Why managing an HMO can reap rewards
The following article is supplied by Kent Reliance for Intermediaries
Forewarned is forearmed. Proper preparation prevents poor performance. Fail to prepare, prepare to fail… there are so many sayings about the importance of planning ahead that I’m always amazed when I hear about people making big decisions without carrying out the necessary due diligence.
Take a recent conversation I had with a broker, for example. They told me they had a customer with a number of houses in multiple occupation (HMOs) who was looking to add to their portfolio. They needed to access finance to enable them to purchase a new property and convert it into another HMO.
When I asked whether they had planning permission to carry out the conversion, the broker said they didn’t have a clue and as far as they were aware the customer hadn’t sought it for any of their other properties either. When I pushed them on whether the property was in an Article 4 area, I was again met with a shrug and a blank look.
Why HMOs have become so popular with landlords
Now I’m not surprised to see an increase in the number of people looking to make the move into the HMO market. Landlords have always looked to increase their rental yields and HMOs certainly give them the opportunity to do just that. While managing an HMO can involve more work compared to running a standard buy-to-let, that extra effort can reap rich rewards. According to the latest research by BVA BDRC*, HMOs generate significantly higher average rental yields compared to other property types at 6.3% - a full percentage point higher than the overall average rental yield of 5.3%.
As well as a superior return, HMOs also give landlords the peace of mind of knowing that, due to separate tenancy agreements, void periods where rooms are unoccupied are spread out and only affect a proportion of the income, reducing the risk of overall payment shortfalls and falling behind with mortgage payments. This must be particularly tempting for landlords renting out single let accommodation and worrying about being unable to let it out.
What does surprise me though is the number of landlords who’re prepared to take the plunge and invest thousands of pounds without carrying out some basic checks first. This brings me back to the importance of looking into whether a property needs planning permission before changing it to an HMO or if it’s located in an Article 4 area.
What landlords need to know before buying an HMO property
The growth in small HMOs accommodating between three and six people who are not from one household increased following a change in the rules in 2010 which allowed homeowners to make certain changes to properties under Permitted Development Rights (PDR). Suddenly, homeowners could use PDRs to convert a C3 dwellinghouse to a C4 HMO property without needing planning consent.
However, at the same time the government also introduced Article 4 directives to encourage the retention of high-quality architectural features, and to preserve and enhance the character and appearance of locally built heritage. Crucially, these directives also give local authorities the power to remove permission for change of use from a C3 to a C4.
So, what should prospective HMO landlords (as well as some experienced landlords, as I revealed at the start of this article) do to ensure they don’t fall foul of planning, licensing or Article 4 directives?
Well, their first port of call before committing to purchasing and converting a property into an HMO should be their local planning officer to check if they need planning permission, as the financial implications further down the line could be huge. They can also do a bit of research into whether there are any other HMOs in the area - if there are, then there’s more chance that an application will be agreed.
It’s worth bearing in mind that larger HMOs which accommodate seven or more unrelated people requires what’s known as ‘sui generis’ planning. Sui generis – a legal term which means ‘of its own kind’ – is a type of planning application to change the use of a property from one use class to another. The sui generis use class also includes non-standard buildings that don’t have their own category, for example theatres, nightclubs and hostels.
Whilst they’re doing that, they should get in touch with the licensing department as well to make sure the property is properly licensed. All HMOs with five or more unrelated people are subject to mandatory licensing, but some councils also require properties with fewer tenants to have a licence too. Landlords failing to apply for a licence when one is needed could face a fine of up to £20,000, plus costs.
They should also check if there are any Article 4 directives in place in the area they’re looking at. Article 4 directives aren’t applied unilaterally across all authorities so landlords should always check the situation in the area they’re intending to buy a property.
Converting a property to an HMO of up to six bedrooms can be achieved using PDR, but if it’s in an Article 4 area then planning permission is always required. I should also mention that all of Wales is covered by Article 4, so whether you want to invest in an HMO in Aberystwyth, Bangor or Cardiff, you’ll need to get planning permission first!
Finally, landlords should know that holding an HMO licence doesn’t mean that they automatically have planning permission and vice versa. Whilst both are operated by local authorities, they are two separate departments each with its own set of considerations.
How Kent Reliance for Intermediaries can help
Fortunately, Kent Reliance for Intermediaries is here to help landlords navigate their way through this potentially confusing landscape.
We’re one of only a handful of lenders in the market who’ll consider applications of HMOs of six bedrooms or fewer from first-time landlords, and we’ll accept applications of up to 20 bedrooms from more experienced landlords. What’s more, you’ll receive support every step of the way from our experienced team of business development managers who have years of knowledge and industry know-how.
With landlords constantly looking for new ways to diversify and boost their rental yields, HMOs could offer them a way to achieve returns that often can’t be matched by traditional buy-to-lets. By making sure they’re aware of the potential planning permission and Article 4 pitfalls before they take the plunge, you’ll be giving them the best chance of achieving their HMO ambitions.
*Source: BVA BDRC Landlords Panel Report Q3 2023 (slide 23)
Adrian Moloney (pictured) is group intermediary director for Kent Reliance for Intermediaries
