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Why location is critical for the HMO market

Grant Hendry, director of sales at Foundation Home Loans, explores how HMO licensing, stock availability and cost varies from region to region and why a number of great HMO opportunities remain available to landlords in the current market.

The modern mortgage market is awash with complexity from a borrower, intermediary and lending standpoint. This is further exacerbated by additional financial pressures being felt by households across the UK – both owner occupied and rental – and some lingering uncertainty over the impact of recent events on interest rates and house prices.

Inevitably, increased living costs are leading to some people having reconsider their immediate homeownership aspirations and the demands of their current accommodation. For landlords, many have gone back to basics in terms of delving deeper into their yield, void and cost calculations. When it comes to yield, houses in multiple occupation (HMOs) have historically topped these charts and proved an attractive option for the more hands-on landlords who have the knowledge and experience to manage differing tenant and property demands.

This yield equation was evident in the most recent BVA BDRC Landlord Panel research for Q4 2022 which outlined that HMO properties went back to the top spot of the rental yield table. These were reported to be offering the strongest yield by property type, at 6.4% for the quarter, followed by multi-unit blocks at 6.2%.

Furthermore, the research also suggests that the proportion of gross rental income spent on maintenance and running costs of HMOs hit a low in Q4 at 26% from the high of 29% experienced in both Q1 and Q3. For the full picture, the proportion of gross rental income spent on maintenance and running costs of HMOs was recorded at 28% in Q2 2022 and 24% in Q4 2021.

Demand remains strong amongst landlords and tenants, meaning that this remains an area of lending in which we at Foundation Home Loans continue to see strong levels of business. Although, there are also an argument to be made that this is more down to our approach – we are one of only a few lenders which don’t load ICRs on such property types – rather than currently being the industry norm.

To find out more about how we can assist you with your HMO Mortgage please click here

With such strong yields, albeit with additional costs actuated, this means that the HMO market is flourishing right? Right?

It seems that location is critical for this particular market.

As outlined in recent market analysis by Sirius Property Finance, while a raft of regulations have led to increased tenant welfare, these have also contributed to a decline in HMO numbers.
Taking a trip back in time for a moment, October 2018 saw the UK government extend the mandatory licensing of HMOs to cover the vast majority of properties containing five or more people from two or more separate households. Previously, only properties with three or more storeys containing five or more people from two or more households required an HMO licence.

There can be no argument that improving the safety and living standards for tenants is a huge step in the right direction. However, this has also placed increased pressure on landlords with some opting to offload their HMO properties rather than dealing with the added costs.

As highlighted in the aforementioned Sirius analysis, this has led to the overall number of HMOs falling by -2.4% in the past year, but this drop is dwarfed by some incredible regional declines. The East Midlands was suggested to have recorded an annual HMO stock decline of -26.1%, the North East has seen HMO stock levels drop by 15.8%, while in the South East numbers are down -6.7%. However, these falls are not universal across all regions. Indeed, the likes of the West Midlands (16.9%) and Yorkshire & Humber (11.2%) recorded impressive annual stock growth over the past year.

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These figures demonstrate how HMO licensing, stock availability and cost varies from region to region and, as with any property investment, it’s vital that landlords do their due diligence before entering into this arena. However, a number of great HMO opportunities do remain available for those landlords who are looking to maximise yields and capitalise on rising levels of tenant demand.

There are also plenty of attractive options from an HMO product perspective. Especially from those lenders who are highly experienced in this type of lending, who are finely attuned to the needs of such landlords and have the underwriting capabilities to match their ever-changing needs.

By GRANT HENDRY

Source: Financial Reporter

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New crackdown approved to tackle substandard HMOs in Dudley

A new crackdown on substandard HMOs has been approved in Dudley to stop rogue landlords who cram tenants into overcrowded homes.

Councillors say they need to “make sure that new homes in Dudley Borough meet a certain standard of quality for the good of the people who live in them”.

Developers looking to turn a property into an HMO (house in multiple occupation) for up to six people will now have to apply to Dudley Council for planning permission under the new ‘Article 4 Direction’ passed this week.

