Now that both the cost of letting and taxation have increased for landlords, many are taking some time to review their portfolio, to see how these costs can be mitigated. One way to do that is to increase rental income by changing the way the property is let and a lot of landlords are considering a move into the HMO market – that’s letting individual rooms in the property, which is categorised legally as a House in Multiple Occupation. If this is something you are considering, here are some of the pros and cons you should be aware of.
Before you go any further, the first thing you need to do is speak to your local council housing department to find out what their policy is regarding HMOs. There is a lot more legislation involved in this specialised sector of the Buy-to-Let market and local councils have the power to decide what is best for their area. That may mean you can simply go ahead; you may need to apply for a licence; there may be restrictions on how many people you can have in one property – or it may be the case that you are not allowed to operate an HMO at all. There is also the possibility – as is the case in certain London boroughs – that if you change the property from a single unit let to an HMO, you cannot change it back. So make sure you are aware of the local policy and also that it could change in the future.
The second thing is, it is vital to check is whether your mortgage lender will allow you to let your property by the room, as many now have specialist HMO mortgages for which you have to satisfy specific criteria. So speak to Mortgage Advice Bureau and find out what you need to do to ensure you are not violating any terms of your mortgage. You also need to be aware that landlord insurance for HMOs is also a very specific market and most mainstream providers do not offer policies.
Once you have established whether you are able to let your property as an HMO, is it the best thing for you? Here are the pros and cons:-
Con: Increased costs
The immediate cost will be the renovation and refurbishment required in order to convert rooms and comply with fire and housing health and safety requirements (fire doors, stud walls, extra bath or shower rooms, etc.). On top of that, there is the potential cost of licensing or registration that you may be have to obtain and, with a greater amount of maintenance and more move ins and outs, comes an increase in ongoing management costs, including bookkeeping. Finally, as room lets are usually all-inclusive, there is council tax and utility costs to factor in to your budget, as well as cleaning of the communal areas.
Con: Increased management demands
If you are letting individual rooms, several tenants will all be moving in an out at different times; you will have many times the number of viewings to carry out; the amount of paperwork is multiplied by the number of tenants; there is generally more wear and tear and therefore more maintenance to be organised and, if there are problems, you have a greater number of people potentially contacting you. The main reason landlords give for not investing in HMOs is that it’s simply ‘too much hassle’, so you need to prepare yourself for that and be able to develop systems and solutions, or employ a good agent that has experience of HMOs.
Con: Scarcity of managing agents
When letting a single unit, there is a plethora of agents to choose from, but HMOs are a different matter. Because of the specific rules and regulations involved and vastly increased management demands, not all letting agents handle room rentals. As a result, if you don’t have an experienced agent in your area, you may have to manage the property yourself or engage a private property manager to work for you, but to make this work financially, you typically have to have a portfolio rather than just one property.
Pro: Increased gross rental income
As a rough guide, letting a property by the room, versus letting it as a whole, tends to bring in between two and three times the amount of rental income. Bear in mind though, this won’t necessarily translate into profit as your operating costs are greatly increased too, so check the additional rental income is more than enough to absorb them and still give you a profit on top.
Pro: Insulation against voids
Because you are letting a number of rooms and making a good profit, if one of those rooms happens to be empty for a little while, you don’t lose all the income, so your costs should hopefully still be covered and you should also be able to realise some profit, albeit reduced.
In summary, HMOs incur a lot of additional expense and hassle but, on the upside, it is possible to realise a higher income from your property, depending on room rent supply, demand and rates in your area – and if you can actually convert to an HMO.
This is a specialist market, so carry out your research, talking to your broker, insurance company and then understanding the local dynamics of running a house in multiple occupation.
This information has been provided by our partner Mortgage Advice Bureau. For more information relating to Mortgages or for Mortgage Advice please visit Mortgage Advice Bureau.