HMO Properties: A complete guide to Houses in Multiple Occupation

Houses in multiple occupation, also known as HMOs, are a popular investment strategy amongst property investors. They allow for higher cash flow than most other strategies, like buy-to-lets, and can be bought in strategic locations to maximise capital appreciation. 

But to benefit from HMOs, you must first understand the nuances that come with them, such as licencing and compliance. In this article, we’ll break down everything you need to know about HMOs, including what the meaning of an HMO is, the benefits that this strategy offers and, more importantly, how you can use them to increase the value of your property portfolio. 

What does HMO stand for in housing? 

HMO stands for House in Multiple Occupation. In simple terms, this means a property that is rented by three or more people who are not from the same household. For example, a family of three people living in a house would not make it an HMO, but three people who are not from the same family or group renting one property would. 

What exactly is an HMO property? 

The Features That Classify an HMO as ‘House in Multiple Occupation’

According to the GOV.UK website, their definition is “A property rented out by at least 3 people who are not from 1 ‘household’ (for example a family).  

Another feature that classifies a property as an HMO is the sharing of facilities, like kitchens, bathrooms or communal areas between tenants. This can vary though, as some HMO properties have en-suite bathrooms, meaning that only the kitchen and communal living area need to be shared.  

It is worth noting that HMOs have their own set of regulations that must be followed (see below for more information) like HMO Fire Compliance, that set this strategy apart from other types of investment properties.  

What distinguishes HMOs from other types of rentals?  

HMOs are characterised by multiple individuals or “households” sharing facilities within a single property. What distinguishes HMOs from a single buy-to-let is the level of shared facilities and the resulting impact on the living experience. 

This sharing of facilities and communal areas in HMOs encourages a higher degree of interaction among tenants. Some HMO investors call this ‘co-living’, where they empathise a community environment in their HMOs, which improves tenant satisfaction, and therefore encourages tenants to stay longer. If you are interested in the difference between co-living and HMOs, then read our guide on Co-Living vs HMO. 

Who can live in an HMO? 

With the cost of living rising, many people are choosing to stay in shared accommodation to cut their overheads. So, realistically, anyone can live in an HMO. However, you tend to find that HMOs attract a specific demographic, predominantly people who are on a lower income, people who are looking to make friends/socialise rather than live alone, or people who are not looking to stay in an area for a long time, like contractors. 

Low income does not mean that HMOs attract bad tenants. The most common type of resident in an HMO is a young professional who is career-focused and wants somewhere cost-effective to live, rather than spending lots of money to live in a home on their own. 

Although many different demographics can be attracted to staying in an HMO property, from students to social housing tenants, it is recommended that you don’t mix them. For example, let’s say you have a four-bed HMO full of three students, you wouldn’t then put a working professional or a contractor in the fourth room. 

Landlords can live in their own HMO units, however, they must still comply with the same legislations as any other HMO. This is a popular choice for homeowners who own a property with multiple unused rooms, as it can be a good way of earning an additional income.  

Section 254 vs. Section 257 HMOs: What is the difference? 

As an HMO investor, understanding the difference between Section 254 and Section 257 classifications is vital. While both fall under the HMO umbrella, they represent separate categories, each with its own set of rules and regulations. 

Section 254 HMOs:  

Section 254 HMOs are properties occupied by multiple people from separate households. To qualify under this category, a property must be inhabited by three or more people forming two or more households. This classification triggers the mandatory licensing process if specific conditions are met, such as the property having at least five occupants from separate households and spanning three or more stories. 

Section 257 HMOs:

Section 257 HMOs are properties originally designed as single-family dwellings that have been converted into self-contained flats. When the local housing authority deems these flats unfit for occupation due to conversion-related concerns, like the building not being compliant, a Section 257 HMO declaration is issued. This declaration brings the property up to HMO regulations, which allows the local authority to ensure that these spaces can be safely habituated.

Examples of houses in multiple occupation

There are many examples of houses of multiple occupation, and how they can be applied as an investment strategy. In fact, it is likely that you have visited one, or at least know of one, without realising that it was an HMO.

One of the most common examples of an HMO property is student accommodation, where individuals who are studying at university share a flat or house but have their own separate rooms. However, this concept is not exclusive to young people or university students. Single adults, working professionals, couples, and even families can reside in an HMO property.  

