Due to the rise in the cost of living, including the rise in homeownership, HMOs or housing of multiple occupancy, have been more popular, particularly in more urban areas.
According to the latest figures, an estimated 472,823 Houses in Multiple Occupation (HMOs) in England, this is up 462,307 from the previous year, an increase of 10,516 HMOs, or 2.3% year-on-year.
The pros and cons of HMOS for landlords are:
- Higher Rental Yields: Letting rooms individually typically generates more income than letting a single property. This is especially true in regions (particularly popular cities such as London and Manchester) where HMO use can drive higher rental and capital values than standard C3 residential units.
- Diversified Income: Multiple tenants paying rent in one property means that a room with a single vacancy has less impact on overall income.
- Flexibility with C4 HMOs: Smaller HMOs (three to six tenants) can often be reverted to standard residential use (C3) via permitted development. This gives landlords the flexibility to re-let or sell as a family home, or as an investment HMO, depending on changing market conditions.
- Strong demand in key markets: Student towns, city centres, and areas with high demand for affordable accommodation often see long-term demand for HMOs.
- Professionalisation of the Sector: There is a growing trend of institutional investment, particularly in student and social care HMOs, due to their economic support for affordable housing for transient workers, students, and low-income earners. Larger, professional landlords are entering the market, raising standards and improving management quality - a positive development for tenants and the sector as a whole.
Cons of Owning an HMO:
- Complex Regulations: HMOs are subject to strict licensing, safety, and planning requirements. In Hyndburn, planning guidance requires HMOs to avoid overconcentration, provide adequate living standards, minimise impacts on neighbours, and ensure suitable parking and waste storage. Areas covered by an Article 4 Direction also require planning permission for new small HMOs.
- Management Demands: More tenants generally means more administration, maintenance, and potential for disputes. Quality of management is crucial, especially in social care HMOs, where poor practice can have serious consequences.
- Upfront and Ongoing Costs: Converting and maintaining an HMO to the required standards can be expensive. This includes additional costs for fire safety, compliance, and regular inspections. Also, any damage to the property falls to the landlord to fix, potentially increasing the costs further.
- Financing Challenges: HMO mortgages can be harder to obtain. Securing an HMO mortgage typically requires larger deposits, provable landlord experience, and council licensing, and often carries higher interest rates.
- Market Volatility and Yield Sensitivity: The HMO market is more volatile and sensitive to interest rates than standard residential. While yields are often higher, capital values can be lower relative to C3 properties, especially in provincial locations where finding buyers for HMOs can be challenging.
- Regulatory Restrictions: Regulatory restrictions, such as the proposed one this week, could limit HMO proliferation, impacting future investment and exit strategies.
How the new legislation will impact the HMO sector
There’s been a noticeable shift in landlord sentiment over the last 12 months, with landlords selling off at least 2,000 student accommodation beds across the UK in that time, ahead of the introduction of the Renters’ Rights Act.
Landlords seem to be looking at the direction of the market, the increase in costs and regulations coming in, and many believe that now is the right time to sell up.
Whilst some have opted to sell, the new licensing rules could in part benefit non-casual landlords by eliminating sub-standard competitors, stabilising tenant demand for high-quality properties, and driving up rental yields for professional operators, due to the overall supply of compliant rooms shrinking due to the new regulation.
For professional HMO operators, who already consider licensing, fire safety, room size, tenant suitability, rent collection, maintenance, complaints handling, deposit protection, tenancy documentation, rent review evidence, and the overall condition of the property, the new Renters' Rights Act is arguably the direction the market should be moving in.
In fact, Landlords still have important rights and routes available to them. Landlords can still regain possession where they have valid legal grounds, and they can still take action where tenants breach the tenancy, damage the property, provide false information, build up rent arrears, or behave antisocially.
In short, the Renters’ Rights Act has not killed HMO investment. It has changed the rules of participation and standards. HMOs will continue to serve a clear need in the rental market. Many tenants want affordable, well-located, flexible accommodation with bills included, good communal spaces, and a professional management experience.
Finally, the Renters’ Rights Act signals a shift towards higher industry standards rather than the end of HMO investment. The new shift is arguably a positive that protects both tenants and landlords by weeding out those particular individuals who are just there for investment purposes, rather than a service that provides fair, flexible housing.
