HMO stands for a “House in Multiple Occupation” and can be defined as an investment property that is let out to a minimum of three tenants forming more than one household but who, collectively, share a toilet, bathroom or kitchen.
The property could be a flat or a whole house that can be made into the likes of bedsits, a hostel, a bed and breakfast for homeless people or a shared house but, obviously, there is a potentially significant cost in undertaking any structural alterations unless you have purchased a property that has been designed and already used for the purpose of renting to HMO tenants.
You cannot just buy a property, put some furnishings in it and then place an advert in your local paper offering rooms for rent. As with all properties that are let out there are numerous formalities to go through to ensure that the property is considered “fit for purpose” but, in the case of HMO properties, there may be additional hurdles to overcome before you will be permitted to rent it out. For instance, you would require a license if the property is at least three storeys high and is to be occupied by a minimum of five people forming in excess of one household.
You will have to maintain detailed records of the tenants and accept that, in the case of HMO tenants, there is likely to be a rapid turnover of people, meaning extra work and cost for you and/or your letting agent in finding replacement tenants, processing reference enquiries and completing other paperwork such as tenancy agreements.
There are health and safety regulations to comply with such as making sure that public areas are kept clear, fire extinguishers are in place and you or the letting agent will need to make regular visits to the property to check up on these things and also to look for any maintenance work that may be necessary such as dripping taps and damp walls.
So, to answer the second part of the question contained in the title “….are they a good investment?” many of the above things that have been mentioned are very relevant as they will impact upon your property rental businesses profit margin in a negative manner and, potentially, if you cannot afford to pay a letting agent to do the paperwork on your behalf, your time as well,
However, it is a well-known fact that rental income from an HMO property can be significantly greater than that of a standard property that has been let out to say a family. One of the reasons for this is that you will be able to, for instance, charge say four separate tenants collectively more than you would say a family of five people occupying the property even though the same number of rooms in the property are being used. In fact, it is estimated that you may be able to generate two to three times more rental income from an HMO property than a standard let property.
In conclusion – yes, an HMO property can be a good investment but, in order to establish this, you need to take into account all the financial aspects of buying, converting and maintaining the property against the rental income, to establish the viability.