The Beginner Landlord s Guide to Houses in Multiple Occupation (HMO)

Transcription

1 The Beginner Landlord s Guide to Houses in Multiple Occupation (HMO)

2 Overview A House in Multiple Occupation (HMO) essentially refers to a property that is rented out to a number of tenants who do not form a single household. The Residential Landlords Association (RLA) goes some way to clear up exactly what constitutes a HMO and we ll look at this in more detail in the legal section of this guide, but for now let s say that it could be any form of accommodation from: Bedsits Shared houses Lodgings Hostels Individual shared self-contained flats / cluster flats Blocks of converted flats Private halls of residence Asylum seeker or migrant accommodation Accommodation for workers or employees Refugees With the great demand for cheaper housing here in the UK, there s no doubt that HMOs are becoming an increasingly important part of the rental world and can present a lucrative opportunity for potential investors. However, mixing a number of different people under one roof can be a complex business, and one that is rife with legislation. Before creating a HMO, landlords should be sure to do their research to fully understand their responsibilities. As a starting point, Aldermore Bank has collaborated with some esteemed HMO specialists to create this beginner s guide to successfully owning and running a HMO.

3 Contributors Tessa Shepperson Tessa Shepperson is a former solicitor specialising in property litigation. In 2001, she set up an online service Landlord Law, which aims to provide useful resources for anyone involved in letting property. A prominent voice in the industry, she is also a regular trainer at Easy Law Training where HMO Law & Practice workshops are run alongside general landlord training. Website: HMO Landlady The HMO Landlady has a wealth of experience in letting houses out on a room by room basis, since falling into the industry back in Over the past seven years, she has been balancing care of her 3 children with the on-going needs of 30 tenants across six houses. Championing ethical practice, the HMO Landlady has documented her profession, including the many mistakes, unintentional run-ins with the law and altercations with some tenants on her increasingly popular blog. She had also authored a book, Renting HMOs Sussed ; a concise and brutally honest practical guide for anyone considering letting their property as an HMO. Website:

4 Contributors Jim Haliburton Jim HMO Daddy Haliburton is a seasoned property investor, with a housing empire currently comprising a total of 780 rooms. This includes 110 HMO properties governed by five staff from the HMO Daddy headquarters in the West Midlands. Having previously worked as a lecturer in Law, Jim puts his passion for teaching to use through property training courses and management workshops focussed on letting HMOs. Website:

5 HMOs as an investment By their very nature, HMO properties tend to be a high-yielding investment. This is on account of the fact that there are rarely any periods of unoccupancy and a single fully occupied residence can bring in a higher return than a typical family rental property. According to HMO Daddy Jim Haliburton, the total rent for all rooms independently in a decent sized property (i.e. five or more letting rooms), should amount to about three times the total you might charge for renting out the whole house to a single family unit. However, that s not to say that they re for everyone. To be a HMO landlord, you need to first and foremost be realistic about who the tenant is likely to be. These residences are typically (but not exclusively) inhabited by one of the following four demographics: Students Transient and foreign workers People on low wages LHA claimants Identifying your typical tenant is a fundamental aspect of being a successful HMO; only then will you understand how (and be prepared) to cater for them. Not only this, but in order to regulate the market, local authorities are starting to take note and this means laying out ever more stringent rules for owners of HMOs to abide by. At a recent Landlord Law conference, HMO legislation expert, David Smith, described a recent growth of both customary and selective licensing and an increased appetite of local authorities to prosecute as significant challenges facing HMO landlords. So whilst these properties offer a great amount of financial potential, they are by no means a quick or easy-win investment. Ethical Practice Since falling into the industry seven years ago, the HMO Landlady has dedicated herself to promoting ethical practice. On the back of her own experiences of running several HMO properties, she says: It s easy to crunch the numbers and play around with working out your yield, however, a high yield comes with more work and maintenance fees whether you re using an agent or not. Before considering any refurbishment, define your market and make your accommodation the best it can possibly be for that market. Unlike conventional rental agreements, to be successful in this game you need the skills to aid you in shaping a household. Over the coming chapters, we ll take a closer look at some of the vital skills required and pick up some worthy tips form the experts along the way.

