What is an HMO?
Student lets and house shares are generally HMOs. The government defines a property as an HMO if it houses three or more tenants, who form more than one household (i.e. are unrelated) and share toilet, bathroom or kitchen facilities.
If there are five or more tenants, it’s classed as a ‘large HMO’ and will need to be licensed.
Can any property be let to multiple occupants?
Unless it’s a leasehold property that has a ‘no letting’ clause in the lease, you can rent out pretty much any residential property on a single-let basis. In contrast, not every property can be let as an HMO, mainly because it adds to the density of the population, which isn’t appropriate for every area. In some cases, you might find a community objecting to HMOs because of the lifestyle associated with occupants of a multi-let. For these two key reasons, local councils have the authority to decide whether a property can be an HMO.
Licensing and planning for rental properties
If you have a single-let property in Wales, you are required to have a licence. For multi-lets, although the national law only requires large HMOs to be licensed, local authorities have the power to require licensing of smaller HMOs.
You may also need to apply for planning permission for change of use. There are three ‘use classes’ that apply to residential properties:
- C3 – a single family home or up to six people living together as a single household
- C4 – HMOs housing between four and six unrelated people
- Sui Generis HMO – properties housing seven or more unrelated people.
If you’re letting a residential property to a single household, there is no need to apply for planning permission, even if the property used to be let as an HMO.
Houses in Multiple Occupation in Wales must be licensed under the Housing Act 2004 by the local authority where they are situated. Each local authority in Wales covers different types of HMOs, but if you rent out a shared house with 3 or more unrelated people living in it sharing amenities, or have a property converted into flats but it was not done with Building Regulation supervision you might be operating a rental property that requires an HMO licence. These licensing requirements are in addition to those of Rent Smart Wales, which is in place under the Housing (Wales) Act 2014.
So, with both licensing and planning under the control of each separate council area, it’s vital that if you want to let a property as an HMO, you speak to your own local housing department to clarify the rules before you invest, to make sure you’ll be able to let it in the way you want.
Every rented property has to meet certain standards of health and safety, but these are higher for HMOs, mainly in terms of fire safety.
For single lets:
- Risks must be assessed
- Any furniture and furnishings supplied must have ‘fire safe’ labels
- Tenants must have clear access to escape routes
- There must be a smoke alarm on each floor, tested at the start of each tenancy.
The additional regulations for HMOs include:
- Installing a smoke alarm in each individual unit, e.g. bedroom or bedsit
- Having a mains-powered, interconnected fire alarm system
- Fitting fire doors, which should have closers
- Having fire extinguishers on each floor
- If the property is licensed, having a written risk assessment.
Again, each local authority can impose its own requirements on top of national rules, so always check these with your local council housing department.
Overall, whether you have a single let or an HMO, the important thing is that you can show you’ve taken all reasonable steps to ensure the safety of your tenants. We’d suggest the best way to do that is to have a local Fire Safety Officer visit the property to confirm the legal requirements and recommend any further ‘best practice’ steps you should take.
Finance and insurance
When you’re looking for a mortgage for a single-let rental property, you’ve got a huge number of buy to let products to choose from. But if you’re buying an HMO – whether that’s an existing multi-let or a property you’re planning to convert to an HMO – you’ll need a more specialist mortgage, which only a small number of buy to let and commercial lenders offer.
Similarly, while most insurance companies offer landlord insurance for single lets, there are a limited number of providers that will cover you for an HMO, so you’ll need to find a specialist insurer. Be aware that your premiums may be higher, as the risk in letting to multiple unrelated tenants is greater. However, as with other types of property, you can often save money by taking out ‘portfolio insurance’ and putting all your properties on one policy.
Any rented property needs a certain level of management and maintenance. The property must be kept in good condition, and you’ve got to secure all the necessary safety certificates; tenants need checking in and out, and there are bound to be phone calls and emails that need dealing with during the tenancy.
However, if you’re letting by the room, the management and maintenance demands are much higher. Your tenants are going to be moving in and out at different times, and house share tenants tend to move more often than single households renting a whole home. That means more advertising, more enquiries, more viewings and more check-ins and check-outs. Also, because they’re all different households, you tend to get a greater number of phones calls for all sorts of reasons.
In terms of maintenance costs, because the communal areas in an HMO are shared and therefore no tenant’s exclusive responsibility, you’ll also have to provide cleaning and gardening services. And for each rented room, you’ll have cleaning between lets and check in/out inventories.
On top of maintenance, you also need to account for paying the council tax and utilities, plus tenants will expect you to provide high-speed wireless internet in an HMO property – although these costs should be reflected in the all-inclusive rent.
Benefits of single lets vs. HMOs:
- Your initial costs are usually much lower than with a multi-let. As long as the property is in good condition, you might only need to secure gas and electrical safety certificates and fit smoke alarms. However, if you’re converting a family home to an HMO, you’ll probably have to add stud walls and extra bathrooms, and then there are all the extra fire safety measures to install. You may also have licensing and planning application costs, plus the cost of any works required – for example, the planning departments might require parts of the property to have soundproofing.
- There’s less management involved – just one tenancy agreement, one household to deal with and a longer average tenancy length. With multiple unrelated tenants, especially when they’re all on separate tenancy agreements, it can be a lot of administration.
- Capital growth is generally better over time because a single household property has more universal appeal than a multi-let and is often in a slightly more desirable neighbourhood. When you sell an HMO, it’s either going to be to another investor, who will be keen to buy at a discount, or to someone looking for a family home, and they’re going to have to do a fair amount of work to restore the property.
Benefits of HMOs vs. single lets:
- Your rental income, yield and net returns could be double what you would get , in comparison to letting the same property to a single family – even with the additional costs. It’s not surprising that this is the main reason why landlords choose to invest in HMOs.
- You can virtually eliminate the risks associated with voids. By letting rooms individually, you greatly reduce the chance of ever having a month where your rental income doesn’t cover your costs. With a single let, any gap between tenancies is time when you’re not getting any rental income at all.
You might consider investing in both types of let, to help diversify and balance your property portfolio – even if it’s just a small one. You could have a couple of single-let properties that are likely to increase well in capital value over time, even if the rental profits are relatively small, then an HMO to significantly boost your monthly income.