While HMOs help to meet a specific housing need, especially for those on a low income, there are concerns that high concentrations in certain areas are harming their character, putting pressure on infrastructure and diminishing community relations.

It is claimed the main issues with HMOs revolve around anti-social behaviour, noise, inadequate living conditions, litter and parking issues.

To find out more about how we can assist you with your HMO Mortgage please click here

Evidence provided by West Midlands Police and the council’s anti-social behaviour team found a correlation between HMOs and increased crime and drug offence levels.

The ‘Article 4 Direction’ has now been rubber-stamped after a six-week consultation period. Councillors say the new legislation will allow the council to keep tabs on the standards of homes across the borough.

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Councillor Simon Phipps, cabinet member for regeneration and enterprise, said: “We need to make sure that new homes in Dudley Borough meet a certain standard of quality for the good of the people who live in them and other residents in the local area.

“It’s clear from the evidence gathered that the unchecked creation of small HMOs using permitted development rights undermines our ability to properly plan developments in our neighbourhoods.

“Our plan will create consistency in the planning system so all HMOs must go through the scrutiny of a planning application before they are created. But we won’t just stop at this measure, because the emerging Black Country Plan will also introduce new policies to make sure new homes are better quality and do not detract from the wider local area.”

By Josh Horritt

Source: Express & Star

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Back to basics – why the increase in interest in HMOs and MUFBs

Houses in multiple occupation (HMOs) have become much more popular over the past few years.

So what exactly are HMOs, how do they vary from multi-unit freehold blocks (MUFBs) and why should you be interested in them?

The definition of an HMO as defined by the government is: ‘A property rented out by at least three people who are not from one ‘household’ (for example a family) but share facilities like the bathroom and kitchen.’

In comparison an MUFB is multiple, separate, independent residential units held under a single title.

So a unit of self-contained accommodation to put it clearly, this means it has its own bathroom and toilet and a kitchen or cooking area for the exclusive use of the individual or household living there.

If the individual or household needs to leave the unit or flat to get to the bathroom or kitchen, then it is not self-contained.

Examples of an MUFB include: purpose-built blocks of flats, houses converted into flats or it can be a number of houses all held under one freehold title.

It is also important to note that properties which do not fall within any particular use class for the purposes of planning permission are classified as ‘sui generis.’

This is Latin for ‘of its own kind’ and means that more bespoke and local rules will exist. Buildings falling under sui generis include HMOs with seven or more bedrooms.

There are many advantages to the landlord or investor in investing in an HMO, for a start the yields are higher.

To find out more about how we can assist you with your HMO Mortgage please click here

By having multiple different tenants each paying rents then the yields are a lot higher and present a lower risk as the chance of void periods where the property is completely empty is much lower than it is when renting a property to a single family or household.

Demand for HMOs is high at the moment too. Students are one of the biggest drivers of demand of HMOs as this provides affordable – and arguably more sociable – accommodation, something in high demand at this time of lock down.

But HMOs are no longer just the domain of students; as single-household accommodation becomes less affordable, the demand for HMO accommodation is rising, which is good for investors looking to expand into this area.

There are things to be aware of with HMOs however. If the property is let to five or more tenants from more than one household, and some or all the tenants share toilet, bathroom or kitchen facilities, then it is mandatory for the landlord to hold a licence.

This licence is granted by the local authority that the property sits in. In addition, different local authorities can require additional licensing, so it’s imperative for the landlord to know its local authority’s position before investing in the property.

The sort of things that a local authority will look for in order to grant a licence is floor area. There are strict rules on how big a bedroom needs to be based on how many people are sleeping in it.

There will also be additional rules around fire safety, with fire doors, fire extinguishers and sometimes and additional fire escape being mandatory.

Article 4 direction

Landlords also need to be aware of what is called ‘Article 4’. Article 4 direction is a statement made under the Town and Country Planning Acts.

The ‘direction’ removes all or some of the permitted development rights on a site.

Existing HMO’s rented prior to the planning requirement coming into place automatically qualify, however any gap in HMO rental means you lose Article 4 permission.

