HMO or straight unfurnished let?

Hi Christopher,

I am by no means an HMO expert, but for assistance if you use our article search and type in "HMO" you will get hundreds of articles
please see >> http://www.property118.com/article-archive/

It is the orange tab at the top of all our pages 🙂

Hi Cristopher,

I am an HMO landlord and want to give you my opinion on this matter.

The risks of HMO's can be lowered in various ways. Try to get the tenants to sign one contract, if you give them separate room contracts, then you are responsible for anything that happens in the communal areas. If damage occurs and nobody owns up, it will be your cost. You could try and take deposits of all tenants for that damage. But if they were to go the Alternative Dispute Resolution route. You would lose.

Signing one contract with a good inventory check (outsourcing this is best) then they are all jointly and several liable for the damage. and the rent, so if one tenant can't pay. the others will have to pay this.

Do not include bills in the rent. This will be abused if you do.

Check with your council re Planning Permission/change of use to HMO as may be required for 3 bedroom.

Check with Private Sector housing that it does not require HMO Licensing. Most council view licensing requirements as 3 stories or more and 5 tenants or more. But always check.

It will take more time to manage an HMO, checks on each tenant, getting 3 people to sign one contract etc. But if managed well it can be fairly hassle free.

Wish you luck with your venture.

Hi Christopher,
I have never been a great fan of HMOs, personally, as I feel that the cash flow models often work well on a flipchart (and a spreadsheet) but I am not totally convinced it is as lucrative "in the cold light of day".

To create a HMO you are going to need to fully furnish it, fit fire doors and fire alarm systems, deal with 3 separate tenants (rather than just 1), make sure you comply with minimum room sizes and any other local Environmental Health requirements and you will almost certainly need to pay all utility bills and council tax and internet.

HMO finance will also be a little more expensive than regular single let finance I believe - assuming you have a mortgage.

So, with 3 rooms @ £700/month (maximum) a room - 2 rooms deliver£1400/month (the same as the single let) and when you let the 3rd room - you then create the extra £700 cashflow.

However - you have got significant costs from the HMO rents (discussed above) as well as more letting agency fees (if you are using them to source your tenants). ie: 3 tenants need to be sourced rather than 1 ... and a lot of HMO tenants tend to move house more often than single let tenants.

So ... how confident can you be of 100% occupancy ... 100% of the time ? .... and even if you achieve the 100% occupancy ... how much extra profit are you actually going to make after all the other costs.

For me - £1400 for a single let or £2100 for a HMO .... the decision is easy ..... SINGLE LET every time.

However ...if you could create 4 bedrooms or 5 bedrooms in the same property ... and are therefore looking at £2800/month (4 beds) or £3500/month (5 beds) ... then I might be tempted to lean towards the HMO model because the upside cash flow is eye catching.

All the best (whatever you decide) ....

Mark

Thank you Neil and Nathan for your very helpful response .
I am looking thro the Archives search on HMO's.
Mortgage company as usual requires an AST contract so presumably Nathan the three occupants are to be listed as 3 tenants of the house bound by the conditions of the AST . If any tenancy changes occur then presumably a new AST is required .
I will go and see the council.

Reply to the comment left by "Mark Trenfield" at "28/01/2016 - 19:28":

Thank you Mark for your response.
We have a mortgage secured on a 2 yr. fix. The London market has been without doubt exceptional for capital growth and we have lived in this area for the last 5 yrs. I still think there is more to come from London albeit at a slower pace.
The HMO question is one of the options here and if we tried it and got comfortable with the running of it ( or managed to find someone to manage it ) we would extend the property thro loft conversion and make it a 5 bed investment property. We have just done something similar on our home. As you say the returns would then be outstanding and as my wife has lower earnings we would set up a declaration of trust putting 90% of the income into her name and therefore making it tax efficient..
The other option is we run it as a straight let for 2 years , sell our current home in the next 2 years , move in to the newly purchased property , pay off the mortgage , develop it out and sell it hopefully without paying CGT on most of the gain.
Maybe I am looking at too many options

Reply to the comment left by "Christopher Marsden" at "28/01/2016 - 19:35":

In response to the above Chris, you could just replace names on the AST as and when new people arrive. Although you could make it the current tenants responsibility to find tenants, obviously once they have chosen you need to meet and vet them.

I understand Marks point, but you may not need fire doors or expensive alarm systems on a 2 storey, you would need to check with council on this, as they change the rules often.

I let out by room rather than on joint but I manage it full time, if someone leaves, the room is filled before the current tenant has left. you may get more void periods, but with that extra profit I still think you would win.

I word of warning though on covering the loft and creating 5 bedrooms. you will be in HMO Licensing territory, it may cost £20,000 to bring it up to spec. Fire doors with intumescent strips, costly smoke detection\heat detection. No locks to be fitted as this is fire risk if needing to escape. no electrical items on exits. all ceilings to be pulled down and replaced with fire retardant half hour plaster board and fire plaster. Its expensive, and you would have to weigh up if its worth it for the term your keeping it for.

