Are HMOs a Viable Investment Option for 2022 and Beyond?

For many years "HMO" has been a buzz term for property investors, with the expectation of high rental yields for minimal outlay. However, with increasing reports of HMO council tax 'disaggregation' hitting landlords pockets, are HMOs still a viable investment option for 2022 and beyond? Let's explore in detail.

 

What made HMOs an appealing option for investors?

 

HMO 1

 

Traditionally, a house in multiple occupation (HMO) is most simply defined as a property that is rented by five or more tenants. These tenants live under one household and share the same facilities (kitchen or bathroom), but are not members of the same family. HMOs can be developed cheaply and the low rent reflects this, often propping up the bottom of the rental market.

This is appealing to landlords as there is always good demand for cheap housing and rent for multiple cheap rooms still (usually) equates to more rent than renting a house the "traditional" way. HMOs also give the investor opportunity to spread void risk, as income generated is spread across multiple occupants. Even if one tenant falls behind or moves out, there are still multiple other occupants providing revenue. 

Additionally, landlords are able to offer tenants an "bills included" package, with rent and bills coming in at less than a tenant would pay in an apartment. This is because landlords have historically only had to pay one council tax bill for the building which is then split between tenants, offering a substantial saving. However, with council tax 'disaggregation' reports becoming more frequent this benefit seems under threat.

 

What made HMOs an appealing option for tenants?

 

HMO 2

 

Ultimately price is whats appealing about HMO living to tenants. Tenants have been willing to compromise on living conditions, sharing kitchen and bathrooms with strangers to keep costs down.

 

All seems great, so whats changed?

 

Council Tax Disaggregation

 

HMO 3

 

Council tax disaggregation is when councils begin to charge council tax per HMO unit rather than one bill for the whole building, increasing outgoings hugely for landlords or tenants. Disaggregation usually effects HMOs which have shared kitchens and bathrooms on each floor, or where landlords have developed HMOs with kitchenettes or en-suites. Some see this as councils penalising landlords that are offering a better standard of accommodation. This type of "high end" HMO has become much more common as landlords work to reduce tenant turnover, management costs and appeal to more discerning tenants.

Legislation allowing disaggregation has been around since 1992 but was rarely used, however a quick search online reveals the legislation seems to be being used much more commonly with many disgruntled landlords sharing stories of hugely increased council tax bills. One landlord estimated that their council tax outgoings could go from £800 a year to £3,500 due to his property being split into five units.

This is something that Heaton Group have also directly experienced, with several properties in our portfolio being disaggregated. This has been a major factor in our decision not to develop any further HMOs, along with the factors described below.

 

HMO Licence Costs

 

HMO 4

 

 You must have a HMO licence in England in Wales if your HMO is rented to more than 5 people or more that aren't in the same household or some or all tenants share toilet, bathroom or kitchen facilities. If your HMO doesn't fit within these requirements, you may still need a HMO licence, so always check with your local council. You will require a separate HMO licence for each HMO you run and they last for a maximum of five years. 

This isn't a cost to be ignored. Firstly, applying for the licence itself can be costly. Secondly, ensuring your HMO meets the regulations to obtain the licence may involve modifications you may not have budgeted for. The conditions to obtain the licence are liable to change, so a building that currently has a HMO licence may have to carry out  further works to obtain the next one when the time comes. Landlords that rent out an unlicensed HMO can receive an unlimited fine.

The cost of a HMO licence varies from area to area, and can be charged per room. For example, a HMO licence in Kensington will set you back £1400 whereas a licence in Kingston is £200 per room.

 

High Tenant Turnover Leading to High Management Costs

 

HMO 5

 

Finding five or more reliable tenants to occupy your HMO can take some work. You have the added task of making sure they’ll all get along within your property, especially as they will be sharing kitchens and bathrooms. 

The process of vetting tenants can be an arduous one at the best of times but, for HMO's, this only becomes more complicated. Finding a group of people who can pay rent on time, are used to the requirements of being a tenant AND will be happy to live with your other tenants can seem like finding for a needle (or five!) in a haystack.

It is also difficult to find tenants who want to live in a HMO long term. With small rooms and shared amenities, living in a HMO is usually a stepping stone and tenants only stay for 6 - 12 months on average. This leaves landlords paying costly tenant finder fees (usually charged at half or more of first months rent) much more regularly than those who own an apartment. Loosing half of a months rent twice a year over multiple units can add up to a considerable amount and mustn't be disregarded while weighing up HMO pros and cons.

In addition to the above, tenants viewing a room as a short term housing solution can mean they don't take as much care in looking after their rented space. Ware and tear adds up quickly with a higher turn over of occupants, especially in communal spaces. Over our portfolio, we have recorded significantly higher maintenance costs in HMOs than in houses or apartments.

Some letting agents won’t even take on HMO's if you decide to have the property managed by a third party. If they do, their management fees are usually more than what is charged for traditional housing.

Rising Utility Bills

 

HMO 6

 

With most HMO landlords offering tenants a "bills included" package, it usually means that tenants are on a shared meter and the landlord pays the monthly bills for the property. Rents are set by taking average utility costs into account, however with rapidly increasing utility costs, bills can quickly spiral before rents can reviewed. 

A bills included rent can also mean that tenants aren't responsible about their energy usage. After all, if their rent is agreed for six to twelve months, the amount of energy they use won't matter, right? Wrong! Well, at least for a landlords profit margin!

 

Appealing to More Discerning Tenants

 

HMO 7

 

Experienced HMO landlords often try to negate the issues of high tenant turnover, high management costs and irresponsible energy use by trying to appeal to more discerning tenants. Most commonly, HMOs will be made more appealing by adding more communal kitchens or bathrooms to reduce the amount of shared amenities, or some landlords go as far as adding kitchenettes and ensuite bathrooms. 

This can work in attracting a tenant who may pay a higher rent and live there for longer, however, this type of HMO is also much more likely to have disaggregated council taxes, therefore eliminating any benefit. Some landlords may pass the individual council tax bills over to the tenant, but this could bring the rent of a HMO unit up to meet that of a one bedroomed apartment with its own amenities, usually a much more appealing option to a tenant.

 

Difficulty Obtaining Mortgages

 

HMO 8

 

When buying an HMO, getting a mortgage is likely to be more difficult than for another buy-to-let property. HMO's usually also require a larger deposit.

Becoming a landlord can be a tricky financial process to navigate and that doesn’t change when it comes to HMO's. Many mortgage lenders will simply not offer HMO mortgages. The few that do could charge you a higher rate of interest than for other buy-to-let mortgages. With interest rates forecast to continue climbing in 2022 and beyond this interest could rocket further.

It is worth noting that some lenders also prefer to work with those who have prior experience as a landlord and an existing property portfolio. As a result, if you’re looking to purchase an HMO for the first time, you might find it very difficult to find the funding.

 

Conclusion

Although HMOs may already form a part of many landlords portfolio, buying a new HMO for 2022 and beyond may not be a viable option. To appeal to a more discerning tenant, landlords may be at increased risk of disaggregation. This in addition to higher management, finance and utility costs could mean that landlords move away from investing HMOs in the future.

 

Looking to invest in a high yielding apartment? 

Take a look over our apartments, available to buy now. We develop apartments in up and coming locations, meaning our investors high yields and high capital growth. We have apartments priced from £135,000, just 12 minutes from Manchester City centre in a new build development. 

 

Enquire today: info@heatongroup.co.uk /  01942 251945

 


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