By definition, an HMO can even be a flat with three or more bedsits, or a house that has been converted into three or more bedsits.    

What is an HMO licence and how does licensing work? 

An HMO license is an official authorisation given by a local housing authority that permits a property owner to operate a house in multiple occupations. To get this licence, the property must pass regulations set by the local council that demonstrate it meets the required Health & Safety and Living Standards, which include key compliance, like Fire Safety.

To get their HMO licence, landlords must apply through their local council. This application will include detailed information about the property, such as its layout, and how tenants will share the space.  

Providing the application answers the right questions, the local authority will then visit the property to conduct an inspection. Here, the property’s compliance will be inspected to ensure it is safe for multiple occupants to inhabit. 

Finally, the local housing authority reviews the application and inspection findings to determine whether the property meets the required standards. If the property is deemed compliant, an HMO license is issued. 

The HMO license comes with certain conditions that you must adhere to, including regular safety checks, maintenance and other legal obligations. Failure to meet these conditions can lead to the licence being revoked. 

Read our blog on HMO licencing for further information. 

What does HMO compliant/approved mean

Being ‘HMO compliant’ means a property can legally function as a house for multiple occupants. This indicates the property adheres to local council rules, ensuring it is safe for multiple people to live in. 

It is vital that HMO landlords go through the process of becoming HMO compliant. Not doing so can result in large times, and in some cases, a jail sentence. This is without mentioning the risks that an uncompliant HMO poses to tenants. 

The Benefits of HMO investing 

Houses of multiple occupation hold many benefits to the savvy investor, which make them a worthwhile addition to your property portfolio. Below are just a few examples of the many reasons why people choose to invest in HMO properties. 

High cash flow

More tenants in a property means a higher rental income, as each tenant pays their rent separately. As an example of how this works, picture that you have a standard 3-bed buy-to-let property with two reception rooms. Let’s say that this property generates £850pcm in rental income, paid by a single family. 

Now, let’s take this same property and look at it as an HMO. Each room could be rented out individually, and one of the reception rooms could be converted into an additional bedroom. Let’s say you fill each room with one tenant, meaning your property now houses four people. Each tenant pays you £400 per month for their room, meaning your rental income has skyrocketed from £850 to £1,600. 

For investors who prioritise monthly income in their portfolios, HMOs are a much more attractive option than standard buy-to-lets. 

Outsourcing

The management of HMOs can be easily outsourced to an experienced HMO manager. The right business will deal with tenant enquiries and fill your property with new tenants if one of them leaves. Outsourcing the management of your HMO property allows you to reap the benefits of high cash flow, without being tied down by the daily tasks that come with being an HMO landlord.

Safety in numbers

Another attractive element of HMOs is that, unlike buy-to-lets, if one tenant leaves, you still have cash flow. With a buy-to-let, if your tenant moves out, the property becomes empty until you go through the rigmarole of the tenancy process and fill it again. However, with HMO properties, if one tenant leaves, your other rooms still generate income, meaning that your cash flow does not suddenly drop to zero, and you still have money coming in to pay the bills.

A rising demand

It is no secret that the cost of houses and rental prices are rising to unaffordable rates for most UK residents. These price increases are pushing more people to consider living in shared accommodation, as it’s a cheaper alternative. As prices continue to soar, so will demand for HMO properties.  

Houses in multiple occupation summed up

In summary, investing in HMOs brings numerous benefits to landlords looking to diversify their property portfolio. In addition to generating high cash flow, they also give you more control over the types of tenants you house. However, this is by no means a strategy that you should jump into blind, as it is covered in a lot of legislation and red tape.

Being knowledgeable of the HMO market and having a team of people around you who understand the rules and regulations is vital to success with the strategy. To arm yourself with the knowledge you need to succeed, read more of our guides.  

If you wish to speak with one of our dedicated HMO experts who can answer any questions about your current or upcoming projects, then contact our team today. We can walk you through the entire process of establishing a HMO, assisting with everything from going through the planning process to managing contractors during your refurbishment.  

For examples of some of the projects that we have been involved in, explore our HMO projects.