HMOs: the pros and cons of investing after recent rule changes

There were two key HMO legislation changes that came into force on 1st October last year:

1. Extended mandatory licensing

Any property housing five or more people, forming two or more households, requires an HMO licence - regardless of the number of storeys. (Previously, mandatory licensing only applied to properties of three or more storeys.)

2. New minimum bedroom sizes

 Depending on the number and age of room occupants, the new minimum sizes are:

• • 6.51 m2 for one person over 10 years of age
  • 10.22 m2 for two persons over 10 years
  • 4.64 m2 for one child under 10 years.

Any room of less than 4.64 m2 cannot be used for sleeping in and the measure cannot include any area where the ceiling height is lower than 1.5m.

The additional licensing cost in itself should not be a huge financial burden, with licences ranging from around £500 to £1,000, depending on location, and normally being valid for five years – that’s an annual cost of between just £100 and £200.

However, some landlords will have had to undertake works to comply with the extra buildings, health and safety measures that are required under the terms of the licence, such as:

• • Upgrading the fire alarm system
  • Installing basins in all bedrooms
  • Providing additional toilet facilities.

In some properties, depending on the existing plumbing system, layout and space available, carrying out works to provide additional toilet facilities may have resulted in a sizeable cost and potentially considerable upheaval and inconvenience for both the tenants and the landlord.

On top of this, the minimum room sizes may have had a more serious impact on the financial viability of some HMO landlords’ investments. As a general rule of thumb, the rental income from the first 3-4 rooms should cover the landlord’s costs, with the remaining rooms representing profit. Many landlords will also have looked to maximise their rental income by letting rooms to couples where possible. With the new minimum room sizes, a landlord may have to ‘downgrade’ what was previous let as a double to a single-occupancy room and may no longer able to let a small single room at all. Both of these could have a potentially devastating impact on monthly profits. Not only that, but if a landlord feels the investment is no longer worthwhile, they may find it much harder to secure a buyer:

• • Other landlords are likely to be reluctant to take such a property on, and
  • A property that has been converted to be let as an HMO may not appeal to a ‘standard’ home buyer.

If you have been adversely affected by the minimum size restrictions, you could try to recoup some of the lost income by letting a small room to one of the existing tenants as an office or storage room. Or, if there aren’t already facilities, you could perhaps convert it into a laundry room and install coin-operated machines to bring in some extra revenue.

There is a third challenge for HMO landlords: financing. HMOs already fall into a specialist lending category, with more extensive mortgage application criteria, one of which is a surveyor’s valuation on a room-by-room letting basis. If one or more rooms becomes unlettable under the new minimum size rules and another perhaps drops in value because it can no longer be let to two occupants, that may affect the level of lending and number of products available. In the worst-case scenario, the property may become un-mortgageable as an HMO, which could force a landlord to sell.

If you are at all concerned about the financing on your HMO, please contact us and one of Mortgage Advice Bureau’s specialist advisers will be able to talk through your options.

However, it’s not all bad news, there is a positive side to the legislation. In a market that has become saturated in some areas over recent years, if some landlords are forced out it will reduce competition for those that remain. From a wider market perspective, the changes have been good news for tenants and for raising standards of rented accommodation. And, fundamentally, even with the additional costs involved in operating an HMO, it is still likely to generate better returns than a single let. Just make sure that you are fully aware of not just the national regulations, but also those of your local council, to ensure the property remains legally let.

Read more about HMOs in our buy-to-let guide.