This month we’ve been concentrating, specifically, on HMOs.
Whilst our key focus rests on providing bespoke bridging finance, we decided to take a step back and look at the whole picture. This led us to ask ourselves: what can we do for those interested in HMO property investment?
We’re living in a time when house prices are rising, mainstream lender’s criteria are tightening and finding a mortgage offer with a 10% deposit is near to impossible. Earlier this year, The Guardian released figures showing that people in their mid-30s and 40s are now three times more likely to be renting compared to 20 years ago. It’s no surprise to the see the demand from tenants soaring.
Examples of popular HMOs are:
- House / flat share
- Student share accommodation (accommodation owned by the university is not counted as HMOs)
But being a landlord is more than just renting out a room. There are many factors you need to consider before investing in UK property ➡
You will need to be declared ‘fit and proper’. Meaning you have no criminal record or a breach of landlord code of practice or laws. You can find more on the rules and regulations here.
Will I need license?
The most common aspect that will affect whether you need a HMO license is the amount of people you’re looking to have under one roof.
- HMO (3 people from more than one household living together)
- Licensed HMO (5+ tenants from more than one household living together)
Whilst a standard HMO do not usually require a license, you should always check with your local council for any additional costings and licenses that they require, as this can differ depending on location. Another aspect that may change the need for a license is the number of floors of the property.
If you’re unsure whether the property you own or looking to convert is counted as an HMO, then you can always check government legislations, or your local council. Licenses can take a while to be granted, so leave extra time to ensure you receive your license well in advance. Once passed, an HMO license is valid for a maximum of 5 years and is only valid for one HMO property.
If you’re housing a large HMO, you may need to convert your property to ensure you’re in line with government guidelines. You might need to install additional bathrooms, increase living space and adhere to specific bedroom sizes. In this situation, a refurbishment loan may best suit your needs.
What am I responsible for?
Properties will be expected to meet certain living conditions, as a requirement of your HMO license. This is to protect your tenant and ensure their safety. It can include elements such as:
- Air Circulation
- Amount of natural light
- Correct heating & plumbing facilities
- Install & maintain smoke alarms
- Update the council with an annual gas safety certificate
- Provide electrical appliances safety certificates, when requested
HMO inspections are required for all HMOs that require a license. Your local councils will be required to inspect the property at least once during the 5-year license period, to certify the fire and facility standards and criteria are met. However, it is your responsibility as the landlord to secure a license before letting out your property.
Landlords must also guarantee there are no hazards on the premises, that are mentioned under the Housing Health & Safety Rating System (HHSRS). Below are a couple of examples:
- Exposed asbestos
- Excessive heat / cold
- Anything that could cause a person to fall and injure themselves – such as uneven flooring
For more guidelines, please see the government legislation here. These can vary between councils.
Things to consider before taking on the role
Like any residential investment, you should take the time to consider whether being a landlord is right for you, as well as your property portfolio.
If time is tight, you can always use an estate agent to manage properties for you, for a fee. On average, estate agents charge 10-15% of the monthly rent, for a full management service. However, many offer ‘tenant finding’ or ‘tenant finding and rent collection’ services, which will reduce the cost.
Here are just a few key factors to consider before committing to the landlord life:
Research your area
Conducting your own research on an area, before purchasing or converting your property, is vital. It provides you with an understanding of how much renters are willing to pay for their accommodation, and to what standard of living.
It also provides competitive analysis. You can see how your property will fair when compared against other HMOs in the area. Whilst the demand for tenants is on the rise, your property should remain at a competitive price.
To guarantee potential tenants are aware of their responsibilities, they should receive a copy of the HMO Code of Practice. Allow time for the potential occupiers to read this before signing the tenancy agreement. Examples of these include:
- Any damage to items supplied, maintained, or repaired by the manager that are labelled on the inventory list, will need to be replaced or its charge will be deducted from the security deposit
- Storing and disposing of rubbish as per the manager’s arrangements
- Keeping the property grounds clear of any litter
- Follow the landlord’s instructions relating in relation to escape from a fire, including the use of any fire equipment
Should your tenant(s) need to exit their agreement early, instructions and charges need to be clearly stated in the tenancy agreement. In most cases, landlords will ask for a notice period, to allow time for them to find a new tenant; often one-or-two-months’ warning.
Finances to consider
When letting out your property, you need to consider the length of each tenancy agreement. Otherwise, you may face months where your property becomes vacant. This is usually an issue facing buy-to-let landlords.
HMOs are typically rented on a room by room basis, which means that if one tenant exits their tenancy agreement early, the landlord is still covered by the income of the other residents. You should consider including a notice period, should your tenants decide to leave early. In most cases, an exit fee or payment clause will be included in the tenancy agreement (Example: paying until the end agreed letting period, or until a new occupant is found), to ensure that you are financially covered; as the property owner.
You will also be required to pay income tax and class 2 national insurance if your revenues are £6,475+ or if renting your properties is counted as a business, which could be if:
- Being a landlord is your main job
- You rent out more than one property
- You’re buying new properties to rent out
Time & effort
When renting to multiple tenants in a constant stream, maintaining high property standards can be difficult. Damage such as wear-and-tear is inevitable with any property letting and should be considered when evaluating the cost of your rental charge. It will fall to the landlord to ensure these standards are maintained and upkept to an acceptable level, ready for new tenants. Other damage caused by tenants, such as a broken door, should be noted in the tenancy agreement – as mentioned above.
Landlords may also be called to resolve any disputes between tenants or fix issues that may suddenly arise, such as a burst pipe. It can be time consuming, particularly if you have another job. This is when estate agent management might be considered.
A Helping Hand
Starting out can be a scary process, so we’ve collected a few resourceful websites to help guide you through your life as a landlord:
This is an organisation and a community made specifically for residential landlords in the UK. It also admits letting agents, who can assist you in renting out your property. They aim to assist and represent all their members.
They also provide documents for experienced landlords, as well as a starter pack for those looking to enter the trade. Membership costs start from £155.
This is a free national association that provides help and support for residential and commercial landlords alike. They assist both landlords with a singular BTL property, and multiple. They will help provide a lawyer, should you need one, as well as a list of documents that landlords can download in their own time.
You will always be able to find government advice via the Gov website. This can be for Covid-19 updates, to rules & regulations and tenancy laws.