Therefore a landlord who purchases a property to convert to an HMO has to be aware of any current or potential Article 4 directives.

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Particularly when purchasing, for example, a three bedroomed property to convert into an HMO where they may not be aware that Article 4 will then apply.

It is only very rarely that a council gives Article 4 retrospectively either, so brokers can play a valuable role by flagging this up to their clients.

This also occurs with ‘sui generis’ properties. Any landlord who purchases a six-bedroomed dwelling who wants to make it larger and add an extra room or more will have to get local authority planning for sui generis use – even if the property already has Article 4 permissions.

Finally, the type of valuation that an investor needs to have also depends on the size of the property.

For an HMO with up to six bedrooms, the investor will need an investment valuation. If they then own seven or more properties they will need a ‘red book’ commercial valuation.

While a number of lenders will lend on HMOs, MUFBs and those falling into the sui generis category, the criteria will differ from lender to lender.

Different lenders will lend on HMOs with different room numbers, for example Landbay will lend on a property with up to 12 bedrooms, but others will not go up that high.

Finally, lenders will typically look at how much experience a borrower has in letting out that size of property.

Most lenders will expect the borrow to have experience of letting a similar sized property, so don’t expect your client to be able to go from renting out a couple of standard, single household residential properties to an HMO with 12 rooms.

Demand for flexible accommodation is on the rise in the UK and with HMOs no longer seen as simply a residence for students, they can be a sound investment, delivering higher yields.

HMO’s stand strong against market fluctuations and can deliver a consistent demand.

Just ensure your client is aware of the rules, regulations and tax policies when expanding into this arena.

By Paul Brett

Source: Mortgage Introducer

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Increased HMO charges ‘should not be passed onto students’ says Fife Council

There is no need for any increase in charges for HMO (house of multiple occupancy) licenses to be passed on to students who are concerned about rent rises, Fife Council has reiterated.

Every HMO needs a licence to make sure health and safety standards are met for residents. The council has recently updated the charging structure for licenses, bringing it into line with other local authorities, and making sure the increasing costs of administering the system were not passed on to taxpayers. Fees have not been increased since 2006.

John Mills, Fife Council’s head of housing services, said: “Any suggestion that the council is somehow responsible for a rise in student rents is just scaremongering.

“Based on current figures, the University charges £21,000 for an individual student over three years. Our HMO fee for one student in that time (in an HMO of five people) is under £300. My understanding is that St Andrews University charges one of the highest residential fees in Scotland. There has to be some perspective here.”

Mr Mills added: “The new charging structure now covers the full cost of the HMO licensing service, including administration, property inspections and verification, democracy and compliance costs. We’ve moved from a flat-based fee structure to one that takes account of the number of occupants in an HMO, and the resources spent on each application through a sliding scale of charges.

“There should be no suggestion that this will lead to rent rises for students. Any rises in rent are at the discretion of the University, and there is nothing to suggest that a rise in the fees the council charges for HMO licenses should be passed on to students. Any charges are a very small proportion of the rental income received by HMO owners.

“I would urge any parents or students who are concerned about a potential rise in rents to raise this directly with the University, as the organisation deciding how much should be charged for student housing.”

Source: Scottish Housing News

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Councillors aim to examine Wrexham’s licensing of houses in multiple occupation to review local standards

Calls for councillors to scrutinise the licensing of houses in multiple occupation (HMOs) across Wrexham have been made.

A topic request form signed by Holt councillor Michael Morris and Smithfield councillor Adrienne Jeorrett has been submitted for consideration by members of the homes and environment scrutiny committee.

It states that: “For some time members have expressed concern over the quality, appropriateness and size of accommodation which is offered to individuals residing in houses in multiple occupation (HMOs) and which is controlled by the licensing regime rather than through the planning process.”

Such concerns over the size of accommodation and amenity space provided in some HMO proposals have been raised numerous times over the years by councillors and planning committee members.

Speaking about plans to convert a property on the outskirts of the town into a HMO last December, Cllr Jeorrett said it was a “great disappointment that adults are having to live in one room with a long term impact on health and wellbeing.”