6 The HMO Daddy s Top Five Tips for running a HMO 1. Manage it yourself Ignore all the course organisers who talk about work on your business not in your business and do it yourself. No one will manage the property better than you and it can increase the profitability tremendously. It is not hard to do once you have the right system in place. 2. Keep it local If you are managing it yourself keep it very local, it will save an enormous amount of time and don t worry your tenants are very unlikely to bother you at home. 3. Don t mix groups Don t mix young or old or working and unemployed. 4. Don t delay In anything. From getting started, dealing with tenants, evicting bad payers and doing repairs - get it sorted as soon as you possibly can. 5. Minimum of 5 rooms - the bigger the better Profits grow almost expedientially once you exceed 5 rooms.

7 Effective HMO Management As we ve previously mentioned in this guide, it s tempting to be lured in by HMO properties typically high yields and low void periods. However, the most important thing to remember is that being a HMO landlord is a full-time occupation. With more money comes with more responsibility and maintenance. As the landlord, you ll need to make sure that you have suitable, water-tight practices in place regarding management of the property. It s easy to crunch the numbers and play around with working out your yield, however, a high yield comes with more work and maintenance fees whether you re using an agent or not. Before considering any refurbishment, define your market and make your accommodation the best it can possibly be for that market. HMO Landlady Some things to watch out for that don t typically arise in a standard rental agreement are: Maintenance: there tends to be more general upkeep required for HMO properties because there s a higher tenant turnover and above average number of call-outs to deal with. When a tenant moves out of the property, for example, you may want to retouch the paintwork in their room and make sure all fixtures and fittings are as they were before and in good condition before the next tenant arrives.

8 Effective HMO Management Bills: you may want to provide and retain some control over heating, internet, water, and basic TV, and recoup it through rent. One thing to be aware of when calculating the monthly bills is the likely requirement to hire a cleaner. Although many initially take the stance that cleaning is the tenants responsibility, the HMO Landlady advises that the reality is that particularly in communal areas, it probably won t get done, warning, If it s a house of men, it definitely won t! Rules: when you ve got a mixture of people living together, it s reasonable to expect some differences of opinion and clashes of personality along the way. The fact is that people don t always get on. Setting ground rules from the outset should help you to come to a quick resolve in case any of the tenants have complaints. General rules for tenant etiquette should also be detailed from the outset. The HMO Landlady recommends laying out rules for communication to keep everything on an even footing and avoid any potential misunderstandings from the outset. This goes as far as laying out in her tenant agreement: If I call or text you and you don t answer, I would appreciate you contacting me within 24 hour via text, phone, or carrier pigeon if necessary. Housing benefit: as most HMO tenants will be paying for their room through some sort of benefit, it pays to know how the system works. In addition to these key things to look out for, there are of course all the usual considerations to take into account, including things like how and when you collect the rent, what amenities you need to provide (such as kitchen appliances) and fire safety.

9 Q&A with the HMO Landlady: the realities of the business Running a HMO is not the same as renting residential property to one single family unit. Now we ve looked at how this affects the day job, we wanted to investigate exactly how these realities impact the business of being a landlord. We asked the HMO Landlady about being at the business end of owning and running an HMO: Q. Have you found that the housing market has impacted the success of your business positively or negatively over the years? A. The houses were bought at the height of the boom in 2007 and are only just recovering their values, so I had no choice but to operate them as HMOs in order to meet the financial commitments. To say I was naive when I started out is an understatement! Q. What happens when you want a holiday? A. This certainly isn t a job for a sole landlord who wants to travel a lot. When I go away, my builder has the keys but isn t qualified to deal with social, financial or emotional issues so those have to wait until I return. I went away for 10 days recently and instructed everyone to pay direct into my account, which some did, but they forgot to put a name as a reference so I received lots of payments for 85 and had no idea who they were from! Some tenants just refused as they prefer to pay me and receive a paper receipt. The reason most people shy away from this market is that they fear the complexities and time consuming management... it takes a lot commitment, a lot of hard work, and a lot of people skills. HMO Landlady Q. Are there any hidden costs involved in running a HMO and how do you prepare for these? A. If the house is refurbished to a high standard including roof, boiler, electrics, etc. then there shouldn t be any hidden costs.

