Should I let friend sublet my HMO or have 5 indivual tenancies?

by Readers Question

3 years ago

Should I let friend sublet my HMO or have 5 indivual tenancies?

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Should I let friend sublet my HMO or have 5 indivual tenancies?

I am about to purchase a house which would allow me to rent out 5 rooms separately, with a shared kitchen, bathroom and communal/dining area.

One of the tenants living there would be a close friend.

I am considering one of these two options…

1) Rent out each room separately, give them all separate tenancy agreements, and they each pay me a deposit. Standard HMO.

2) Rent the house to my friend, and allow him to SUBLET the rest of the rooms. So he pays me the full rent, and collects the rent per room from the rest of the tenants.

Would love to hear your thoughts on which of these options you would do and why. Also would I need a HMO licence for both, or would that depend on my local council?

Thanks in advance

Adamfive



Comments

Dr Rosalind Beck

3 years ago

Are you sure your friend would agree to option 1? I don't think I would, not unless the rent that way was considerably less (not even then) - as he is going to bear all the responsibility for making sure he keeps the house filled and everyone pays their rent. I think the real options instead are:
1. rent out each room individually - you might need to include bills as not doing this can cause lots of arguments and if they don't pay the electricity bill and it gets cut off you will have to foot the bill. There may also be liabilities regarding water (although that might just be in Wales)
2. Find a group of 5 friends who want to share and they all sign the tenancy agreement and are jointly liable. You also want to get guarantors for each as far as possible. This is the preferable option but quite hard to achieve, depending on the local market and the timing.
Sorry, but I say forget the friend. Business and friendship don't mix. He should rent off a non-friend.
All the best with it.

Ian Ringrose

3 years ago

If your friend can be trusted and has the income to cope when a room is empty, the easy option would be to let him rent out the rooms. As it will be his home, he can use licenses rather then AST, so remove problems a lot quicker.

But if I was him, I would want at least a 30% discount on what you would have charged for the rooms, in exchange for doing this and paying all the bills.

If he ever wished to leave, he would have to remove all his lodgers and give you the complete property back.

Note it will still be a HMO, so still has to keep to all the fire regs etc.

Mandy Thomson

3 years ago

Hi Adam

If you had 5 unrelated people living there, it would be an HMO, regardless as to whether those people were all your direct tenants on ASTs , or head tenant/lodger landlord and 4 lodgers renting rooms from your friend/tenant as licensees.

The other question, should the additional occupiers be your friend's lodgers or should everyone be your tenant directly will depend several factors.

Firstly, does your friend want the responsibility of being a resident landlord, having to set house rules and enforce them, collect the rent and still be responsible for paying you if there's a shortfall? On the other hand, this gives him more control over his living situation insofar as it would be easier to evict his housemates if they were lodgers. The usual notice period for a lodger is one month following the date the rent is paid, but this can be less if the rent is paid more often (NB if rent is paid weekly, whether it's a lodger or a tenant, by law the landlord must give the them a rent book and record payments - even if rent paid through bank) and/or the situation is serious enough (e.g. threat of violence, serious disruption or damage) but it is advisable to have reasonable evidence, in case a disgruntled ex lodger takes out a claim against their former landlord. Also, at least in England, a court order isn't required to enforce eviction - the landlord can simply change the locks the day after the lodger is supposed to move out, pack up the lodger's belongings and give the lodger notice to collect them (usually a fortnight). Google "lodger rules" and "lodger notice periods" for more information.

I have never let or lived in an HMO, but other landlords who have have commented that having lodgers rather than tenants can be easier for everyone concerned as it's easier to enforce house rules and get rid of trouble makers. However, this really depends on the market you let to - if it's professionals and they're thoroughly referenced, they're likely to be better behaved than vulnerable people reliant on local housing allowance, and it's possible professionals would prefer the greater security of being a tenant and living with housemates on an equal footing, rather than being subject to the whims of a live in landlord and having less security.

Mandy Thomson

3 years ago

PS If your friend is going to be the lodger landlord, and he decides to move some friends in as lodgers, he needs to have a formal agreement and understanding with them, just as you must with him, especially if either of you will be very reliant on the rent money - Google "lodger friend".

Another thought - what if he was the lodger landlord, but he decided to move out - his housemates would then become full tenants legally.

Ian Ringrose

3 years ago

-> Another thought – what if he was the lodger landlord, but he decided to move out – his housemates would then become full tenants legally.

Not true, this would only happen if the landlord accepted rent from them. The lodger landlord will be responsible for all costs of removing them unless agreed otherwise.

Mandy Thomson

3 years ago

Reply to the comment left by "Ian Ringrose" at "10/02/2015 - 18:46":

But that's only assuming he wanted to get rid of them - if he wanted them to remain, they would become tenants.

Adam Davies

3 years ago

Thanks for the responses guys, will do my best to reply to each one of you.

Rosalind - I forgot to mention, not only will my friend be paying less rent than everyone else, I am only after a certain amount, he is free to charge whatever he wishes on top. This gives him an incentive to profit from this arrangement, and I benefit from him managing the tenancy, it is a win-win situation.

Also I do not expect him to pay the full rent from day one as we both understand it will take time to let all the rooms.

In answer to your questions, yes I will be paying all bills, and your second suggestion sounds ideal, however as you stated, hard to achieve.

Ian - Spot on. I also see this as being the easy option, and as above, there is incentive for him to do so. By this “he can use licenses rather then AST”, do you mean he can use ‘lodger agreements’?

Mandy - Very good points, especially the last one. I do intend to let to professionals only, so yes perhaps they may prefer the security of a tenancy.

One more question, would my friend be allowed to issue a lodger agreement? I have heard this is only possible from a ‘live-in landlord’. Not sure how strict this is.

Ian Ringrose

3 years ago

Yes, a lodger agreement is just a type of license. Legally there is no such thing as a "lodger agreement", but so what....

Your friend MUST live there for it to work, and should not have a home else where. It is common to have lots of levels of landlords. For example.

FreeHolder / LeaseHolder / Tanant / Lodger

The Freehold is the Landlord of the LeaseHolder
The LeaseHolder is the landlord of the Tanant
And the Tanant is the landlord of the Lodger

And there are 3 DIFFERENT legal set of rules, all that use the same works to mean different things in the above example.

Check that your mortgage and insurance allows your tenant to have lodgers, sometimes it is limited too 2 lodgers being allowed.

Mandy Thomson

3 years ago

Reply to the comment left by "Adam Davies" at "10/02/2015 - 22:31":

Hi Adam

No they don't have to be an owner occupier, but obviously they need to have rights of occupation themselves (so a valid tenancy) and your written permission. You might also want to advise your mortgage provider that your tenant will be subletting to licensees.

Adam Davies

3 years ago

Thanks again guys, plenty to think about. I am in the process of arranging my mortgage so yes this will be a factor.

I need to double check with my local council, but I believe I only need a HMO license if there are more than 5 people living at the property. So for example, if I only let out the 4 rooms, although this is a HMO, I may not need a license. Will double-check though.

You've all been really helpful.

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