There is no harm in doing 3 bedroom HMO, one contract (most lenders would accept) if it doesn't work revert back to single AST, but always worth trying it.

There are websites out there that can assist you find tenants for next to no money spareroom is one i prefer as you can select buddy ups and get them talking to each other.

In my experience, central London, a 3 bed on two floors is not an HMO, you need a third floor for that, though things keep changing.

I run a 4 bed from a regular 3 bed semi and it is far better than having a single let financially. The bills are on key meters so there is no dispute over who looks after the bills (I do the water and it is the only issue I have in getting 4 lots of mini amounts), I include council tax (very low area) - damage is limited - how much damage can people do? I have 40+ tenants and damage is rare, tenants are clumsy and that comes with the job.

It is harder to let on a single let, families will be very fussy and with sharers you'll have very similar problems to multi let - and if the single let doesn't pay or leaves you have no rent, this will never happen with multi let.

I do separate contracts, but be careful now with mortgagers they are tending towards students in this type of let and I was refused for 4 separate 'professionals' having been accepted for 8 years.

I do run a few full on licensed HMOs, I'd never set one up from scratch now, each new license brings new regs.

I'd go for multi let if you have the rooms every time.

I disagree on all the hassle described above by some people and myself being located in SE London (1 minute from a station, 10 mins to the city centre), I cannot imagine letting out differently than by room (have a 3 bedroom, 2 storey flat).

Mind you, all those commenting above should indicate whether or not they own property in London or say in Scotland where rents are far lower and costs tend to be broadly similar.

Couple points for you to note:
1) You do not have a licensable HMO if you have 3 separate rooms only
2) You may however be required to apply for Additional Licensing if you are located in Southwark (or Newham, but that's different postcode). The cost of installing fire alarm system is about £900 (which I paid) and then you have another max £1k for fire doors with all bells and whistles. There is absolutely NO requirement for some extra ceilings for such a small property – this is not even outlined in the Additional Licensing requirements by either Newham or Southwark
3) If you are subject to Additional Licensing you have to also be careful on the room sizes. If you do not have a living room, you will have to have each room >10sqm I believe and a larger kitchen with common aread
4) Cost of additional licensing is negligible
5) Tenants in London, which are professionals tend to be very reliable – I suggest you do not maximise your rent, but offer slightly attractive rates (like I do versus other properties around) and they will not want to leave (I have tenants staying there up to 4 years with no hassle)
6) Bills? I prefer to offer the room prices inclusive of bills – OK, these may get abused, but it will save you tons of hassle and electricity bill may end up say £30 instead of £20 per month.. Not a big deal if you ask me given hassle/maintenance free and the benefit of offering property inclusive of bills (always more attractive as it offers people certainty over their outgoings).
7) Management? Depends on how handy you are. I have a full time job (10 hours per day) and I manage it myself. Broken kitchen tap? Replaced the same day after work (Screwifx is open pretty much 24/7). Broken fridge? Attended the same day, fixed the following when parts arrived. You can always hire some handyman too to attend to some things you are not able to handle. ~7% management charges in London are a waste of money in my view – especially if you add another 7% on top for identifying tenants (find them yourself on spareroom and interview thoroughly before offering the room).
8) Inventory list? I suggest you buy cheaper furniture. I purchased all my bedroom furniture for £500. This is less than 1 months’ worth of rent. No one will steal your bed or wardrobe… No one will intentionally be breaking your fridge or washing machine. These things are either insured or wear over time, and you can just replace them as you would with your 2 tenants (the additional wear is negligible).

All in all, I suggest you follow points 1-8, get the additional income, be a little be more hands-on and you will be better landlord than 95% out there, who may install some amazing fire protection, but stick to their 5 day repair deadline policy, which is irritating for everyone involved.

Best of luck!

Couple other things worth noting… Professional tenants in London tend to be… well, professional. This means they have no intention of leaving unpaid rents, and especially getting prosecuted in court with a sentence that they have unpaid rents. In many cases (especially for those working in the City), this means end of their career as they cannot get their FCA approvals for being reckless with their own money (so how could they manage clients' money?). I work in the City so I do know how this works.

In the 4 years that I have managed the property I have never had any complaints, not single day of void period and as mentioned in a comment before me – the comfort that even if anyone doesn’t pay it would be only one room, not the entire property. It would be a nightmare for me financially if the entire flat income suddenly disappeared (there is mortgage interest to be paid, construction on the building as it is a leasehold) so I simply cannot afford say 6 months of no rent income because family X decided not to pay their rent...

Wow , well first of all thank you again to Nathan and also to Harlequin Garden and London Property for all your help and information. I have been a Landlord for 2 years now and been an avid follower and member of 118 but this is the first time I have really engaged with it on a personal issue . I am starting to feel this is a real opportunity to pursue and that's in no small part down to you guys and this forum. Quality !
We will do this professionally and we have operated our current 2 bed flat along the lines that London Property described and this has gone well.