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Are HMOs a Good Investment in 2024? A Guide for Landlords and Investors

Robert Jones, Founder of Property Investments UK
  • by Robert Jones, Founder of Property Investments UK

    With two decades in UK property, Rob has been investing in buy-to-let since 2005, and uses property data to develop tools for property market analysis.

HMOs have been a popular opportunity for many property investors to consider in recent years. As the UK property market continues to evolve we will look at whether HMOs are a good investment in 2024.

Contents

  • What Is an HMO?
  • The Pros
  • The Cons
  • So, In 2024 Do HMOs Still Make a Good Investment?
    • Demand
    • Prices
    • Rents
    • Yields
    • Refurbishment Costs
    • Maintenance Costs
    • Running Costs - Bills Inclusive
    • Mortgage Costs
    • Tenant Turnover
  • HMO Licensing Regimes
    • Article 4 Directions
    • Enforcement of HMO Rules and Regulations
  • Increasing Competition For HMOs From PBSA and BTR
  • The Renters (Reform) Bill and Running an HMO

What Is an HMO?

An HMO is a house in multiple occupation. An HMO is a type of shared house.

In practical terms, an HMO is normally a property let out to several people, who are not part of the same family, on a room-by-room basis. Tenants in an HMO will normally share some of the amenities in the house such as the kitchen, the bathrooms and maybe a communal living area.

HMOs are often aimed at specific tenant types such as student HMOs, HMOs for professionals or HMOs aimed at tenants on benefits.

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The Pros

The main advantage of investing in HMOs is that yields should be much higher than a buy-to-let, let to a single tenant or family. HMO yields can be two, three or more times higher than other rental property.

An HMO can also offer less risk of voids and less risk of arrears than other properties. (It’s unlikely all your rooms will be empty or all your tenants will be unable to pay.)

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The Cons

In return for higher yields, there are several disadvantages to HMOs.

HMOs are generally more expensive to buy and set up.

HMOs involve a lot more work. Both in terms of setting up the HMO in the first place and then in running and managing it.

HMOs involve more legal issues. You may need a licence and will have to abide by the many rules and regulations which apply to HMOs but which do not apply to other rental properties.

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Houses, Chelsea

So, In 2024 Do HMOs Still Make a Good Investment?

Here we will look at some of the many factors that affect whether HMOs are likely to prove a good investment or not in 2024:

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Demand

Demand for HMO accommodation is likely to remain strong across 2024. Rising living costs mean more tenants are likely to consider shared accommodation to help save money.

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Prices

HMOs could be good value in 2024. A decline in property prices could mean that HMOs, or properties suitable for converting into a house in multiple occupation, become cheaper this year.

It also means that anyone who buys an HMO this year could see the value of their investment fall in the short term, however.

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Rents

As all rents are likely to rise in 2024 HMO rents are likely to increase too, offering improved returns for HMO owners.

A recent Spareroom Rental Index says that UK room rents rose by 16% year-on-year compared to Q3 2022, with the average monthly room rent hitting £721. The average rent in both London and the UK as a whole is now at an all-time high.

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Yields

If property prices decline and rents continue to increase then this could mean that yields on HMO investments will increase in 2024.

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Refurbishment Costs

If you are converting a property into an HMO then the refurbishment costs in terms of materials and labour are likely to be significantly more than refurbishing an ordinary house or flat. Minimum space requirements, minimum WC and bathroom requirements and fire alarm systems – none of which are required in a single-family property – can be very expensive.

This report quoting a mortgage lender says that the average house in multiple occupation conversion cost is now £41,000.

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Maintenance Costs

HMOs tend to have higher maintenance costs than a standard buy-to-let since many people share them and often have a higher turnover of tenants. Wear and tear can be higher. Some tenant types, such as students, typically involve HMO landlords with more maintenance and repair issues than, say, a family tenant would.

Again, in times when labour and materials costs are high running an HMO can be expensive in terms of maintenance costs.

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Running Costs - Bills Inclusive

Many HMO landlords offer bills inclusive accommodation, where all bills like gas, electricity, water, Council Tax and maybe also broadband are included in the room rent. That means that the landlord is responsible for paying these no matter how much the tenants use.

In 2024 when all these bills are high, and quite possibly will increase more, this increases the overheads and risks for landlords with a house in multiple occupation.

This report quoting a national estate agency group says HMO landlords are amongst the property market’s losers at the moment, as room rents have not kept pace with rising energy bills.

