foxtons Property Management to oversee the licensing, paperwork, project management, maintenance, changes of occupancy and everything in between, so you can be confident and successful with your HMO.
Landlord Essentials is a series of articles where our experts delve into the big questions for London landlords. If you have a question on letting your property in London, ask a Foxtons expert. If you want help making your property a success, get in touch with Foxtons lettings team.
