Whenever people start thinking of retirement and financial security, they think of property investment. The property industry in England has become highly regulated. Every day it gets harder for investors to make a profit while adapting to the ever-changing regulations. By managing your own HMO, you can save and keep more money.
The purpose of this guide is to offer an overview of all aspects of managing a small to medium-sized HMO property in the UK.
This guide will help you decide if you wish to convert your property into an HMO. If you have already decided to do so, we are here to help you get started, by offering you the big picture of HMO Property management.
In this guide, we will address the following:
Definition of an HMO
The acronym HMO stands for ” House in Multiple Occupations”, but the actual definition is more complex and it’s changing regularly.
A simple definition of an HMO, according to gov.uk is
“A property rented out by at least 3 people who are not from 1 ‘household’ (for example a family) but share facilities like the bathroom and kitchen. It’s sometimes called a ‘house share’. ”
According to the website Shelter, to be defined as an HMO, a building, must fall within one of the following categories:
- a property in which more than one household shares a basic amenity, such as a bathroom, toilet or cooking facilities: this is known as the ‘standard test’ or the ‘self-contained flat test’
- a building that has been converted and does not entirely comprise of self-contained flats: this is known as the ‘converted building test’
- a property that is declared an HMO by the local authority
- a converted block of flats where the standard of the conversion does not meet the relevant building standards and fewer than two-thirds of the flats are owner-occupied: this is known as a section 257 HMO.
For the purpose of this guide, we’re going to focus on how to manage a small to medium-sized HMO, comprising of 3 to 7 rooms.
Why have an HMO Property
We live on a small island with a limited amount of space and an increasing population. The number of homeowners is decreasing every year. This has a positive impact on the rental market, by increasing the demand for privately rented accommodation.
Due to the effect of coronavirus and the loss of jobs, people are downsizing, by moving from a 1-bedroom apartment into rooms (couples in particular).
From a financial point of view, an HMO has less risk, because the property will usually not be completely empty. If a tenant moves out, there will still be at least 2-3 other tenants living at the property and paying rent.
When letting a property, there is also the risk of a tenant not paying, which can make the landlord lose the rental income (could be 3-4 months)until the tenant is evicted. This can be very difficult for a landlord who bought the property with a mortgage that needs to be paid every month.
According to an article published by NEWSTATESMAN in 2018, there were 169 evictions happening in Britain every day. Renting your property in times like today increases the chances of getting tenants who miss out on rent because they can’t afford to pay.
Setting up an HMO can be your safety net against losing all your rental income at once. If a tenant defers payment, there will be 2 or 3 others that will pay. This will enable you to cover the mortgage payments at least partially if not fully. You will decrease the chance for the bank to repossess the property in times of hardship.
By managing your own HMO property you can adjust the rent per room according to the market. You will probably do your best to fill up the property as fast as possible. An agency might not be as motivated to fill up your property.
HMO Licensing Guidelines
Who needs an HMO licence
Usually, HMO requires licensing if 5 or more people from 2 or more households live at the property. There are a few exceptions to this definition but this depends on each particular borough. Most boroughs have well-defined areas as part of Article 4, where setting up new HMOs is forbidden. Here is a video that clarifies what Article 4 is. Most of these areas are usually in the center of the city on a few streets. For setting up and managing an HMO in London, you need to check with the specific borough where the HMO is located.
We have an entire chapter dedicated to this licensing matter, in our HMO Management course. This will go live in September of 2020 and will be updated regularly.
Cost of on an HMO license
The cost of licensing an HMO depends again on the borough where the property is located and it can vary greatly from £55 to over £1000. Here is an article which said that the HMO licensing cost is a postcode lottery.
Apart from the licensing costs, there are other expenses that you need to take into consideration, like setting up the fire doors, emergency exits, soundproofing, etc.
Requirements to get a license for an HMO
The requirements to get an HMO license are similar between different councils. Sometimes the dimension of the rooms and communal areas allowed are different. Some council might consider a room single and another council might consider a bedroom with the same size as a double room.
The penalties for an unlicensed HMO depend on the gravity of the problem. The amount of the fine also depends on the time the landlord has been in breach of the regulations. This happens when renting out the specific property to more people than allowed or by not having all the required installations.
The penalties for an unlicensed HMO start from 2k and they can go up to 40k.
Haringey Council published on its official website that an unlicensed HMO could cost £30,000 in fines. There have been cases where a landlord was fined over £40,000 for having more tenants than allowed in the license.
In an article published by simplybusiness about the 5 big fines and penalties received by landlords, a Brighton landlord was fined £43,680 for breaching safety obligations.
“At the time, it was Brighton Magistrates Court’s biggest fine on record.
The property had an obstructed fire escape, unsatisfactory fire equipment and alarms, tiny bedrooms, and 12 tenants (the property was licensed for just nine).”
Furniture acquisition for an HMO
Ikea is best of there is you need a lot of furniture because you can find it all in one place.