As part of the work looking into the licensing of HMOs, it is suggested that scrutiny “undertake a review of how the current standards were arrived at” and if they are nationally prescribed or determined locally.

It also proposes that the committee:

– Compare with other Local Authorities to establish if our standards are more or less generous than others and if they need reviewing.
– Consider the issue of bed spaces versus bedrooms and occupancy numbers.
– Consider how to ensure that HMOs offer a reasonable standard of accommodation by providing rooms of an adequate size for the number of occupants and reasonable communal living areas/ circulation space.
– Establish if there need to have differing standards for the various types of HMO eg. those that primarily house contractors who are working in the area and those that are conventionally let to tenants – (the former having a much greater parking need)
– Possibly look at a “Landlords Charter” on how they will deal with complaints

It is hoped that the scrutiny committee will help “remove the tensions between determining planning applications and and the licensing regime for HMOs” – along with “ensuring a better quality of accommodation for the tenants” and “reducing the tensions with the adjoining community neighbours”.

It is estimated that the topic will take four months to be examined by scrutiny members.

Previously in 2017 we have reported how there has been concerns that there is a lack of staff due to council cuts for inspections, as well as the implication there could well be a large number of unregistered HMO’s out there.

At the time we reported, “Detail was given to the meeting over the five year inspection periods, with an officer explaining that although the five years is the maximum mandatory inspection period, HMOs that are of concern could be inspected much more regularly such as six monthly. Lead Member for Housing, Cllr D J Griffiths, did point out that it was a chicken and egg situation at times as without investigating properties the council would not know of any issues to deal with, but without the staff to do so then investigations may not be as frequent” and “More detail was given on work done to locate unregistered HMOs, including: “There are probably more HMOs than are legally registered, but it is finding them is the challenge. We look at various sources, council tax bills, housing benefit information, or even looking on the internet to see what is to let locally.”

Source: Wrexham

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New charges for houses in multiple occupation in Coventry – what it means

Action to tackle irresponsible landlords has half-succeeded at Coventry council after one of two schemes was passed by councillors.

A city-wide ‘additional licensing’ scheme was approved at full council on Tuesday, January 14, but ward-specific ‘selective licensing’ came to a halt after it was voted down to allow for further investigations.

The new additional licensing policy will focus on houses in multiple occupation (HMO).

The scheme is likely to impact a number of student homes, which the council hopes to reduce through the introduction of more purpose-built student blocks.

Under additional licensing, a landlord who has been operating an unlicensed HMO could pay £1,250 for a one-year licence; £1,055 could be charged for a one-year licence if they are not listed as part of the council’s ‘proactive enforcement regime’; £705 for a two-year licence; £640 for a five-year licence; and £545 for a renewal.

Selective licensing would have been in certain wards, although councillors voted it down after citing an upcoming selective licensing review from the government and ‘out-of-date’ data from a 2011 census which was used to determine the areas the new scheme would fall into.

In consultation, landlords also claimed it added ‘unnecessary financial burden’ and could lead to increased costs being passed onto tenants.

Both schemes were planned to hold landlords to account and help set and maintain minimum standards across the city.

Combined the schemes would have introduced fees potentially worth thousands of pounds on landlords.

Around a dozen councillors were forced to leave the meeting and not take part in the vote as they are landlords themselves.

Cabinet member responsible Cllr Tariq Khan said the selective licensing scheme will be revisited once the government’s review has been published, while his deputy Cllr David Welsh welcomed the new additional licensing.

Cllr Welsh said: “This is probably one of the biggest steps this council has taken to improve the quality of housing in many years.

“Members will be aware what HMOs have done to the quality of housing across the city and the issues they have created.

“I look forward to working with the good landlords we have in the city and I’m very aware there’s many who do take responsibility for the properties they own and manage them well.

“But this scheme will tackle those who fail to do this, people who seek to invest in the city in terms of owning a property but don’t want to be responsible for the state of the properties and the behaviour of the tenants within.

