Helping clients invest in HMOs

For landlords looking to diversify, a house in multiple occupation (HMO) can be an attractive proposition. By letting to multiple tenants, landlords can often achieve a higher rental income than from a single tenancy, and the income stream may be more resilient — if one tenant leaves or falls into arrears, there are still other paying tenants in place.

HMOs also cater to a broad tenant base. While they are often associated with student lets, many are now occupied by young professionals, seasonal workers, or those seeking more affordable accommodation in a competitive rental market. This range of demand can help maintain occupancy levels year-round.

However, HMOs require more active management than standard buy-to-lets, and they come with specific licensing and compliance requirements that advisers need to ensure their clients understand.

Defining an HMO

In England and Wales, an HMO is typically defined as a property rented out by at least three people who are not from the same household but who share facilities such as a kitchen or bathroom.

A large HMO — rented to five or more people from more than one household — usually requires a mandatory HMO licence from the local authority. Smaller HMOs may still require a licence if the local authority operates an additional licensing scheme.

Because licensing requirements vary, the first step for any would-be HMO investor is to check with the local authority where the property is located. There is no central register of licensing schemes, and failing to obtain the correct licence can lead to significant fines.

Licensing and compliance essentials

Whether mandatory or additional, HMO licences are issued by the local authority for a maximum of five years. To qualify, the property must be suitable for the number of occupants, and the manager (whether landlord or agent) must be deemed ‘fit and proper’. This means no relevant criminal record or history of breaching landlord laws.

Common conditions of HMO licensing include:

• Annual gas safety checks.
• Installation and maintenance of smoke alarms.
• Provision of electrical safety certificates when requested.
• Adherence to minimum bedroom sizes, e.g.:
o Single bedroom (one person over 10 years old): 6.51 sq m minimum.
o Double bedroom (two people over 10 years old): 10.22 sq m minimum.
o Single bedroom (one person under 10 years old): 4.64 sq m minimum.

Some councils also apply selective licensing schemes to address local housing or anti-social behaviour issues. While these don’t replace an HMO licence, they can apply to all privately rented properties in certain areas, regardless of occupancy type.

Planning considerations – Article 4 and change of use

Licensing is separate from planning. Changing a property from a single dwelling to a small HMO or a large HMO may require planning consent, particularly in Article 4 areas, where councils have removed permitted development rights to control HMO concentrations.

For investors, Article 4 can mean more time, more cost, and no guarantee of planning approval. Advisers should encourage clients to check both current and proposed Article 4 designations before committing to a purchase.

Funding HMO projects

HMO-ready properties can be scarce, and many investors choose to convert existing stock. This often involves a two-stage funding approach:

1. Bridging finance to purchase and refurbish the property.
2. Refinancing onto a longer-term buy-to-let mortgage once works are complete and the property meets licensing requirements.

Some lenders, like Castle Trust Bank, are able to provide both the bridging finance to purchase and convert a property and the option to refinance onto a longer term product once the renovations are complete. This can give clients greater certainty with an agreed exit route onto a term mortgage from the outset. 

Operational and cost considerations

Running an HMO often means higher start-up and ongoing costs than a single let, including:

• Furniture and appliances.
• Fire safety and environmental health compliance.
• Utilities (often landlord-paid).
• Increased maintenance due to higher occupancy.
• Higher letting agent fees for tenant-find or management services.

Clients should also be prepared for more intensive management, whether handled personally or via an agent, and a greater emphasis on choosing tenants who are likely to live well together and respect the property.

Key takeaways for advisers

HMOs can deliver higher yields and offer a degree of income resilience, but they also demand greater management, compliance, and upfront investment. Advisers can add real value by:

• Guiding clients through the differences between licensing, planning, and Article 4 restrictions.
• Highlighting funding strategies that suit staged refurbishments.
• Ensuring clients budget realistically for operational costs.

As with any investment, success comes down to thorough planning. For advisers, understanding the regulatory framework and funding options will put you in the best position to help your clients make informed, profitable decisions in the HMO sector, and to plan for success.