Your guide to HMO management costs and budgetting

HMOs are often considered a profitable and savvy investment choice. However, to succeed in this venture, it’s essential to have all the crucial puzzle pieces in place, starting with an efficient budget. In this guide, you’ll discover the various management costs that can shift and influence the profitability of your HMO, learn how to budget for them effectively, and explore strategies to manage these costs more efficiently.

WHAT ARE THE COSTS OF RUNNING AN HMO?

Managing a House of Multiple Occupation (HMO) in the UK involves various fees and expenses. These costs include legal obligations, once-off payments, and the average monthly cost of running an HMO. Depending on your property’s the location, size, and condition, local regulations, market conditions, and investment strategy, they will vary. What’s essential for landlords is to accurately budget for these expenses, making provisions for the unexpected and the likely scenarios to ensure the financial viability of their HMO investment.

While budgeting for your HMO must be tailored to your particular case, here is a streamlined guide with some typical costs involved when operating an HMO.

HMO COMPLIANCE & CONSULTING COSTS	HMO MANAGEMENT COSTS	HMO OPERATIONAL COSTS	HMO FINANCIAL COSTS
· Safety compliance · Licensing fees · Legal and professional fees	· Property purchase or rent · Management fees (day-to-day operations) · Cleaning services	· Utilities · Maintenance and repairs · Council tax · Furniture and furnishings · Advertising and marketing · Insurance	· Income tax and national insurance · Void periods

 

HMO COMPLIANCE & CONSULTING COSTS

Safety Compliance (Yearly)

The costs derived from safety compliance in the context of HMO management involve ensuring that the property meets regulatory standards for fire, gas, and electrical safety. Here’s a breakdown of the expenses involved in safety compliance:

Fire Safety Equipment: Expenses for fire alarms, smoke detectors, fire extinguishers, emergency lighting, and fire blankets. These items need to be purchased initially and maintained regularly to ensure they are in proper working condition.

Certificates and Tests: This cost includes hiring a qualified professional to conduct essential safety assessments and obtain the required certificates for the property. This includes conducting a fire risk assessment, as mandated by law for HMOs, and obtaining fire safety certificates from the local authorities. Additionally, the cost of Portable Appliance Testing (PAT) to ensure that electrical appliances are safe and comply with regulations.

Licensing Fees (PERIODICALLY)

In many instances, landlords are required to obtain a licence from the local authority, depending on the number of occupants and location of the HMO. While some of these fees are compulsory, you can avoid preventable costs with a good strategy.

Licence Fees: Licensing costs vary widely across councils depending on the specific local regulations as well as the type of licence —whether it’s a Selective or a Mandatory Licence. If you need an HMO licence, this two-stage payment is crucial to ensure compliance and avoid unnecessary risks and hefty financial penalties:

• Part 1: This is the first of a two-part payment enforced by the local council for obtaining an HMO licence —it covers the expense of processing your application.
• Part 2: Once the application is approved, landlords are required to pay the second part to obtain the HMO licence —covering enforcement and the ongoing management of the HMO scheme.

Renewal Fee: HMO licences need to be renewed periodically to extend their validity. This fee is typically payable every 5 years —the maximum validity period— but, in some instances, the licence expiry date could be shorter, depending on the policies and council assessment.

Late Renewal Penalties: Landlords who fail to renew their HMO licence on time may be subject to late renewal penalties, which could result in additional costs.

Appeal Fees: If an application for an HMO licence is rejected and the landlord decides to appeal the decision, there may be associated fees for petition with the relevant authorities.

As a landlord, it’s crucial to budget for licensing fees as part of the overall management costs for regulatory compliance. Failure to obtain or renew an HMO licence can result in fines, legal action, and potentially being prohibited from renting the property as an HMO. Staying current with licensing requirements and ensuring timely payments are essential responsibilities for HMO landlords.

Legal and Professional Fees (ELECTIVE or as needed)

Legal and professional services aren’t all enforced; they depend on your strategy and experience as a landlord. However, legal advice is a powerful tool to protect your HMO investment effectively and ensure compliance. You can budget for these costs as part of the overall management expenses when professional assistance is necessary, for instance, to mitigate legal risks.

Legal Advice: Landlords may seek legal advice from solicitors or legal advisors to understand their rights and obligations under HMO regulations.

Eviction Proceedings: In cases where tenants breach their tenancy agreements or fail to comply with HMO regulations, landlords may need to initiate eviction proceedings.

Dispute Resolution: Legal fees may arise from resolving disputes with tenants, neighbouring properties, or local authorities regarding HMO compliance issues.

Professional Services: Landlords may engage other professionals, such as property management companies (more on below), surveyors, or compliance specialists, to assist with HMO management and compliance.

Court Representation: If disputes escalate to litigation or court proceedings, landlords may incur legal fees for preparing legal documents, court appearances, and representation by legal professionals during hearings or trials.