“This scheme will give the council power to put conditions on the licence in terms of the quality of accommodation and others that we have not been able to do until now. That will make a big difference.”

Additional licensing requires all owners of HMOs that are occupied by three or four tenants and all converted self-contained flats that are wholly tenanted to apply to the council for a HMO licence.

Selective licensing would have required owners of rented properties in designated areas to apply and pay for a property licence and pass a ‘fit and proper person’ test.

Additional licensing will come into force on May 4 for a period of five years.

By Tom Davis

Source: Coventry Telegraph

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Wrexham Council accused of being reluctant to approve HMO proposals

Wrexham Council has been accused of being reluctant to allow any more houses in multiple occupation (HMOs) to be created in the county.

It follows the rejection of plans to turn a family home on Salop Road into five bedsits because of the large number of similar properties nearby.

A number of concerns have been raised by both councillors and residents about problems arising from HMOs in recent years, such as an increased demand on parking and rubbish being left piled up on streets.

A planning inspector has also highlighted how they are making the main Mold Road gateway into Wrexham a less attractive place to live.

Planning agent Bob Dewey, who is acting on behalf of the landlord behind the latest proposals, said he acknowledged some of the issues raised.

However, he claimed there was a need for low cost accommodation in the area and criticised the small amount of HMOs being approved by the local authority.

In the appeal documents, he said: “There is a strong feeling that the council does not wish to permit any further HMOs.

“Tragically, the term HMO seems to have become has become a term of condemnation.

“Local people and planning councillors seem to have associated such a use with bad management by owners and anti-social behaviours by the occupiers.

“There is no doubt an element of truth in this concern, but experience appears to suggest that problems mainly arise from properties run by institutional operators and absentee landlords.

“The appellant is a local man anxious to provide a good service to people who require this type of accommodation.

“It is not in his interest to let the property in a manner which would create problems for him or for the locality or his neighbours.”

In refusing the application, the council said the proposed development would result in an over concentration of HMOs within the area.

The authority’s guidelines set out a maximum of ten per cent of bedsits within a 50 metre radius of any given location.

It also said the plans would cause an increase in demand for parking on the street, adding to existing problems.

In response, Mr Dewey said the one parking space outlined would be sufficient as he claimed most people living in the property would not own a car.

The appeal will be decided by an inspector appointed by the Welsh Government at a later date.

By Liam Randall

Source: Wrexham

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Council to launch public consultation on HMO licensing scheme in Worcester

COUNCILLORS will “consider options” on proposals to amend an HMO licensing scheme for Worcester City.

At a communities committee meeting on October 30, city councillors in Worcester discussed a proposal to approve a 12-week public consultation to extend the HMO scheme in the city.

There are currently HMOs in every ward in Worcester with the exception of St Peter’s, and the licensing scheme would aim to crack down on rogue landlords and improve standards.

Councillors discussed applying the scheme to the parts of Worcester where it was more necessary and where there were more HMOs, but Cllr Richard Udall said the scheme needed to be enforced across the whole city, saying: “I am a bit shocked and surprised at what is being said here. More regulation means more protection. Lowering standards is an invitation to rogue landlords to come into areas where there is no protection.”

The Worcester City Additional Licensing Scheme runs for five years, at the end of which the Council is required to review the scheme with a view to re-designation or discontinuation.

Property standards in HMOs can often be lower than other rented properties due to poor conversions of older properties, more than one household living independently of each other, regular turn over of occupiers and in some cases poor management by the landlord.

The aim of licensing is to ensure these properties meet the legal standards and are properly managed to provide greater protection to the health, safety and welfare of the people living there.

According to the city council’s report: “The implications of moving to an Additional Licensing scheme which is targeted at specific wards would be that City-wide improvements to private housing would not be sustained but that instead a targeted approach could be taken to problem areas.”

The committee agreed to send out the consultation and amended the reports recommendations so that they will make the final decision on whether to declare the scheme, rather than the corporate director for homes and communities along with the chair and vice char of the committee.

In March 2015, Worcester City Council’s cabinet approved an Additional HMO Licensing scheme for the whole City, which came into effect later that year. Accreditation of HMOs had previously been in place but because it was a voluntary scheme, it was not taken up by the majority of landlords.

