If you’re already in the property game (or have considered it for any length of time), you’ll be well aware of the hype surrounding houses of multiple occupancy (HMOs), and their potential to deliver a fantastic return on investment.
But it’s not all plain sailing, and everything from planning and licensing errors to posting pictures of soiled mattresses online when trying to attract tenants can easily cause issues, costing you in more ways that one.
So what are the biggest issues faced when investing in HMOs, and which issues are most commonly overlooked? We asked developers and property experts about the biggest pitfalls and challenges they see on a regular basis.
Defining an HMO – A tricky business
Starting with the surprisingly complex question of ‘what is an HMO’, Phil Ashford, founder of Comfort Lettings and a Chartered Accountant, provides some insight into the various definitions for shared houses, and discusses one of the most critical aspects at the early stages of any HMO project – understanding the difference between planning and licensing.
Starting off with the Housing Act (2004) definition, Phil shares:
“Ultimately, a brief overview is that a HMO will be a property “occupied” by “more than one household” and “more than two people” who share one or more basic amenities and it could include shared houses, some self contained flats and bedsits.
I have put into quote marks three important parts of the definition: Occupied, Household and more than two people.”
When you start researching the exceptions to this definition, things get more confusing, but Phil does a great job of explaining it in more detail in this article.
Moving on to licensing, again the definition of an HMO is complex. Mandatory Licensing currently applies to any house with 5 or more people, living over 3 or more floors, and consisting of 2 or more households.
Under this definition, a household with 6 people living over 2 floors would not meet the criteria for Mandatory Licensing, nor would one with 4 people living over 3 floors, however it is expected that later in 2018 the specification of the number of floors will be removed from the criteria, meaning 5 or more people sharing a house over any number of floors (even a bungalow) will meet the criteria for Mandatory Licensing.
Added to this is the fact that councils can introduce Additional Licensing in specific areas to reduce this criteria, changing the number of people or number of floors required to meet the criteria for licensing.
The final common error Phil raises in understanding the definition of an HMO when it comes to planning permission, as again the goal posts are different compared to the Housing Act and Licensing.
Phil says “Please, please, please do not confuse the above licensing requirements with HMO planning requirements – the two are separate and different, please do not just speak to one Council department without consulting the other (Planning and Licensing are separate and very distinct departments).
Generally, all conversions between a dwellinghouse C3 Use Class dwelling and a HMO C4 dwelling are a ‘permitted development’ meaning you can change a house from having a family in it to having a group of up to 6 unrelated people who would form a HMO as per HA 2004 without the need for any planning permission.
The pertinent question you need to ask your local planning department is whether they have an ‘Article 4’ direction in place. If they do, then your house has had its permitted development rights for converting C3 houses into C4 HMO houses removed, meaning a new HMO will need planning permission. If the area already has a ‘high concentration’ of HMOs in it, then planning permission will be very difficult to obtain!”
Once you go above the 6 person limit for C4 use class, you move into a whole new classification known as ‘Sui Generis’. For any HMO with 7 or more intended occupants you will need to apply for planning permission regardless of the Licensing requirements or whether there’s an Article 4 directive in place.
The key advice from all of this is to take time to understand the different types of HMO, and who uses each classification. Making sure you can make the distinction between planning and licensing is critical to stay on the right side of the law with your next project, as mistakes here can be costly!
HMO Finance and Mortgage Mistakes
Next up we spoke to Lisa Orme, a specialist HMO mortgage advisor and owner of Keys Mortgages. With her background, focusing on the mistakes she’s seen with HMOs from a financing perspective was an obvious hot topic, joking “this could be a long article!”.
Her top 5 most common HMO Finance Mistakes are listed below:
- A HMO is not valued at 10x rent and you can’t or don’t always get a commercial valuation. Fundamentally if it’s a ‘house’ it will be valued as such.
- Relying on getting all your money out can be disastrous especially of you’re stuck on bridging or have someone else’s money tied up. A commercial valuation isn’t the be all and end all, and getting one does not guarantee you would get all your money out.
- Having a licence has no bearing on the value of the property nor does it mean you’ll get a commercial valuation; planning on the other hand can have an impact on the value. They are NOT the same thing.
- There is not one definition of a HMO, unfortunately there are many depending on whether you’re considering planning, the myriad of licensing schemes, the Government definition, fire, health and safety definitions and then lender definitions. The latter is crucial to ensure you’re using the right product, so as well as speaking to your local authority (planning and housing teams) as per Phil’s advice above, also engage with your mortgage advisor early to understand how lenders will view your property.
- Using the wrong product can land you in hot water; having the loan recalled, banned from using a lender or worse. Read this blog post for more on this:- http://www.keys-mortgages.com/use-the-right-loan-for-your-hmo
HMO Management Tips and Tricks
Once you’ve navigated these waters and have a correctly licensed HMO up and running, with any relevant planning permission obtained, and have your finance sorted out, the mistakes don’t taper off just yet…
Ben Thorns, co-founder of Living Smart (and a huge advocate of systems), provides luxury rental property across the North West, including a number of HMOs for both professionals and students.
As a company, they manage their portfolio in house and have made plenty of mistakes themselves when it comes to giving tenants the best experience, but also notice other people repeating these mistakes.
Managing a HMO well is a challenge, and getting it right is just as important as the early work in buying, renovating and refinancing your project.
At the early stages of a project, Ben advises paying attention to storage solutions. ” A big selling point, and often a factor that can set a HMO apart from the competition, is the storage space on offer. Even if a room is fairly small, if it has a lot of space for the tenant to house their belongings, it could make all the difference.
“We often see tiny, cheap wardrobes in large rooms. Instead, put in the biggest wardrobe possible and ensure that the beds have storage space underneath.”
He also suggests that the landlord or agent needs to remain involved with the house on an ongoing basis, for example with bins and recycling “don’t assume that the tenants will just take care of it.”
“Everyone living in a shared house often ends up thinking that the bins are someone else’s responsibility – so nothing gets done. We send a group text reminder to the whole house the evening before collection day with a link to the collection calendar.”
With regards to communication, Ben advises “There should be a simple way that all of your tenants can communicate with one another, and also for you with them. “We’re talking just a simple noticeboard, mounted somewhere obvious in a communal location, in a hallway near a main entrance or exit.”
“Make it look professional and authoritative in a wall-mounted frame, and post the HMO license, Gas Safe certificate and emergency contact details.”
He also likes to make sure his new tenants get a warm welcome and integrate quickly into the house:
“Tenants in shared houses, particularly young professionals, can have busy work and social lives – it’s quite possible that someone new could move in and not meet anyone else in the house for several weeks.
“We always make introductions via email and ensure the new person is added to a house Whatsapp group. We find that Whatsapp is usually the easiest way for tenants to chat amongst themselves.”
One final comment from Rick Gannon, host of The HMO Community Group and founder of New Era Property (and thinking with his ex-police officer hat on), on the important subject of tenant referencing advises that a simple Google search of a prospective tenant’s name could save a lot of trouble.
“The police turned up looking for one of my tenants – he was 22, employed and had good references, and he had viewed the property with his mother, who was his guarantor,” recalls Rick.
“If I had checked online, I would have found details of a violent assault he committed – he had violated his bail conditions.”
With so many potential mistakes to be made, it’s clear that HMO investing is not a walk in the park like many would have you believe.
The returns can be absolutely phenomenal, but it’s so critical to have the right knowledge and support structures in place (with good contacts like mortgage advisors and letting agents) to help you navigate and hopefully avoid many of these common mistakes made by so many people looking to get into the HMO investing strategy.