Compliance Reviews: Landlords may engage professionals to conduct compliance reviews and audits of their HMO properties to identify any areas of non-compliance and implement corrective measures.

Professional Services: Landlords may also consult with other professionals, such as property management companies (more on this below), surveyors, or cleaning companies, to assist with HMO management and compliance.

HMO MANAGEMENT COSTS

What’s included? Once again, management costs to run an HMO will depend on your strategy, from how to source your property to how to run it, for instance, the cost of outsourcing day-to-day admin.

Property Purchase or Rent (Once-off or Monthly)

While the initial cost of acquiring or converting a property is typically a once-off straightforward move, some landlords might consider the alternative path to run an HMO under the rent-to-rent scheme. If you are considering renting a property to sublet, you’ll have to evaluate specific factors to include in your strategy and budget, for example, possible renovation costs. You can explore this alternative thoroughly with our R2R HMO guide.

Management Fees (Monthly or Yearly)

Would you like to have a professional property management service to handle HMO day-to-day operations? Then, you’ll incur management fees. While this is an optional cost when running an HMO, outsourcing property management can help landlords save time and effort while ensuring that their properties are well-maintained and compliant with regulatory requirements.

The service, what it entails, and the cost will depend on your agreement, all of which should be thoroughly outlined in your contract. Typically, property management fees involve some of the following services:  

1. Tenant Management: Tenant screening and selection; drafting and managing lease agreements; collecting rent payments.
2. Property Maintenance and Repairs: Conducting periodic inspections to identify maintenance issues or repairs that may be needed; scheduling and overseeing works; handling emergency maintenance.
3. Financial Management: Regular financial reports detailing income and expenses related to the property; assistance in budgeting; and expense management for bills and invoices on behalf of the landlord.
4. Tenant Communication and Support: Handling tenant inquiries and assistance as needed, such as issues related to tenancy agreements or property maintenance.
5. Compliance and Legal Support: Monitoring changes in HMO regulations and ensuring that the property remains compliant with all relevant laws, guidance and assistance in navigating issues related to property management, including leasing in eviction procedures, and disputes.
6. Administrative Tasks: Record keeping of leases, rent payments, maintenance activities, and other property management tasks such as filing paperwork.

Cleaning Services

It might seem like an obvious or trivial consideration, but in favour of a smooth operation and routine upkeep, consider the cost of providing cleaning services between tenancies or cleaning communal areas regularly. While some of these costs can be estimated and offset with the rentals, it’s important to budget accordingly.

THE OPERATIONAL COSTS OF HMOS

Utilities (Monthly)

These costs are the essential services such as electricity, gas, water, and other utilities required to maintain the property and provide for the tenants. While budgeting, remember that effective management of utilities can help minimise expenses, enhance property sustainability, and ensure a comfortable living environment for tenants. Monthly costs associated with utilities involve:

• Electricity: Monthly expenses to power lighting, appliances, heating systems, and other electrical equipment within the property.
• Gas: Monthly charges for gas supply used —as applicable— for the property’s heating, cooking, and hot water systems.
• Water: (Biannual) Water usage charges, covering water supply charges, sewerage charges, and any additional fees for metered water usage. Water, electricity, and gas are typically metered and included in the overall rent, depending on the tenancy agreement. These costs are subject to factors such as the property size, number of occupants, and usage patterns; accurate estimates are crucial.
• Shared Metering: Landlords may want to allocate and manage utility costs fairly and accurately in HMO properties, especially where usage-dependent utilities are shared among tenants. Implementing secondary meters can help maintain tenant satisfaction and prevent surprising expenses.
• Other Utilities: Depending on your property and what you include as part of your HMO strategy to attract and retain tenants, other utilities such as internet, television, and telephone services should be budgeted in your monthly charges. These costs may vary based on the service provider, chosen packages, and usage levels.

Landlords should budget for monthly utility expenses and monitor usage patterns to identify anomalies or excessive consumption that may indicate leaks or inefficiencies. Moreover, adopting an energy-efficiency strategy can help reduce utility costs over time; for instance, consider applying energy-saving measures such as energy-efficient appliances and insulation.

Maintenance and Repairs (As needed)

Maintenance and repairs involve regular upkeep and addressing any necessary repairs to ensure the property remains in good condition for tenants. What this cost involves will depend on each case, and while not all costs can be predicted, regular inspections and maintenance can help keep urgent and expensive repairs to a minimum.

Include in your budget, for example, routine maintenance for private and communal areas and exteriors, appliances, and emergency repairs (such as plumbing leaks, electrical faults, or heating system failures), as well as structural concerns, including issues or damage to the property (such as roofing leaks, dampness, and cracks in walls). A common baseline for HMOs is to set aside 10% of the monthly rent towards a maintenance a repair fund.

