Investing in large houses in multiple occupation (HMOs) presents a unique blend of challenges and opportunities. Understanding the intricacies of mortgages, legal classifications, and health and safety regulations is crucial for anyone considering this investment path.
The Appeal of Large HMOs
Large HMOs, typically consisting of properties where each bedroom is rented out separately, offer a higher income potential compared to traditional rentals. This is because you’re essentially generating multiple streams of rental income under one roof. Additionally, the impact of rental voids is usually less severe, as income from other tenants can offset a single vacancy.
Management and Regulations
However, large HMOs demand more in terms of management and upkeep. They are also subject to more stringent health and safety regulations, making their operation more complex than standard rental properties.
Types of HMOs Defined in Housing Act 2004
The Housing Act 2004 outlines the legal framework for HMOs:
- The Standard Test: Properties with tenants from multiple households sharing amenities like kitchens or bathrooms.
- The Self-Contained Flat Test: Similar to the standard test, but specific to flats.
- The Converted Building Test: Applies to buildings converted into non-self-contained flats.
HMO Declarations and Licensing
Local authorities can issue an “HMO declaration” under Section 255, classifying a building as an HMO, even if not used solely for accommodation. Conversely, Section 256 allows for the removal of such a declaration. Section 257 covers HMOs converted into self-contained flats, with additional considerations.
Mandatory Licensing for Large HMOs
Since 2006, large HMOs housing five or more people from at least two households require a license from the local authority. This rule applies irrespective of the building’s number of storeys. Licenses, valid for five years, necessitate that the landlord or managing agent be “fit and proper”, with no criminal record or breaches of landlord laws. Local authorities maintain a register of these licenses, which are contingent upon meeting specific standards for safety and property management.
Health and Safety Obligations
General Requirements
All rental properties, particularly HMOs, must provide a safe living environment. This includes additional health and safety measures due to the complexity of multiple households sharing one premises.
Fire Safety Standards
Fire safety is a critical aspect of managing a large HMO. Requirements vary based on the number of floors but generally include smoke detectors, heat detectors, fire blankets, interlinked alarms, and fire escape routes. The Fire Safety (England) Regulations 2022 introduced new requirements, including providing tenants with fire safety instructions and information about fire doors.
Electrical Safety Compliance
Electrical safety is governed by the Housing Act 2004 and The Electrical Safety Standards in the Private Rented Sector (England) Regulations 2020. These laws mandate regular inspections and testing of electrical appliances and systems, with compliance documentation readily available for tenants and local authorities.
Planning and Development Considerations
Local councils may implement planning controls on HMOs to manage the impact on the local area.
General Permitted Development Orders and Article 4 Directions
While some conversions from residential to small HMOs don’t require planning permission, local councils can restrict these rights using Article 4 Directions. This means planning permission might be necessary for changes that would otherwise be permitted.
Sui Generis HMO Properties
Large HMOs occupied by seven or more unrelated tenants fall under the Sui Generis class, requiring different planning approvals compared to smaller HMOs. They are treated more like commercial properties in terms of health, safety, and structural requirements.
Mortgage Considerations for Large HMOs
Lenders differentiate between small and large HMOs, impacting the mortgage rates and terms offered. High street lenders might prefer smaller HMOs, while specialist lenders handle larger properties.
Mortgage Rates and Criteria
Mortgage rates for large HMOs tend to be higher due to the increased risk. Factors influencing rates include the property size, the nature of the ownership (e.g., a limited company), and other criteria like loan-to-value ratios and rental coverage.