Maximising HMO rental income – How to make the most profit from your property

Thinking of letting out your property? Planning to rent out as an HMO? Already have an HMO and want to maximise your income from it? This article will give you some ideas about how to make the most money from your rental property, with the least amount of hassle.

What Is An HMO

The Government definition of HMO as set out in the Housing Act 2004 is ‘House in Multiple Occupation’ although many people refer to it as a ‘House of Multiple Occupancy’ or a ‘Multi-let’. It’s an HMO if at least three tenants live there forming more than one household and sharing toilet, bathroom or kitchen facilities. It’s a large HMO if at least five tenants live together on that basis.

A ‘household’ is either a single person or members of the same family who live together. A ‘family’ includes people who are:

• Married or living together, including couple in a same-sex relationship
• Relatives e.g. grandparents, aunts, uncles, siblings
• Step-parents and step-children

As the landlord of a large HMO, you have certain standards and obligations to meet, and will need to obtain a licence from the council.

Why Rent Out As An HMO

The advantage of renting as an HMO is that rental yields are likely to be higher than with an ordinary buy-to-let rental. Meanwhile, the risk of non-payment is lower because each tenant pays for their room separately.

When considering gross yields on an HMO, you can expect at least 12%, while an average of 15% is realistic. Total returns on HMOs outperformed standard buy-to-let properties by 40% from 2010-2014. HMOs had an average total return of equity (ROE) of 108% over this period, compared to 77% for buy-to-let (BTL) properties.

The downside is that it can be harder to get a mortgage for an HMO property than for BTL. Also, there are more rules and regulations to comply with, managing multiple people under one roof can involve more admin for you, and there may be more maintenance requirements.

Who Rents A Room In An HMO

The cost of renting a room in an HMO is lower than the cost of renting a one-bedroom flat. Therefore, tenants choose to rent in an HMO when they can’t afford to buy their own home and are not eligible for a council property. Typically, these will be students, graduates, young professionals, key workers, the mobile workforce, seasonal workers, divorcees, and (if you so choose) people on benefits.

Compared with the rest of the year, tenant demand surges by 64% in September, so it’s important to get your timing right.

If you’re aiming for students as tenants, be aware that they’ll want a property that’s near the campus, nightlife and amenities. They usually sign up for a 12-month tenancy, and you might need to furnish the property with durable furniture to cope with the expected wear and tear.

If you’re renting to graduates or young professionals, they’ll expect a higher quality of fixtures and fittings, and a property that’s near the inner city for an easy commute.

If seasonal or transient workers are your target market, they’ll want short-term or flexible tenancy agreements, and won’t be too concerned about the quality of the furnishings. You’ll have a higher turnover to deal with as these tenants move on quickly.

Don’t try to mix tenant types in the same property, as their different lifestyles are likely to cause clashes.

Getting Started With An HMO

First, you’ll need to choose the right building in the right location. It’s also important to use a local agent who has specialist experience of dealing with HMOs – as we do. We source HMOs across Cambridgeshire, Northamptonshire and Lincolnshire and will ensure the property you choose complies with current HMO licensing legislation. We can also advise on local rental charges.

It’s likely that you’ll need to convert the property to make best use of the space. The easiest way to do this is to add extra bedrooms, washing and toilet facilities. You must follow the rules about over-crowding and bedroom sizes, but you might be able to convert an existing living space into a bedroom, such as a dining room. Turn any remaining unused space into an en-suite, or add an extra toilet or shower-room. When going for bigger and more structural changes, you can add an extension and/or loft conversion.

As always, you need to know your market and choose fixtures, fittings and decor accordingly. These days, most tenants will expect a smart exterior and an attractive, energy-efficient home. That means boosting kerb appeal by repainting outside walls, fitting a new fence if required, tidying the garden and adding some potted plants. It might also mean updating the windows to current standards, as well as investing in insulation and draught proofing. As well as giving tenants a warm and comfy home, they will appreciate reduced energy bills.

Consider fire-safe wallpaper, lining paper, carpets and flooring. Provide a fire blanket in the kitchen. Ban smoking indoors – as well as improving fire safety, this can also help appeal to more tenants.

With extra tenants in the building, you’ll need to provide adequate facilities for refuse disposal. To keep things tidy, that might mean constructing a bin-store in front of the building and providing extra bins.

Things To Remember

You’ll need specialist insurance for your HMO property, as traditional landlord insurance won’t protect you. This will cover the building, contents you provide, and loss of rent. You’ll also need to register your HMO with the local council and get the relevant licence. If you don’t do this, your insurance may be invalid.

You should also comply with additional fire safety regulations by installing an adequate smoke-detection system and a fire alarm. Fire doors need self-closing devices attached, and you’ll need to tell tenants not to tamper with them, and to leave those doors closed when not in use. They must report damage or faults with a fire door.

Be clear about who pays utility bills – the responsibility is down to whomever is listed as the account holder. As the landlord, you will usually have to pay the council tax.

Charging per room will help maximise your profits. For the lease, you can go for an individual tenancy agreement where each individual is solely responsible for their own payments and behaviour, or a joint agreement where all tenants are jointly liable for payments and the property.

We recommend individual room-only contracts with flexible terms. By doing this, you retain control over shared common areas including the living spaces, kitchen, and shared bathrooms, and can get easy access easily for regular inspections and maintenance.

Keeping up with maintenance and repairs is key for a happy home. You’ll have to give tenants at least 24 hours’ notice when you’re going in for an inspection, and let them know in the agreement how frequent your inspections will be.

As always when renting out a property, your agreements should also ensure your tenants don’t sublet.

Make sure you give tenants a choice of ways to contact you and be aware of their preferred communication channels. This helps keep communication flowing and minimises any unhappiness on their part.

On your part, it’s good practice to keep good records of all correspondence, inspections and maintenance. This shows you’ve complied with all relevant regulatory requirements and legal obligations, just in case of future disputes.

We have a dedicated HMO team who are here to help. We can find you the right HMO property, assist with the conversion, help source reliable tenants, and even manage the property for you. Please get in touch for more details.