Council Tax (Monthly or Annually)

Landlords are typically responsible for paying council tax for HMO properties, although the specific arrangements may vary depending on the tenancy agreements and local regulations. Here’s an elaboration on council tax payments:

1. Frequency: Council tax is calculated yearly, typically with monthly payments, depending on the local authority’s billing cycle and payment options.
2. Payment Responsibility: Landlords are usually responsible for paying council tax for HMO properties, regardless of whether the property is occupied by tenants or vacant. In some cases, landlords may pass on the cost of council tax to tenants by including it in the rental agreement.
3. Calculation: The amount of council tax payable for an HMO property is determined based on the property’s valuation band, which is assessed by the local authority. Valuation bands are based on the property’s market value as of a specific date and are used to calculate the annual council tax bill.
4. Exemptions and Discounts: Some HMO properties may be eligible for council tax exemptions or discounts, depending on property occupancy, usage, and tenant profiles. Landlords should check with the local council to determine if any exemptions or discounts apply to their HMO property and to ensure compliance with relevant regulations.

Council tax payments are an essential financial obligation for HMO landlords. They should be managed carefully to ensure compliance with local taxation regulations and avoid potential penalties or legal consequences.

Insurance

Insurance for HMO properties is crucial to protect landlords from the unique risks associated with renting to multiple tenants and managing shared facilities. Typically, this cost links to specialised insurance policies covering property damage and liability insurance to tenant default or rent arrears and legal expenses coverage. Insurance is crucial aspect to managing an HMO; you can learn more about insurance and how to protect your investment.

Furniture and Furnishings (Once-off or As needed)

Embarking in shared accommodation involves budgeting for furniture and furnishings costs as part of the initial investment and allocating funds for ongoing maintenance and replacement when needed.

Typically, the budget for setting an HMO includes once-off costs for purchasing furniture and furnishings for communal areas (such as living rooms, dining areas, kitchens, and shared spaces within the property), any basic furnishings for individual tenant rooms (such as beds, mattresses, wardrobes, desks, chairs), as well as costs for maintaining and replacing furniture and furnishings as needed due to wear and tear, damage, or changes in tenant occupancy. Additionally, landlords may consider investing in upgrades or improvements to enhance the property’s appeal and functionality for tenants.

Advertising and Marketing (Once-off or As needed)

Now, let’s talk about promoting the property to attract potential tenants and the expenses associated with marketing. While this may not be on your priority list, consider the potential gains in the long term, such as attracting the right profile of tenants for your HMO, as well as fewer and shorter void periods.

This cost is, by and large, a question of individual choices, includes initial advertising, listings (such as subscription fees, listing fees or commissions for promotion), print advertising, and social media marketing.

 

HMO MANAGEMENT OF FINANCIAL COSTS

Income Tax and National Insurance (Yearly)

Income tax and National Insurance are both yearly obligations that landlords must consider when generating rental income from their properties, particularly if they operate as a business entity. Here’s an elaboration on these obligations:

1. Income Tax on Rental Income: Rental income is subject to income tax, which may vary depending on their total taxable income and tax bracket. Deductions for allowable expenses, such as mortgage interest, property maintenance costs, and letting agent fees, can reduce the taxable rental income.
2. National Insurance Contributions (NICs) for Business Operations: Landlords who operate their rental properties as a business entity, such as a sole trader or a partnership, may be liable to pay National Insurance contributions (NICs) on their rental income. NICs are payable on profits generated from business activities, including rental income, if the landlord is considered self-employed for National Insurance purposes.

Landlords are responsible for accurately reporting their rental income, expenses, and liabilities to the authorities according to the relevant tax laws and regulations. Failure to comply with these complex regulations can result in penalties, fines, and legal consequences. To manage tax liabilities effectively, budget for services such as professional advice from tax advisors or accountants to ensure compliance with tax laws and optimise your tax position effectively.

Void Periods (Variable)

Landlords should incorporate provisions for void periods into their financial planning and budgeting processes to account for potential income fluctuations and mitigate associated risks. 

The periods when rooms are empty and not generating rental income still account for more than one line of costs, including fixed expenses such as mortgage payments, utility bills, maintenance costs, advertising, and marketing expenses to find new tenants.

WRAPPING UP HMO MANAGEMENT COSTS

We explored the diverse costs of managing an HMO, from regulatory safety measures —like fire safety equipment— to compliance costs and ongoing management expenses —such as property maintenance and insurance premiums. I hope you have built a solid understanding of the typical costs and how financial considerations like income tax responsibilities, handling void periods, and investing in marketing are also essentials from the budget phase.

These aspects highlight the significance of meticulous planning, proactive management, and strict adherence to standards for a smooth operation. Running costs of an HMO entail regulatory requirements, financial obligations, and operational complexities, besides the niceties to attract reliable tenants.