What is a HMO?
HMO (House of Multiple Occupation) refers to a property inhabited by three or more tenants from two or more households, who share bathroom and kitchen facilities. The tenants are neither related through blood nor marriage.
What are the 5 reasons not to invest in UK HMOs? Let’s look at each of them in more detail.
1. Difficult to start up
In comparison to single-let properties, mortgages for HMOs are more difficult to acquire. Many mortgage lenders simply do not offer mortgages for HMOs. Those minority that provide HMO mortgages often charge a higher rate of interest or require larger deposits, which makes them more expensive to get. Some lending agents refuse to take on HMOs unless the property is not managed by a third party. Or else the HMO mortgage might be rejected, or higher management fees are charged. Furthermore, some lenders prefer working with HMO landlords with prior experience, which makes it difficult for starters who look for their first HMO purchase, to obtain mortgage funding.
2. High Risk
From the perspective of investors, HMOs are less attractive than single-let properties, because potential buyers are restricted to other HMO landlords. Most regular buyers will not consider HMOs because they will have to spend the time, effort and money to convert it back into a family house. In other words, the growth of HMO capital is limited and the risk of investing in HMOs is relatively high.
3. High cost
Not only is it costly to convert a family house to an HMO, it is also demanding to fulfil the ever changing license specifications. From fire regulations to housing health, the identification of any problems might lead to heavy fines up to ￡30,000 being imposed, as well as losing ownership of the property and even criminal prosecution. Besides, it is important for beginners to notice not all buildings can be converted into HMOs. Larger buildings stand higher chance of acquiring planning permission. However, it often results in higher operating costs and initial purchase price.
4. HMO licensing
In recent years, the number of investors who turn to HMOs increases with the growing demand for affordable housing. It is mandatory for investors to acquire a license from the local council for their properties. Nevertheless, the number of new licenses being granted decreases. ThereIt is especially hard for new investors to obtain licenses for their properties. While local councils do not easily offer permission for HMOs licensing, the process can last as long as 18 months.
5. Heavy responsibility
Many investors who are interested in HMO business underestimate the time and effort it takes to operate HMOs. It is not something that can be done within one weekend afternoon. From meeting the newest license specification to clash between tenants, they are all tasks that need to be handled with care. Some investors might hire experienced letting agents to manage HMOs, but the letting agent management fees will further increase the cost of HMO investment.
While it is attractive to gain stable income through HMO investments, it is important for investors to notice the disadvantages of investing in HMOs. Every investor aims at generating maximum yields with minimum level of cost and risk, yet it is noticeable that the investment of HMOs in the UK is of high cost and risk, which is not cost-effective. Consequently, it is not advisable to invest in UK HMOs.