10 Q&A with the HMO Landlady: the realities of the business Patching problems just delays the issue and, if you re not handy with a tool box, your maintenance costs can be high. I can just about turn off a stop cock so I keep my builder very happy and issue him with a maintenance list once a month. HMO licence fees can be expensive, as can fire safety systems - oh, and the electric bills are huge! If the landlord has done their numbers correctly, there should be enough profit to make sure the house is safe and warm, the utilities work, the furniture is decent and the carpet is clean. Q. Finally, you regularly speak about your job and advise to expect the unexpected. What s the most bizarre thing that s happened to you in the 7 years you ve been doing this? A. I ve had drug raids, threatened suicides, discovered 2 separate tenants near death, discovered tenants that have serious mental health problems, held sobbing tenants while filling out forms in the Housing Benefit office and have been threatened with court action before now. When people are near rock bottom they re desperate and panic so I don t take it personally. Having said that, I took a mediation course which helped enormously. For the HMO Landlady, taking responsibility for her tenants welfare is a really important element of the job. She believes that to really run this kind of establishment properly now only takes a lot of commitment and sheer hard work, but a lot of people skills too. And it seems that this altruistic approach sometimes pays off. She recalls, I had one incident where one of the tenants befriended everyone else within the house, but one day just left having broken into each room, stolen car keys, electrical goods, money and clothes. I later found that he didn t touch anything which belonged to me because I didn t deserve to be robbed! Q. Finally, what about the best bits? A. Favourite parts of the job? It beats sitting in an office with a boss breathing down your neck or getting involved in office politics. But the downside is you can t leave it to your colleagues if you go on holiday or are ill. As long as you re practical and not driven by ego, you get to indulge in lots of property porn and play around with Excel spread sheets looking at how much money you COULD make if you had the heart to up the rents and ignore the maintenance!

11 HMO Mortgages There are three main things that a lender will typically look at when considering an application for a HMO mortgage and these are: Property type, location, value and whether it requires a license to be run as an HMO (this is determined by local authority guidelines and can differ from place to place) The type of tenants that the property will attract Your creditworthiness, and in some cases your level of experience. The number one mistake made by landlords investing in the HMO market is assuming that a normal Buy-to-Let mortgage will suffice. In fact, this may be considered fraud if it s revealed that you had no intention of letting the property as a single let when you purchased it. At Aldermore, we judge each application on an individual case-by-case basis. If you re considering running a HMO and would like more information, help or advice about the mortgage options available to you, don t hesitate to get in touch with one of our expert advisors.

12 The Legal Low-Down with Tessa Shepperson As we touched on previously in this guide, HMO legislation can be a complex beast. We spoke to exsolicitor (not practicing) and legal specialist in landlord and tenants law, Tessa Shepperson, to get the low-down on the legal issues facing HMO Landlords. How can I tell if I m running a HMO? The rules of what constitutes a HMO are complex and if you are not sure of the ins and outs it s advisable to take advice. But generally your rented property will be an HMO if it is: Occupied by three or more people Who form more than one household But share basic amenities And each pay rent, and; At least one of the parties occupies the property as their principal home Note that there are different rules regarding the definition of an HMO for the purposes of planning and council tax. I am not going to be looking at these in this quick guide, but for more information, visit the Landlord Law Blog, where I regularly contribute content about the legal issues facing the HMO market. What are the different types of HMO: Any type of occupation can be an HMO; this could be: A tenancy: for example three nurses sharing a flat together, or A license: for example, a hostel where the occupiers have a license rather than a tenancy A third type of HMO residence exists in the instance that you take a lodger into your home; what most people don t realise is that if you have more than two lodgers in this will normally made your home an HMO. Finally, other common types of HMO are student halls of residence and B&Bs.

