Growing HMO portfolios: What our landlords are telling us

Rob Stanton, sales and distribution director at Landbay, discusses how advisers can best support their HMO landlord clients and why there are currently many positives in the HMO sector.

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Rob Stanton | Landbay
2nd July 2024
Rob Stanton, business development director, Landbay
"There are pitfalls for the unwary, and knowing your local market well is essential. There is no doubt that anyone invested in this type of property needs to do their homework first."

In the teeth of an ongoing housing shortage, demand remains strong for decent and fairly managed houses in multiple occupation (HMOs). Our latest landlord survey shows continuing confidence in this property type, with some landlords growing their portfolios and treating them as a full-time career. London and the South East is the hotspot for our HMO landlords, followed by the East Midlands.

Managing HMOs is not without its challenges. But just under 30% of landlords who took part in our latest landlord survey owned an HMO property or portfolio. 72% of these landlords owned HMO properties through a limited company. Half said they did not have another job and used their property or portfolio as their sole source of income.

Self-managing landlords need to take care though. There are pitfalls for the unwary, and knowing your local market well is essential. There is no doubt that anyone invested in this type of property needs to do their homework first.

Some councils, keen to tightly control the supply of HMOs, are introducing additional licensing schemes for smaller HMOs (defined as when at least three unrelated tenants live in the home). A large HMO – defined as a home occupied by five or more unrelated people – must always have a licence unless an exemption can be sought, no matter where it is. But these additional schemes are often in selected parts of a town or city.

Councils can also control HMO stock through implementing an Article 4 Direction. While planning permission is always required when changing a single dwelling house to a 7+ bed HMO, it is not normally required for an HMO for up to six people. But an Article 4 Direction removes permitted development rights in particular locations. This means that would-be HMO landlords in those areas must apply for planning permission for a change of use for smaller HMOs as well.

Applications are only granted if the accommodation meets a high standard. They may be subject to tests such as the ‘sandwich’ test where permission would not be normally granted where a new HMO would mean an existing residential property would be sandwiched by adjoining HMOs on both sides. When permission is granted, the property may also require licensing, even if it houses fewer than five occupants.

Clearly, regularly checking when and where an Article 4 Direction is applied is essential due diligence for would be HMO landlords. This includes any plans by councils to implement or change a direction. Following the local elections, we may see more councils introducing licensing regimes and Article 4 Directions and we’ll be keeping a close eye on the situation.

Despite some of these and other complexities of managing a portfolio, our survey found that nearly half of the properties were self-managed by landlords – a third of which owned portfolios with over 20 properties. Only 19% of HMO landlords relied on property management companies, with a quarter using estate agents.

The reason for this more DIY approach could be that the most popular size of HMO portfolio was the smallest, between 4-10 properties, with 34% falling into that category. 31% of the HMOS were part of portfolios of 20 or more, while 22% were in portfolios of 11-20 properties.

Other positive news in the sector is that decreasing utility bills mean higher net rental which can make it easier to borrow a greater amount against the property’s value. In addition, council tax banding for individual rooms in shared houses has been reversed, meaning HMOs will be classed as a single dwelling as before.

As our landlords attest in our survey, there are many positives in the HMO sector which is proving to be ever resilient. It will be interesting to see what the next Government does, if anything, about this market. But, as long as investors do their research thoroughly before making the leap, HMOs can give great returns.

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