HMO Essentials: Boost Your Rental Profits in 2024

A House in Multiple Occupation (HMO) is a specific type of rental property that houses multiple tenants who share common areas and facilities, such as lounges, kitchens, bathrooms and laundry facilities. Understanding the definition, rights, responsibilities, licensing requirements and differences between HMOs and other property types is important for landlords and tenants. This guide will cover these aspects and provide insights into rental yields and regulatory frameworks.

When is a House Considered an HMO?

Definition and Criteria

An HMO is a property rented out by at least three people who are not from one household (i.e. they are not a family). Each household has its own tenancy agreement with the landlord. HMOs are often large houses or flats with multiple bedrooms and shared common facilities like the lounge, kitchen and bathrooms.

According to GOV.UK, a property is considered an HMO if :

• It is rented to three or more tenants, forming more than one household.

• The tenants share facilities such as a bathroom, kitchen or toilet.

• It is the tenants’ only or primary residence.

What are Your Rights When Living in an HMO?

Tenant Rights

Tenants living in an HMO have the right to be sure that their living conditions are safe and fair. These rights include:

• Living Conditions: The property must meet some basic standards, including those relating to room sizes; common facilities; fire, gas and electric safety; security; and energy performance.

• Maintenance and Repairs: Landlords are responsible for maintaining the property and making necessary repairs.

• Fair Treatment: Tenants must be able to live in the property free from harassment and unfair eviction practices.

• Information: Tenants must be provided with clear information about their tenancy, including its terms and conditions and the rental details.  

Responsibilities

Landlord Responsibilities

Landlords of HMOs have significant responsibilities to ensure that the property is safe, well-maintained and legally compliant. Key responsibilities include:

• Fire Safety: Installing smoke alarms and fire extinguishers on every floor, fire resistant doors, emergency lighting, fire exit signs and means of escape.

• Gas Safety: Conducting annual gas safety checks.

• Electrical Safety: Ensuring all electrical systems are safe and regularly inspected.

• Security: Ensuring there is appropriate security for individual and communal doors and windows.

• Energy Performance: Ensuring appropriate energy performance and certification.

• Hygiene: Providing adequate facilities for waste disposal.

• Licensing: Obtaining and maintaining an HMO licence or additional licence, as required.

Failing to comply with the required standards can lead to hefty fines for landlords. In London, a landlord was recently fined £13,500 for failing to uphold the standards of a liveable household.  

Tenant Responsibilities

While landlords have significant obligations, tenants also have responsibilities, including:

• Rent Payment: Paying the rent on time.

• Property Care: Keeping the property clean and reporting any maintenance issues.

• Respect for Neighbours: Ensuring their behaviour does not cause a nuisance to others.

When do You Require a Licence for an HMO

Licensing Requirements

An HMO licence is mandatory for properties that meet specific criteria. You must have a licence if:

• The property is rented to five or more people, forming more than one household.

• The tenants share facilities such as a bathroom or kitchen.

• It is at least three stories high.

Even if the above criteria are not met, local councils typically still have “additional” licensing requirements for HMOs with fewer people, so you must check with them.

Applying for a Licence

The application process involves submitting detailed information about the property, including its safety features, and management arrangements. The local council will inspect the property to ensure it meets all legal requirements before granting a licence. Periodic HMO licence fees will have to be paid.

Health and Safety Rating System

Overview

The Housing Health and Safety Rating System (HHSRS) assesses potential risks to health and safety in residential properties, including HMOs. It covers 29 categories of possible hazards, including fire, dampness, mould and electrical issues.

Enforcement

Local councils use the HHSRS to enforce health and safety standards in HMOs. If a property is found to have serious hazards, the council can take enforcement action, including:

• Serving improvement notices.

• Issuing prohibition orders to prevent occupancy.

• Carrying out emergency repairs and charging the landlord.

Difference Between a BTL and an HMO

Buy-to-Let (BTL)

A buy-to-let (BTL) property is a self-contained dwelling rented out to a single family or no more than two separate individuals under a single tenancy agreement. While fire, gas and electrical safety, and energy performance and other requirements need to be met, a licence is not required.

HMO

An HMO, which involves renting out individual rooms to multiple tenants who share common facilities, needs to adherence to strict standards and also requires a licence or an “additional” licence from the local council. While managing multiple tenancies in an HMO is more challenging than managing a single tenancy in a BTL, an HMO can provide a higher rental yield than a BTL due to the multiple income streams from different tenants.

Reported Rental Yields

Rental Yield

HMOs generally offer higher rental yields compared to standard BTL properties due to the multiple tenants paying rent. British Landlord Association data indicates that HMOs are seeing 7.5% rental yields.

Factors Influencing Yields

• Location: Properties in high-demand areas, such as university towns, city centres or business districts, tend to see higher yields.

• Property Condition: Well-maintained and modern properties attract higher rents.

Getting the Best Deal

Research and Comparison

Thorough research and comparison are essential to before making an HMO investment. Consider factors such as location, property condition and potential rental income. Using property comparison websites and consulting with local estate agents can provide valuable insights.

Professional Advice

Consulting with a property lawyer or financial advisor who specializes in HMOs can help you navigate the complexities of HMO regulations and ensure you are compliant with all requirements.

Licensing and Compliance

Ensure your property meets all licensing and safety requirements before letting it out as an HMO. Non-compliance can result in significant fines and legal issues. By adhering to regulations and seeking professional advice where necessary, landlords can maximize investment returns while providing safe and compliant housing for their tenants.

FAQs

Q. What defines a property as an HMO?  

A. A property is considered an HMO if it is rented out to three or more tenants who form more than one household and share facilities like the bathroom and kitchen. It must also be their main residence.

Q. Do I need a licence for my HMO?  

A. You need an HMO licence if your property is rented out to five or more people forming more than one household and the tenants share facilities like a bathroom or kitchen. Even if there are just three or four tenants, however, but they form more than one household, an “additional” HMO licence is very likely to be required. Licensing requirements vary by local council, so check with your local authority.  

Q. What are the landlord's responsibilities in an HMO?  

A. Landlords must ensure the property is safe and well-maintained, including fire safety, gas and electrical safety, and security and energy performance, and providing adequate waste disposal. They must also ensure that the property meets all licensing or additional licensing requirements and be responsive to tenant complaints about repairs.

Q. What is the difference between a Buy-to-Let (BTL) and an HMO?  

A. A BTL property is typically rented out to a single household or two individuals under a single tenancy agreement, while an HMO is rented out to multiple tenants under separate agreements who share some common areas and facilities. Whilst BTL properties must also adhere to all the necessary safety and energy performance standards, they do not need to be licensed, unlike like HMOs. HMOs can also provide higher rental yields than BTLs, but come with stricter regulations and licensing requirements, and greater management challenges.

References:

1. Renting out a Property | GOV.UK

2. HMO Neglect leads to Five Figure Fine for landlord | LLT | Published 14th June 2024

3. Find your Local Council | GOV.UK

4. Housing health and safety rating system (HHSRS) | GOV.UK | Published 26th May 2006