Are HMO’s the smart investment?

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In the post-Brexit world, nothing is certain. However, it appears that investment in Houses of Multiple occupancy is where many property investors are looking. HMO properties can allow a landlord to maximise their return by splitting property into separate spaces with separate tenancy agreements. An HMO is defined as a property with at least three tenants forming multiple households, where ‘multiple households’ means tenants are not in a relationship or related.

HMO landlords tend to come in three categories:

• Those who rent out spare rooms within their property

• Regular ‘Buy-to-Let’ Landlords that bought a large property that it is suitable for HMO letting

• Landlords that actively seek out properties that are suited to an HMO style or are willing to spend time and money changing a property to become an HMO

Why invest?

Demand

There is a growing trend amongst the under thirties to not live alone. This could be due to a plethora of reasons, two of which are the fact that rent for a single bed recently moved over the £1000pcm mark or maybe thanks to sites such as SpareRooms that increases the opportunities available to find groups of similar people to live with. Whatever the reason, it is good news for those looking to get into the HMO market.

Furthermore, with the 21^st century phenomenon of ‘Generation Rent’, there are more people looking to rent rather than buy. This is thanks to things such as more stringent mortgage laws and inflated property prices, even after Brexit. This means that the size (and quality) of the potential tenant base has increased.

Ability

Since 2013, Planning permission rules surrounding small scale extensions have been relaxed. This means that investors actively seeking properties to convert to an HMO style are able to quickly and easily increase the size of a property without having to go through the arduous process of planning applications. This has been a particular bugbear of MP Steve McCabe, who raised the issue of ugly HMO extensions in parliament in August.

Return

When compared to a standard buy-to-let single freehold and block of flat models, HMO’s outperformed both. The single and block of flat models returned 6% and 7% respectively, whilst HMO’s averaged a 10% return per annum. As the saying goes…the numbers don’t lie.

Things to consider

Rules

As with all types of private rented housing, there are laws surrounding certain things that must be provided. For HMO’s these are more complex than usual. Firstly, the property must be licenced to become an HMO by the local council. To gain this licence the property must adhere to a certain criteria. For example, no room can be too far from communal facilities such as a kitchen or bathroom (when renting out individual rooms) and there are stipulations over the types of locks that must be used on doors both inside and outside the property. Unfortunately for those looking to invest in HMO’s, there is currently no standard definition of what an HMO is or what it must contain, therefore it is best to check with the council what the property must have and ensure the correct licence is applied for or face a fine of up to £20,000.

Oversupply

As is often the case when an investment opportunity that offers a higher yield than the rest comes to light, lots of people jump on the bandwagon. This means that the market could be flooded with shoddy HMO’s. The best thing to do to avoid this and being dragged down is to spend time thinking about the potential layout of an HMO property and how it would feel to live there. Tenants are more willing to pay higher rent when the property is worth it. Furthermore, this doesn’t have to cost more, it is simply a case of taking a step back and thinking “How would this work if I was living here?”

Making life easier?

Unsurprisingly, having multiple tenants with differing tenancy agreements means that HMO rental is more complex than a standard single let. The property manager will have to deal with issues both in the communal areas and in private areas. This is where property management software is key. Arthur Online is the leading property software management tool when it comes to HMO letting. Arthur’s unique database allows the property manager to work on both a property and unit level. This means when an issue arises, or a task needs to be completed the property manager can automatically inform all parties that need to know.

Furthermore, due to the fact there are more tenancy agreements within the property, there tends to be a higher turnover within HMO properties. However, when using Arthur this is not a problem. Tenants can request to end a tenancy through Arthur, the property manager can the accept this and automatically assign the letting agent to find a new tenant.

By using Arthur Online Property management software, Landlords can take on an HMO without worrying about the extra workload it may present.

Sign Up for a free thirty day trial of Arthur Online.

… LandlordZONE.

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Urgent review into UC rent arrears

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Lord David Freud has called for an “urgent” review of Universal Credit claimants – tenants who have fallen into rent arrears. Lord Freud was appointed Minister of State for Welfare Reform at the Department for Work and Pensions in May 2015 and is a Conservative member of the House of Lords working towards implementing Universal […]

… LandlordZONE.

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Tenant now in prison and friend looking after property and cats?

