Continuing our path down the world of real estate for how both landlords and tenants can interact and operate together in the different environments of tenancy, this is going to be Part 2- Houses in Multiple Occupation (picture roommates).
The following forms of Rental Real Estate will be covered in this series, from the smallest going up in terms of investment.
- Rooms Rentals(Attached accommodation).
- House in Multiple Occupation (HMO).
- Attached Properties (Cottages and duplexes).
- Single-family homes.
- Cluster properties.
Part 2 – House In Multiple Occupation (HMO).
What is A Home in Multiple Occupation?
Any rental property that is occupied by 3 or more tenants (not a household) who share property faculties such as the bathroom, lounge, and kitchen area is classified as an HMO.
This can include Rooms, Attached homes, Single Family Homes, Cluster properties and apartments; so long as faculties are shared by the tenants; the property is an HMO.
HMOs can be classified into 2 types, concerning how tenants pay for the accommodation:
Dependant Rental Fees:
Where the tenants in the HMO are sharing the rental bill to accommodate the property. The landlord is charging a fee for the property and not for individual accommodation per tenant.
Independent Rental Fees:
Where the tenants in the HMO individually pay rent to accommodate the property. The landlord is charging a fee to each tenant for occupation in the property.
Landlords decide how they want to charge rent on the property but as standard practice, they are encouraged to go the route of dependant rental fees; whereby they treat all tenants in the property as a single entity. The reasoning for this is further discussed below.
Home in Multiple Occupation – The Basics.
HMOs are rental properties that allow landlords to be the most efficient with their properties by allowing more than one tenant to occupy and pay rent for the same space.
Costs of HMOs-
Homes in Multiple Occupation will usually begin in their smallest forms as either large attached properties such as cottages or large single-family homes and can escalate to being as large apartment-style buildings.
The minimum requirement for an HMO is a property that can legally accommodate 3 adults.
Property faculties such as the kitchen, lounge area, and bathroom are shared between tenants but must be functional. The average ratio is the availability of 2 bathrooms for every 3 bedrooms.
Management of HMOs-
Landlords can manage HMO properties as they see fit but the 2 most common avenues of management are the Dependent and Independent management approaches.
The 2 approaches are on a spectrum which decides how individualist or united the landlord treats the tenants.
Dependent management treats the tenants as one entity in a more united system. Tenants pay one bill, one deposit and suffer shared consequences for improper practices under the tenancy. This is the more common approach for HMO landlords.
Independent management treats each tenant as their entity who in most cases is only responsible for their actions.
The legality of HMOs-
HMOs as a legal entity are treated as most single living accommodations. Special scrutiny is paid in ensuring that the property is not overpopulated past its ability.
Most HMO properties are put to use to accommodate campus students in dorm environments and depending on where this is done, landlords may apply to certain tax breaks.
What to expect From an HMO arrangement (Landlords and Tenants).
As stated above, a key consideration for management expectations of HMO properties is the understanding that in most cases the multiple tenants accommodating the property will be treated as one entity for many procedures.
This makes the management of the property more manageable for the tenant and places greater responsibility on the tenants to manage one another concerning taking care of the property and operating within contractual boundaries as any missteps from one tenant could result in consequences that affect all of them.
The following are 6 of the most influential considerations that could arise in an HMO environment and how they would influence both tenants and landlords of the property.
1. Roommate Lease Language.
Every rental environment involves a lease agreement but in the case of HMOs, tenants and landlords need to be aware of the use of unique terms specific to their situation.
“Jointly and Severally Liable” – this term is used to signify an instance whereby all tenants sharing accommodation under the HMO property are equally liable for the reimbursement of specific damages as well as will equally share the consequences of being unable to do so.
An example of this would be the following; in the event where tenants are equally and severally liable for the payment of rent, If one tenant does not pay their share of rent; all tenants must find a way to make up the deficit.
If the tenants do not make up the deficit, they will all face the consequences which could include the payment of a late fee, a poor future rental referral from the landlord and potential eviction from the property.