If you own a van, a good option is Gumtree. Many people leaving the city or country offer their furniture for free and you just need to collect it. Gumtree works best in big cities, not in remote areas. Here is what the ads for free furniture look like on Gumtree. A very important aspect that should not be overlooked is that all furnishings should comply with the current regulations, which means they need to have a fire safety label on them. Make sure you check this for items made of fabric, like sofas and mattresses.
If you would like to learn about the key pieces of furniture required in an HMO, check out our HMO Management course. We have an entire section dedicated to this. You can take the course from the comfort of your own home in your own time.
Advertising and viewings when managing an HMO
Once your HMO is ready for tenants, you can start advertising your rooms and showing people around. Some great websites for advertising a room to rent are:
Remember to get some good looking photos and to not make the ad sound too long. Keep it short and sweet. A good place to get inspired about professional photography and interior design trends is Airbnb.
Here is an example of a well phrased and simple add with beautiful photo:
When conducting viewings, make the most use of your time, by choosing a few days a week so show your rooms to potential tenants. Set them 2 or 3 days apart and ask people to come and see it then. You might want to give them time slots 10-15 minutes apart. This will allow people to social distance and not cramp up the place.
Agreements and references for HMO tenants
One of the main duties of HMO Management is reference checking and tenant screening. Once you found a tenant interested in renting a room, you can use Openrent or Experian to run a background check on your tenants. The cost of a reference check is about £20/tenanat. Alternatively, you can check the references yourself.
The next step when managing an HMO is signing the tenancy agreement. There are many tenancy agreements online but before you choose one, here are a few things that you need to check. You can set penalty charges for late payments, charge fees for lost keys, or for changing the agreement. In our documents section, you can find a well written and decently priced AST agreement which will cover all the requests mentioned.
We have even created a video about how to get an agreement signed online for free.You can find it here:
Look at the sections about the responsibilities of the tenant and make sure that it has everything you need. If it doesn’t, adjust it according to your needs.
An alternative to charging a deposit from a tenant is getting renter’s insurance. The insurance cost starts from £68/tenant. Most companies will only offer it once the tenant has passed a thorough background check and proved that is financially secure. The tenant passes the reference check and gets approved, you can be covered for the cost of rent and furniture. The insurance company covers up to £3000/month in rent and you also get your legal fees covered in case the tenant needs eviction. You can use Openrent for this as well.
Inventory and check-in
The type of inventory you need when managing an HMO is different from when renting an entire home. Every AST agreement should have a brief inventory describing the state of the room and furniture and some photos attached to match the description from the document.
Below you can find an example of an inventory done by a professional.
This report was produced by https://inventorybase.co.uk/ . They also offer trainings on their website on how to conduct an inventory.
I believe that an inventory is not always necessary if the cost of your furniture is £200-£300, you can rent it without one or you can just do a basic one yourself, using our HMO room inventory template.
Certificates required for an HMO
Anyone in charge of HMO management should know that the main certificates required to let out a property are: Gas certificate (CP12), Electrical Installation Condition Report (EICR), and the Energy Performance Certificate (EPC).
From my first experience as an HMO property manager, I found out the hard way that it is not enough to book an expert to inspect the property. Before doing so, you need to check that there are no exposed wires in the property and that all the monoxide and smoke alarms are in place. If an expert shows up for an inspection, this doesn’t guarantee that you will pass the inspection and get the certificate. If your property is not up to code and they need to come back on a later date, you will have to pay for the inspection again.
You can book all the above types of inspections on the Openrent platform.
HMO Management, Maintenance and repairs
The most challenging part of managing an HMO property is maintenance and repairs. There are many ways you can go about doing this. You could find a trustworthy handyman in the area an offer him a monthly incentive. In return, he would deal with small issues arising during the management of your property. Alternatively, you can use our contractors if you are in urgent need of repairs or maintenance. You could also do it yourself if you live close to the property and are particularly handy.
The way we calculate income tax has been changed by the government on the 6th of April 2017.
The government has made some big changes gradually every year, from 2017 to 2021. In 2021 the new method of calculating taxes for rental income has changed completely.
According to Axa:
“The government hopes that these changes to landlord tax relief will help prevent the highest earning landlords from receiving the biggest income tax relief, but they won’t affect registered companies or landlords of furnished holiday home”.
You can find out more about these changes if you read this post, where you can see even a comparison between three different landlords who own different numbers of properties.
I have also created an explainer video where I show you how to use an online calculator tool:
The property market in the UK is highly regulated and Managing an HMO is not an easy job. In this guide, we have tried to cover the main aspects of HMO management. However, there are still many requirements that have not been mentioned or explained in-depth, and that needs to be addressed. For this purpose, we are launching out HMO Management course at the end of September 2020. Here you can find more information about it and you can register for preorders.
If you feel overwhelmed after reading this guide, we would like to remind you this: You don’t need to do this on your, we also offer the option full HMO management. All you need to do is get in touch with us.