House in multiple occupation

Houses in Yeovil, some of which have become HMOs.

Houses in multiple occupation (HMOs), also known as houses of multiple occupancy, is a British English term which refers to residential properties where ‘common areas’ exist and are shared by more than one household. Common areas may be as significant as bathrooms and kitchens / kitchenettes, but may also be just stairwells or landings. HMOs may be divided up into self-contained flats, bed-sitting rooms or simple lodgings.

Strictly speaking, HMOs are not the same as purpose-built flat blocks, since most will have come into being as large buildings in single household occupation. Some legislation makes a distinction between those buildings occupied mainly on long leases and those where the majority of the occupants are short-term tenants.

History

The concept of HMOs arose from the Housing Act 1985, which first defined an HMO as “a house which is occupied by persons who do not form a single household”.[1] The Local Government and Housing Act 1989 expanded the definition to include any part of a building which:

  1. “would not [ordinarily] be regarded as a house”, and
  2. “was originally constructed or subsequently adapted for occupation by a single household”[2]

Both the 1985 and 1989 Acts have since been superseded by the Housing Act 2004,[3] which established a more complete and complex definition[4] and also introduced the requirement for some HMOs to be licensed subject to mandatory licensing (see below).

Licensing

HMO licensing was first introduced in Scotland in 2000.[5] To be granted a licence under the scheme, properties must meet certain standards, such as presence of smoke detectors and fire doors.[6] These provisions were included in response to a fatal fire at a student flat in Glasgow, which had no working smoke detectors, and metal bars preventing escape through a window.[7]

HMO schemes have been subsequently introduced to other parts of the UK, though the definition of what constitutes an HMO varies between Scotland, Northern Ireland, and England & Wales. Local authorities, who manage and enforce the licensing of HMOs, have the power to vary the conditions of the licence. Failure to apply for or comply with the terms of a licence for an HMO constitutes a criminal offence.

Smaller HMOs in England & Wales, comprising for example a terraced house shared by students or young transient professionals, require mandatory licensing under the The Housing Act 2004 if the property comprises five tenants and three floors (sometimes two floors).

HMO investment

HMOs are popular with buy-to-let investors because, it is believed, they have higher income-generating potential than ordinary or ‘vanilla’ buy-to-let properties (though, according to industry statistics, the earning potential of HMOs has recently become outclassed by that of multi-unit freehold blocks (MUFBs)).[8] By splitting single properties into multiple bedsits that are each let out on separate tenancy agreements, landlords can also reduce their exposure to loss of earnings through rental arrears or voids.

Controversy

Some argue that HMO investment is necessitated by insufficient housing supply in the UK, whilst others argue that it is exploiting it.[9] Indeed, the popularity of HMO investment is such that particularly successful HMO landlords are able to supplement their income by selling guidance books and ‘coaching’ other landlords.[10]

Finance

Due to the additional legal requirements placed upon HMO landlords, not every buy-to-let mortgage lender will agree to finance HMO properties. This has led to the emergence of a specialised HMO mortgage market, catered for by a smaller subset of lenders.

Because the choice of products is narrower, HMO mortgage borrowers are often subject to stricter criteria. Often they need larger cash deposits, as the average loan-to-value ratio is slightly lower than for an ordinary buy-to-let mortgage, while the minimum property value tends to be higher. Borrowers who are financing unlicensed HMOs may also be required to prove that their local authority has no intention to license the property in the future. It is also common for HMO mortgage lenders to stipulate the number of rooms permitted, the type of tenancy agreement and tenant demographic permitted and even the type of lock installed on internal and external doors.[11]

See also

References

  1. ↑ Housing Act 1985, s. 345. Legislation.gov. Retrieved March 30, 2015.
  2. ↑ Local Government and Housing Act 1989, s. 165(1)(c), Sch. 9 para. 44. Legislation.gov. Retrieved March 30, 2015.
  3. ↑ Housing Act 2004, s. 266, Sch. 16. Legislation.gov. Retrieved March 30, 2015.
  4. ↑ Housing Act 2004, ss. 254–260. Legislation.gov. Retrieved on March 30, 2015.
  5. ↑ "The Civic Government (Scotland) Act 1982 (Licensing of Houses in Multiple Occupation) Order 2000". Office of Public Sector Information. Retrieved January 10, 2010.
  6. ↑ "Houses in Multiple Occupation: A Guide for Tenants". The Scottish Government. Retrieved January 10, 2010.
  7. ↑ "Students welcome tighter controls on landlords". BBC News. September 30, 1999.
  8. ↑ Multi freehold blocks provide highest gross yields in UK for landlords. Property Wire. January 20, 2015.
  9. ↑ Dyson, R. Buy-to-let: creating bedsits for 20pc returns is just a response to the market. The Telegraph. July 25, 2014.
  10. ↑ Dyson, R. Buy-to-let gurus reveal their formula for making millions. The Telegraph. July 17, 2014.
  11. ↑ HMO criteria. Commercial Trust. March 18, 2015.

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