What is an HMO? A Beginner's Guide to House in Multiple Occupation Investing
You've likely heard the term 'HMO' mentioned by property investors, often in the context of high cash flow and impressive returns. But what exactly is an HMO, and how does it differ from a standard Buy-to-Let?
If you're exploring ways to maximise your rental income, you're in the right place. This guide provides a simple, jargon-free explanation of House in Multiple Occupation (HMO) investing in the UK. We'll cover what they are, the crucial rules you must follow, and the pros and cons of this popular and powerful property strategy.
What You'll Learn
1. The Absolute Basics: What is an HMO in Simple Terms?
What is a House in Multiple Occupation (HMO)?
An HMO, or House in Multiple Occupation, is a property rented out by at least 3 people who are not from one 'household' (like a family) but share facilities like the bathroom and kitchen. It's sometimes called a 'house share'.
The government's definition is the legal standard: a property is an HMO if at least 3 tenants live there, forming more than 1 household, and they share a toilet, bathroom, or kitchen facilities.
This model is common in areas with high demand for affordable accommodation, such as near universities, hospitals, or in large city centres.
How Does an HMO Make Money?
Unlike a standard Buy-to-Let (BTL) property that is let to a single family unit for one rental payment, an HMO is let on a room-by-room basis. This creates a significantly higher rental income from the same property.
There are two primary ways an HMO generates returns:
- • High Cash Flow (Profit): By letting out multiple rooms individually, the total rent received is much higher than if the same house was let to a single family. This is the main appeal of the strategy.
- • Capital Appreciation: Just like any other property, the value of the building itself can increase over time.
Simple Example: BTL vs HMO
Imagine a standard 4-bedroom house in Middlesbrough.
As a BTL: It might rent to a family for £900 per month.
As an HMO: Each of the 4 rooms could be let for £450 per month, generating a total of £1,800 per month.
Even after accounting for higher running costs like bills (which are often included in HMO rent), the potential profit is significantly greater.
2. The Golden Rule: Understanding HMO Licensing
Because you have multiple tenants in one property, the management and safety standards for HMOs are much stricter than for standard BTLs. This is where licensing comes in, and it's a legal requirement you cannot ignore.
There are two types of licensing to be aware of:
Mandatory Licensing
In England, a property must have a Mandatory HMO Licence if it is occupied by 5 or more people from more than one household. This is a national rule and applies everywhere.
Additional & Selective Licensing
This is where local knowledge is crucial. A local council has the power to introduce stricter licensing rules that go beyond the national minimum.
- • Additional Licensing: The council can require smaller HMOs (e.g., with 3 or 4 tenants) to also be licensed.
- • Selective Licensing: The council can require all privately rented properties in a specific area to be licensed, whether they are an HMO or not.
Important: Before even considering an HMO property, you must check the local council's website (e.g., Middlesbrough Council, Durham County Council) to understand their specific licensing rules and costs.
3. Your 5-Step Guide on How to Start in HMO Investing
Choose Your Location & Tenant Type
Are you targeting students near Durham University or young professionals working near Sunderland's city centre? The location and tenant type will dictate the type of property you need, the level of finish, and the potential rent.
Get Your Finances Ready
Securing a mortgage for an HMO is a specialist process (more on this below). You will typically need a larger deposit (at least 25%) and the lender will want to see a clear business plan.
Find the Right Property
The ideal property is often a large Victorian terrace with multiple reception rooms that can be converted into extra bedrooms (subject to regulations). Proximity to transport links and amenities is critical. This is where a local property sourcer can provide a huge advantage.
Understand the Costs
HMOs have higher setup and running costs than BTLs. You must budget for:
- • Licensing Fees: Can be £500 - £1,500+ depending on the council.
- • Refurbishment: Creating a compliant and attractive HMO often requires fire doors, smoke alarms in every room, and modern shared facilities.
- • Bills: HMO landlords typically pay all the bills (council tax, gas, electricity, water, broadband).
- • Management: Managing multiple tenancies is more work. Many landlords use a specialist HMO letting agent, which costs more than a standard agent.
Comply and Let
Once the property is ready, you must ensure it fully complies with all national and local standards before letting out the rooms. This includes everything from minimum room sizes to having the correct fire safety equipment.
4. Thinking Like a Pro: HMOs, Article 4, and Mortgages
What is an 'Article 4 Direction'?
This is another critical piece of local knowledge. An Article 4 Direction is a rule a council can implement to remove permitted development rights.
In simple terms, it means you need to apply for full planning permission to change a family dwelling (a C3 property) into a small HMO (a C4 property with 3-6 occupants).
Many councils in areas with high concentrations of HMOs, like Durham and parts of Newcastle, have Article 4 Directions in place to control the number of shared houses. Trying to create a new HMO in an Article 4 area can be very difficult and is not recommended for beginners.
Important: Always check for Article 4 Directions on the council's planning portal before buying a property you intend to convert.
HMO Mortgages
You cannot use a standard BTL mortgage for an HMO. You need a specialist HMO mortgage product.
- • Stricter Criteria: Lenders will often want to see some experience as a landlord before offering an HMO product.
- • Higher Interest Rates & Fees: HMO mortgages are seen as higher risk, so they typically come with higher costs than standard BTL mortgages.
- • Valuation: The lender's valuation will be based on the property's value as an HMO and its potential rental income, so having your numbers spot-on is crucial.
5. A Balanced View: What are the Pros and Cons of HMOs?
✅ The Pros
High Cash Flow
The number one reason investors choose HMOs. The potential monthly profit is significantly higher than a BTL.
Reduced Void Periods
If one tenant leaves, you still have income from the other rooms, unlike a BTL where the entire property is empty.
High Demand
In the right areas (cities, university towns), the demand for affordable, flexible room lets is consistently strong.
❌ The Cons
More Regulation
Licensing, Article 4, and stricter safety standards mean more legal hoops to jump through.
Higher Costs
Setup, refurbishment, bills, and management are all more expensive than a standard BTL.
Intensive Management
Managing multiple tenants, dealing with shared living issues, and higher tenant turnover requires more time and effort.
Harder to Finance
Mortgages are more specialist and can be harder to obtain, especially for first-time investors.
Conclusion
So, what is an HMO? It's a high-yield property strategy that involves renting a property by the room to multiple tenants.
While it offers the potential for fantastic cash flow, it is not a passive investment. It is a business that requires significant capital, a deep understanding of local and national regulations, and a commitment to active management. For the right investor in the right location, it can be an incredibly powerful way to build a property portfolio.
Ready to Explore HMO Opportunities in the North East?
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