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I rent a small studio to a chap that I have discovered is in prison. He was obviously expecting it (apparently breached a restraining order with his ex) and has left a friend living in the flat, to look after it, including all his belongings and 2 cats, until he gets released. The housing benefit… Read more

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Airbnb – can we blame landlords for taking the leap?

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It seems controversial holiday lettings site Airbnb is never far from the headlines these days.

With the UK in the midst of a housing crisis many – the RLA included – have spoken out against the site, claiming the exponential rise in the number of homes now being offered to let is having a detrimental impact on the supply of desperately needed rental properties.

And while this is undoubtedly the case – particularly in London – can we really blame landlords for taking the leap?

The recent stamp duty surcharge on new buy-to-let purchases along with the changes to mortgage interest relief and the wear and tear allowance all combine to make the PRS a much less attractive place for property owners who want to rent out homes.

Battered by the taxman and hampered by ever increasing legislation, it is a very real temptation, especially when faced with increased profits and fewer regulations, to abandon buy-to-let in favour of lucrative holiday lets.

And provided this is done properly this is a legitimate business decision.

Anecdotally a number of landlords have gone on record as saying their fortunes have improved considerably by making the change – with a former landlord in Leeds claiming he tripled his income.

So what are the pitfalls?

Firstly, anyone tempted to make the move must be aware that changing the use of their properties could see them in breach of their mortgage conditions and potentially invalidate their insurance.

If you have a mortgage on your property it is extremely likely that letting it out on Airbnb will breach your mortgage conditions. Similarly, there is the issue of insurance. Any insurance policies on the property may be invalidated by moving from buy-to-let to holiday lettings and making the change without checking this out isn’t advised.

Letting a leasehold property out on Airbnb could also be against the law. In a recent landmark case a UK court ruled that a leasehold flat owner had breached the conditions of her property’s leasehold contract by advertising and renting out the apartment on Airbnb. The contract included a clause saying the property was to be used ‘solely as a private residence’.

So while renting out property Airbnb may seem like an easy way to make big bucks while side stepping red tape – all while thumbing your nose at the taxman – it is not a decision to take lightly.

In short before you make any big decision on the future direction for your property portfolio, be that a single flat or a string of homes, read the small print. It could save you a lot of money and a lot of heartache long term.

To read the RLAs most recent research work into the Airbnb phenomenon click here.

… LandlordZONE.

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Just 3% of landlords have Rent Smart Wales licences

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Just 3% of Welsh landlords have been licensed under the controversial Rent Smart Wales scheme, with just nine weeks until the November 23rd deadline. The registration and licensing scheme was launched in November last year and requires all landlords and letting agents to register their properties and undergo a training course to obtain a licence. […]

The post Just 3% of landlords have Rent Smart Wales licences appeared first on RLA Campaigns and News Centre.

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Landlord consultation on tax changes

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Landlords are being asked for their opinion on the Government’s new digital tax plans. The HMRC has launched a simplified four question consultation asking landlords what they think about proposals for digital record keeping and quarterly tax reporting. Landlords are being asked whether plans to introduce a cash basis for those with simple tax affairs […]

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Suggestions after section 21 and house full of rubbish?

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I have a tenant that has continually been in arrears and despite me coming to arrangements to assist , the arrears have simply increased as a result of several holidays. I served a s21 and tomorrow they are instructed to move out. (a few days over 2 months notice provided) I have sent them 3… Read more

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Deposit Protection compulsory for sublet?

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I recently sublet from a tenant with the consent of the landlord and sublet contract. A £1300 deposit was paid direct to tenant on request of the landlord. Following moving out of the property a scrape on the wooden floor was noticed. The landlord has asked tenant to withhold entire deposit to pay for scrape…. Read more

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The market v the evidence

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To consider the property market as a whole or an umbrella term for its sectors and segments depends on the thinking and the nature of the property. Thinking about the property market as if a whole is pointless, except as regards whether to become involved. For the participant, it makes more sense to define the category of property, and its sectors and segments, all of which have their own identities.

Commercial property is governed by business tenancy law. In leases of commercial property, the standard basis for rent review is the (open) market rent. “Open’ is superfluous, business tenancy law has removed any practical distinction. For purpose of the review, the lease contain matters to be assumed and disregarded. Since the property is not physically available in the market to let with vacant possession, the lease will embody what is known as a ‘hypothetical lease’. The hypothetical lease does not have to replicate the lease, but often it would.

