HMOs are defined as properties rented to at least three people from different households, using shared facilities.
Demand has grown significantly in recent years in this market, especially from students, who typically live in this style of accommodation.
Students often live in HMO properties as they choose to rent with several other individuals who will pay for their own room and are not related to one another, which means they are not considered one household.
The reasoning behind a landlord splitting a house into a HMO rather than a single buy-to-let property is because they can rent out each room, rather than just the whole house.
This means that a landlord can receive a higher yield on the house and allow more people to live there.
However, Simpson outlined that as it has been widely reported, there are challenges involved in becoming a HMO landlord.
Having five unrelated occupants in a property triggers mandatory HMO licence requirements. Individual councils can also demand a licence for a property with three or more occupants.
This incurs cost, which varies by council – and can take several months to obtain. A licence, once granted, is valid for five years.
Although before granting a licence the local authority must be satisfied that the property is suitable for a certain maximum number of people to live there.
Simpson said: “However, there is no guarantee of the licence being accepted, and the process can be difficult with lots of different angles to consider.
“For example, the requirement to comply with local council standards for things like minimum room sizes and the number of bathrooms, not to mention undertaking safety checks like annual gas safety tests, and ensuring fire safety features are up to scratch, such as installing fire doors.
“Landlords must also keep on top of all the requirements, as things can change.”
The fire safety equipment which is required includes extinguishers, blankets, and a hard-wired smoke alarm which must be fitted in every communal area, including bedrooms.
In addition to this, the electrical system in the property, including wiring, all fixtures and fittings and any electrical appliances must be tested by an electrical engineer at least every five years.
This will then produce a certificate like the gas safety check.
Simpson said that while it sounds complicated and time-consuming, there is a definite upside once the licence has been obtained. He believes it demonstrates a commitment as a credible professional landlord who is taking tenant welfare and accommodation standards seriously.
“There is also the positive for tenants – having a landlord with a HMO licence provides them with the confidence and knowledge that they will be safe and secure, living in good quality accommodation,” said Simpson.
He added that this means the tenants are more likely to stay for longer tenancies, which in turn benefits the landlord too.
HMO licences were introduced as part of the Housing Act 2004 and they were introduced in order to protect people living in shared houses.
From 2006 onwards, landlords have needed licences for houses in multiple occupation.
From a lenders’ perspective, obtaining a HMO licence establishes a landlords’ credibility and encourages support.
Simpson said: “At YBS Commercial, we launched our own HMO product last year, available to borrowers with a minimum of one year’s experience as a HMO landlord, because we strongly believed it was a sector we had confidence in and wanted to provide our backing.
“And it is not just us. The demand for HMO products has grown in recent years – lenders have responded, and there are many more specialist HMO borrowing options for landlords on the market today.”
Demand for HMOs has been steadily rising over the past few years largely due to the higher yields related to this property type.
While HMOs demand a level of expertise in terms of managing tenants, the buildings and the plethora of legal obligations, the financial yields outweigh the additional obligations.
“So not only are there options available to HMO landlords, having a licence can reap tangible benefits, for landlords, but also for tenants and lenders,” added Simpson.