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Mortgage Costs

It is normally more difficult to get a mortgage to buy a house in multiple occupation. Many lenders will not lend to inexperienced HMO investors. Fewer lenders will lend for HMO purchases and interest rates and fees tend to be higher than for a standard buy-to-let mortgage.

In 2024, when interest rates have been rising for some time, this could make it more expensive to buy an HMO than in the past.

The financial website Unbiased says that HMO mortgages are usually linked to rates like LIBOR rather than the Bank of England base rate. Landlords have to prove their experience before taking one out, maximum LTV ratios are typically 60-75% and HMO mortgages tend to be more expensive both in terms of interest and fees.

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Tenant Turnover

The tenant turnover of HMOs tends to be much higher than standard buy-to-lets. Students, for example, only rent HMOs for part of the year in many cases. Other tenants may only stay a few months compared to a few years for a standard buy-to-let.

Higher tenant turnover in HMOs can involve more management time and expense by way of more marketing, paperwork and tenant check-ins and check-outs.

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HMO Licensing Regimes

HMOs can involve landlords in what are often complex and expensive local authority licensing regimes.

In England, large HMOs which accommodate five or more people from more than one household always need a licence from the local authority.

Smaller HMOs need a licence if the local council has designated the area as an additional HMO licensing area. Also if the area is a selective licensing area where all rental homes need to be licensed. More and more local authorities are introducing these licensing schemes across their areas, with more new schemes expected in 2024.

HMO licensing costs can be high, ranging between £600 to £1,000 per property for a five-year licence depending on the council area.

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Article 4 Directions

Article 4 is a planning regulation meaning that all new small HMOs require planning permission. (New large HMOs always need planning permission.) It is a regulation used by local authorities to control the creation of more HMOs in specific areas.

More local authorities are likely to introduce Article 4 directions in 2024.

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Enforcement of HMO Rules and Regulations

In order to keep an HMO licence a property must not only meet but maintain minimum standards. These standards cover such things as bathroom and kitchen facilities, heating, ventilation and lighting, safety measures such as fire alarms and exit routes and rubbish disposal.

Local authorities are responsible for the enforcement of HMO rules and regulations. Under the Housing Act 2004 they can issue civil penalties of up to £30,000 per offence or prosecute the offending landlord in court.

HMO enforcement regimes tend to be much stricter than for ordinary rental properties. In 2024 many local authorities are becoming much more active in HMO enforcement.

A London council recently took action against an HMO landlord resulting in a £480,000 fine – believed to be a record.

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Increasing Competition For HMOs From PBSA and BTR

One factor would-be HMO landlords must consider in 2024 is the increasing competition they face from large, well-resourced landlords, particularly from PBSA and BTR developers. These large landlords are expanding fast in many areas. Their brand new developments offering all mods cons can prove very attractive to tenants. Some of these new developments can bring hundreds of new units onto the market in a town or city in just one year, and severely reduce the demand for small HMOs operated by private landlords.

Build-to-rent or BTR developments are blocks of flats and occasionally houses built by large developers. They may attract tenants who would otherwise house share in an HMO.

Purpose-built student accommodation or PBSA is student accommodation built by large developers. It may attract students who would otherwise rent a room in a student HMO.

Knight Frank's last Student Property Report says a record £7.2 billion was invested into new PBSA schemes last year – an increase of 69% year on year. It says 95,000 new student bed spaces will be added to supply by 2025.

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The Renters (Reform) Bill and Running an HMO

The Renters (Reform) Bill contains proposals that will change the law regarding the private rented sector and the letting and renting of property. There is a possibility that the Renters (Reform) Bill could become law in 2024.

If it becomes law the Renters (Reform) Bill will introduce some fundamental changes to tenancy law that are also likely to affect HMOs. Planned changes include ending fixed tenancies and new rules on rent rises. They include introducing new eviction rules including ending no-fault evictions. They will allow tenants to have pets. They will introduce a new Private Rented Sector Database and Property Portal on which landlords will have to list their properties before they rent them out.

Although the Renters (Reform) Bill will affect all properties it could make things more complex for HMO landlords and especially student HMO landlords in 2024.

Read More

  • Empowering Tenants: An Examination of the Renters Reform Bill

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At the end of the day, whether an HMO still makes a good investment in 2024 will depend on your own preferences and investment requirements. It’s advisable to consider all the pros and cons before deciding if a house in multiple occupation is a good investment choice for you in 2024.

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Filed Under: HMOs

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