For landlords, this term is used to distance themselves from tenant disputes that affect could negatively influence rental income and damage the property.
2. The Roommate Agreement.
As the landlord will often treat roommates of an HMO as a single entity concerning how damages, negligence, and conflict within the property will affect the tenancy; It is often up to the tenants to decide how they can prosecute individuals who cause issues in the tenancy.
This is done through the roommates’ agreement; a legally binding document signed between only the tenants. It holds each tenant liable to operate within specific rules and procedures within the property and poses individual consequences if rules are broken.
If for example, a tenant is unable to pay their share of rent; the lease agreement would hold them all accountable and liable to pay a late fee to the tenant. The roommate agreement, on the other hand, could have a clause that makes the specific individual responsible for the late fee; liable to repay to the late fee amount back to the other tenants.
The lease agreement will hold the tenants equally and legally liable to the landlord, the roommates’ agreement holds the tenants equally and legally liable to each other.
For more on what should be included in a roommates’ agreement and how it should be implemented, I have written out a detailed discussion on just that (HERE).
3. Quiet Hours Policy.
Andy Warhol; an American Artist famously stated: “One’s company, two’s a crowd and three’s a party.” And every landlord and tenant should pay special heed to his wise words.
HMOs are a notoriously popular accommodation arrangement for students and young adults who are prone to being moderately “louder” than your average tenant; especially when they are living together.
The “Quiet Hours Policy” can be found in both the lease and the roommate’s agreement. It is put in place to help moderate external(neighborhood) and internal(tenant) complaints of disturbing the peace against the landlord and tenants.
It simply holds the tenants accountable for following a certain procedure or operating within certain boundaries when they want to have fun in a way that could affect others.
4. Accessibility and Safety.
For the landlord, the basic requirements in this department are being able to provide each tenant with a key for access to the overall property (gate and house key), provision of individual private room keys and a procedure for how lost keys are replaced and how personal tenant and landlord damages are reimbursed in the case of break-ins resulting from tenant negligence and general bad luck.
Tenant negligence in the case of accessibility and safety could be a situation whereby a theft or damage of tenant or landlord property is the result of an individual tenant forgetting to lock the door or gate to the property.
In the case where renters insurance is not in place, the tenant will have to have specific clauses for how the matter is handled under the lease agreement; which would most likely hold all tenants liable for property damage.
The roommates’ agreement (presented above) would be necessary to handle the ramifications of such a case on an individual tenant level.
Accessibility and safety can further expand to involve measures of private security for the tenants of the property. It’s not uncommon for HMO properties specific to campus students to involve means of communicating to private or campus security in the event of emergencies.
5. Subleasing Regulations.
Subleasing or subletting is the action of a tenant renting out their current rental accommodation to other individuals. The original tenant becomes a landlord.
This has a higher chance of occurring in HMO properties as the property is already designed to accommodate multiple tenants. If the property owner and landlord are unable to accommodate all the rooms of the property; tenants may attempt to fill in the gaps themselves.
Subleasing involves a plethora of legal considerations on its on that are not covered in this post. Most landlords but not all landlords would rather not allow subletting in their property or require to include specific rules and procedures for the process.
Subleasing becomes a larger consideration for landlords and tenants the larger a property becomes, and should always be included in lease agreements.
6. Renters’/Tenants’ Insurance.
This form of insurance provides coverage for any damages that may arise from tenant negligence.
This is a policy that may be required by the landlord of the property but is managed by the tenants through the roommates’ agreement.
For the landlord, this assists in protecting their property from tenant caused damages as well as helping the tenants cover themselves from the mishaps of one another
Renters’ insurance can provide coverage for accidental damage such as in the case of fires or property breakage, robberies and medical bills if a tenant gets hurt in the property.
2 Key Takeaways For Successfully Running An HMO property.
Concerning the above considerations, the following 2 points are the most important takeaways to consider when thinking about entering or running an HMO property:
- Landlords are encouraged to treat every tenant in the property as part of an individual entity instead of individuals (shared responsibilities and consequences).