By Tom Banner

Source: Hereford Times

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Objections To Turn Former Scarborough Care Home Into HMO

A proposal to turn a former care home in Scarborough into a House of Multiple Occupancy (HMO) has provoked reaction from local residents.

More than 70 people have objected to plans from Artz Ltd to convert Harewood House at 47 West Street into a property to house up to 30 people.

The objectors are concerned about the number of HMOs in the area and also about the increase in parking and traffic it could bring.

Fantasia Leisure Ltd, which would manage the HMO if it were to be granted permission, says in its supporting information that overseas workers would be housed in the building.

It adds:

“Fantasia currently is inundated with inquiries for working people from overseas looking for accommodation in Scarborough.”

The company added that it had recently been asked if it could find accommodation for 200 workers in the area.

A number of the objectors, in their letters to the council, bring up the case of the Breece, a former hotel in West Street that later became an HMO.

In 2014 a court ordered the closure of the Breece following more than 50 anti-social behavior complaints and allegations of stabbings and rape at the premises.

One objector wrote:

“The Breece was a sizeable HMO and subsequent amendments were made to the relevant section of the Local Plan to provide powers to restrict the size of HMOs and control their location to avoid ‘clustering’.

It was deemed appropriate that the maximum number [of occupants] should be 10. The proposed number of occupants for Harewood House greatly exceeds this number.

Furthermore, such a development would greatly increase the number of HMO buildings and occupants in this area. The proposed site is close to three existing HMOs, the largest of which has made an application to significantly increase its numbers.”

Scarborough Civic Society has also objected to the plans, saying that, if granted, the number of tenants in HMOs in the area would double. It adds that it would also detract from the character of the Conservation Area.

The Harewood House care home closed in 2017 and despite two auctions being held no buyer has yet been found to take over the property.

By Carl Gavaghan

Source: Yorkshire Coast Radio

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Huge number of HMOs have no licence and are illegal, says new research

There is a non-compliance rate of 75% in unlicensed HMOs in London.

Research conducted by the private consultancy London Property Licensing for trade body safeagent – formerly NALS – has found over 130,000 unlicensed properties which should be licensed under mandatory, selective or licensing schemes.

The research, carried out through Freedom of Information requests, found there are over 310,000 private rented properties in London that require licensing.

However, non-compliance in the capital is rife.

Licence applications have been submitted for only 25% of the 138,500 private rented properties that require licensing.

Without a licence application submitted, these properties are being operated illegally and landlords and/or agents can face prosecution or a civil penalty of up to £30,000.

The landlord can also be ordered to repay up to 12 months rent.

Since October 2018, the mandatory HMO licensing scheme has applied to most HMOs shared by five or more people whereas it was previously restricted to properties three or more storeys in height.

In some boroughs, additional licensing schemes have extended licensing to properties rented to just three or four unrelated people.

The picture for selective licensing is markedly different, according to the research.

These schemes extend licensing to all private rented properties including single family lets within a certain geographical area.

Licence applications have been submitted for 85% of the 173,000 private rented properties that require licensing under selective licensing schemes in London– a non-compliance rate of 15%.

Added to the confusion over licensable properties, many London boroughs are struggling to process over 24,000 licence applications.

Currently, about 40% of boroughs still rely on paper applications.

Safeagent is calling for a simpler, more streamlined licensing process.

Safeagent CEO Isobel Thomson said: “The results of the survey are concerning.

“Consumers are not being well served and indeed many are being placed at risk through this mish-mash of licensing schemes.

“Right now, the system isn’t fit for purpose and councils are drowning in paperwork.

“Landlords needing property licences are either deliberately evading the schemes or are in the dark concerning their legal responsibilities, and tenants are being placed at risk.

“If the compliance rate for HMO licensing schemes is only 25%, how can these schemes be effective?

“Isn’t it time we went back to the drawing board to come up with a simple, streamlined system that works for all?”

By ROSALIND RENSHAW

Source: Property Industry Eye