13 The Legal Low-Down with Tessa Shepperson What happens if I don t follow the management regulations? The Management Regulations are special health and safety based regulations which apply to ALL HMOs. Some landlords think that just because their property does not require a license, it is not an HMO and they therefore don t need to comply with the Management Regulations laid out for HMOs. This is not the case. If a landlord fails to comply with the Management Regulations he (or she) can be prosecuted by the Local Authority and fined in the Magistrates Court. The maximum fine is 5,000 per offence and this can mount up to quite a hefty sum if a landlord is prosecuted on a number of separate offences. When does a landlord need to get an HMO licence? The standard rule is that a landlord will need to get a licence for his property if: The property has three or more storeys (including habitable attics or basements), and; There are five or more unrelated occupiers However, it s important to bear in mind that many Local Authorities have applied for additional licensing which will mean that ALL HMOs in their area will need to be licensed. If in doubt, always approach your Local Authority before you take in any tenants. Why is it so important to fully understand tenant s rights? So far as HMOs are concerned, tenants (or licensees if the occupier is a licensee) rights are mostly the same as when there is no HMO. There are however a couple of additional points: 1. You cannot serve a valid section 21 notice on a tenant if they are living in an HMO which ought to be licensed but is not 2. If a landlord is successfully prosecuted (normally this will be by the Local Authority), tenants have the right to request the court to make a rent repayment order. In some circumstances this can be more serious financially for the landlord than the actual fine.

14 The Legal Low-Down with Tessa Shepperson Did you know If you re a member of a Landlord Association you can download tenancy agreements from their websites and some even offer Room Agreements. Whichever you decide, the law remains: 1. All agreements should be Assured Shorthold Tenancies 2. The landlord must give a minimum of 6 months fixed term although a tenant can request a shorter term 3. The tenant can give you 1 months notice at the end of the fixed term but you must give them no less than 2 months or 8 weeks notice and serve a Section 21 notice if you want to end the tenancy How do I avoid prosecution? Be very careful to comply with the law at all times. Running an HMO is different from an ordinary tenanted property because of the Management Regulations. So for example with an ordinary tenancy a landlord will generally carry out repair works once he has been notified of the issue by his tenant. However if the property is an HMO, by the time the issue is reported, the landlord will already be in breach of the Management Regulations and vulnerable to prosecution and a fine. So landlords need to take a more proactive approach. For example quarterly visits are not normally sufficient. Monthly or in some circumstances even weekly visits are often required. These visits, the work done to the property, and contact with tenants must also be carefully documented. Otherwise if you are prosecuted in circumstances when you have actually been compliant, it will be hard for you to prove this. Local Authorities are now starting to bring more prosecutions under the HMO regulations and so landlords need to take extra care to protection their position. Landlords running HMO properties are strongly advised to get some training so that they are aware of what their obligations are. For example my company Easy Law Training Ltd carries out regular HMO workshops.

15 The Legal Low-Down with Tessa Shepperson Tessa Shepperson s Top Ten Legal Tips for First-Time HMOs 1. Do not let rooms to tenants under so called licence agreements without getting legal advice (from a qualified lawyer) first. In most cases these licenses will actually be tenancies. 2. Check with your Local Authority to see what the situation is regarding licensing in your area (as it varies across the country). If you need to get a license, make sure that you do this before you start renting 3. You will also need to make sure that the property complies with the standards set by your local authority, for example as to room size and amenities/services provided to tenants. 4. Under the Gas Regulations, you will need to get the property inspected by an installer registered with the Gas Safe Register before the property is let and then every 12 months and provide a copy of the certificate to the tenants 5. You will need to get the electrical installations inspected and tested every five years and obtain a certificate 6. You will need to have a notice (laminated plastic is suitable and cheap) in a prominent position in the HMO giving the name, address and telephone contact number of the landlord or property manager. Failure to do this will put you in breach of the regulations and vulnerable to a fine of up to 5, Carry out regular inspections and keep detailed written records 8. Confirm in writing all requests made to tenants (for example to keep access ways clear) otherwise how will you be able to prove that you have made the request, for example if you are prosecuted? 9. Do not ignore letters and notices from the Local Authority they are not going to go away! 10. Make sure you get some proper training. Tessa Shepperson

16 Final words Here at Aldermore, our expert team are on hand to help both new and experienced Buy to Let landlords, including for Houses in Multiple Occupation. Whether you re just starting out, looking to expand your portfolio, or re-mortgaging you ve come to the right place don t hesitate to get in touch and let us know how we can help.