The object of the exercise is the market rent. Whether necessary to confine interpretation of the market rent to the locality and/or the market for the type of property depends upon the purpose of the interpretation, also whether the lease so provides. Generally, leases do not. Mostly, leases make no attempt to expressly state that the market for the property should be in any particular locality.

Attempts to impose limitations is to do with interpretation. In reality, market activity, buying, selling, developing, leasing, is a reflection of its participants: developers, investors (landlords), occupiers (tenants). At rent review, any presumption in favour of reality reflects fashion in interpretation. Whether any ambiguities in the construction of a lease, its terms and conditions, should be interpreted literally or based upon commercial common sense.

In the UK, the Labour party was last in government from 1997 to 2019, a period of 13 years and sufficient time to have left a veil of socialism across the board. Regardless of one’s personal politics, the traditional feudal relationship between landlord and tenant, master and servant, has given way to an assumption amongst tenants that the continuing of tenant business plans should take priority over landlord objectives. The balance of power having shifted away from the future into heritage has taken the market in a direction that is out of sync with reality.

Symptomatic of the change in direction is that surveyors mostly value back to front. It is not necessary to justify an opinion, but reasoning is expected. Reasons partly explains the process, in negotiation also a way of undermining a proposal or offer. Addicted to logic, instead of getting a feel for the market then casting around for evidence in support, surveyors cast around for evidence and apply it regardless. To have a feel for the market would require impartiality: the test of integrity is that the opinion would be the same if acting for the other party.

In negotiation, clients expect their advisers to be on the clients’ side but thanks to the judiciary the rules change as soon as the dispute procedure is involved. On referral, the RICS disclosure requirement for arbitrators and independent experts (“third parties”) covers the overt: the object of referral is to have the rent fixed by someone with no vested interest in the outcome. The need to root out partiality amongst surveyors acting as expert witnesses is essential. In common with third parties, the challenge for any expert witness is to approach the matter afresh, with an open mind. Whether an open mind is capable of emotionally detaching from  personal preference, let alone client instructions, when the expert witness could be sued for negligence or damages in tort, is a moot point. Truth will out, via a propensity for ridiculing any interpretation that conflicts with the expert’s evidence.

The weight that third parties place on expert witness evidence ought to depend more upon the credibility of the evidence than on the expert witness. Whether the thirty party is able to detach from some preconceived notion varies according to the personalities. Surveyors are prone to socialising with one another. For anyone not in the social circle, an eye for detail is required to point out phraseology in the expert witness report and whether the expert witness is descending into the arena to argue the client’s case. Since surveyors are often more at home with numbers than words, the subtly that numbers symbolise can be lost on the uninitiated.

The market in itself is not interested in evidence. the market is unbridled. The market does not care whether participants are successful or not. But whereas the wider consequences are important in reality, in business tenancy law at rent review the wider consequences for the parties are irrelevant. At rent review, the participants are the hypothetical willing landlord and hypothetical willing tenant. Terminology is defined in a neutral way but that does not stop surveyors from wanting a different gear.

Surveyors do not make the market: we simply interpret it for the benefit of our clients. Our interpretation depends upon not only where we are coming from, so to speak, but also where we want to get to. The influence surveyors have over the direction of the market for the type of property should not be underestimated. It can make or break the landlord’s investment and/or the tenant’s business. It is therefore beholden upon third parties, and expert witnesses, to ensure that the force of collective persuasion does not steer the market in a direction that differs from where the market would go if left to its own devices.
In my opinion, the market would like to take off. To be rid of all the businesses that should have fallen by the wayside long ago, to prune and allow new ideas to flourish. The delay is caused on one hand, by third parties wanting to stand in the way of change, on the other by expert witnesses intent upon preserving the status quo by capitalising on third party failing to rise to the challenge of not disagreeing with interpretation. The projection of landlord frustration is reflected in struggling tenants.  It is not the system that is at fault but how the game is being played.

Michael Lever
The Rent Review Specialist
Established 1975

… LandlordZONE.

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Clause 24 response from Tim Loughton MP

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This is the response I received from my local Conservative MP from East Worthing, who obviously is another one who doesn’t understand the Bill and its implications: Dear Mr… Thank you for contacting me about changes to the taxation of landlords. I am passionate about helping small businesses thrive. But this needs to be balanced… Read more

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