- For tenants, the Roommates’ agreement is as important as the lease agreement to protect themselves from the blanket consequences of not keeping to the responsibilities of the lease agreement.
Should You Be In An HMO?
Houses in Multiple Occupation along with Room Rental properties are the two forms of rental real estate that experience the shortest tenancy periods and specifically for HMOs; they experience the highest turnover periods.
This is to say that tenants occupy the property for short periods while it is also common for new tenants to quickly reoccupy vacant properties.
The common reason for this is because the majority of HMO properties are primarily occupied by student residents who will usually switch accommodations frequently as they progress in their education.
Below is a small guide as to what type of tenant and landlord would best work with an HMO property.
What Type of Landlord is an HMO property For?
- The property you want to use as an HMO is near an HMO friendly location such as a university campus or the city (HMOs are usually accommodated out of common necessity).
- Your property can legally accommodate the lodging of more than 2 tenants.
- You are either personally willing and knowledgeable/prepared to become knowledgeable on the nuances of managing multiple tenants under the same roof or you are willing to hire a management agency to help with the property.
What Type of Tenant is an HMO Property For?
- Best for students looking for more affordable accommodation near campuses.
- Encouraged, for individuals who can coexist with others.
Concluding Evaluation of HMOs.
Houses in Multiple Occupation are pretty much the upgraded versions of Room Rentals. Both rental properties have relatively short tenancy periods and involve multiple individuals living in the same property.
The main difference between the two is the fact that HMOs accommodate more than 3 rent-paying individuals instead of(or as well as) accommodating the landlord in the property.
Regardless of whether the landlord is charging tenancy in the HMO on a per-tenant or for per property basis; there is significantly higher earning potential in an HMO environment for the landlord.
Tenants living in an HMO property are usually given more liberty and are more at ease than in a Room Rental situation because they are living with peers instead of the landlord.
There is a possible issue for tenants that they will have to interact with multiple problematic individuals as it is mostly in the power of the landlord to decide on which criteria to provide tenancy to individuals.
Scoring HMOs as an Investment.
As will be the case with all the other rental properties in this series, I will be scoring HMO properties within the following 4 criteria as well as providing brief reasoning for the score:
- Accessibility – How easy is it to set up and start.
- Scalability – The ability to increase and handle the increased demand for the service.
- Return On Investment – How much you get for how much you put in.
- Return Potential – What can you reasonably expect to get out of this investment.
1. Accessibility (2/5).
HMO properties at a minimum will usually require the investment of “single-family home” proportions.
Properties on average will usually lean towards the larger side of the spectrum for properties with 4+ bedrooms to properties able to accommodate 8+ tenants.
This makes HMO properties along some of the least accessible.
2. Scalability (4/5).
Though HMO properties typically target a specific type of individual (young campus adults); the market has a consistent annual demand for low void periods to manage the relatively short tenancies of tenants.
In popular cities or areas near large university campuses; a landlord will be able to stably have full tenants for HMO properties that accommodate from 3-10+ tenants.
This makes the rental environment one of the best with regards to scalability.
3. Return On Investment (4/5).
HMO properties are on average the among the most expensive rental real estate properties to invest in but they are also on average; more able to leverage the number of tenant spaces within the property to produce a higher return on investment.
HMO properties will typically be more expensive than Room Rental estates but cheaper (per individual) than all the other rental properties. Where HMO properties beat their counterparts is in the potential earnings per property.
A single household renting a single-family home may pay more rent than anyone tenant in an HMO property but a fully occupied 4-8 person HMO property will likely generate far more than that – consideration being given that the properties are of similar size in a similar neighborhood.
4. Return Potential (4/5).
The “full occupation” leverage potential stated above allows HMO properties to greatly increase their potential return with the more tenants they accommodate in their properties.
For properties that can accommodate more tenants, their potential return rises.