HMOs are so popular (if not the most popular) with buy to let and portfolio landlords because they tend to attract the highest yields in property letting. Before starting your property venture though, it is important to know all the costs of a property investment deal and more specifically the rental operating costs of an HMO.
On average, 2% – 5% of the annual rental income is used to cover HMO maintenance, so it’s sensible to put away money for repairs. Maintenance costs cover any replacement/repair, from a burst pipe and blocked toilet to a replacement sofa and new cooker. In respect of the latter, you will be able to claim replacement items in your annual tax return, but you’ll still have to pay for them upfront.
In an HMO the landlord pays the heating, lighting and water charges. This is factored into the cost of the rent but you’ll have to pay the bill every month or quarterly when it appears in your inbox.
Another bill that landlords often overlook. You’ll also have to pay the council tax and, depending on where your property is, this can prove quite expensive. To get a council tax estimation on your HMO property, visit mycounciltax.org.uk.
You’ll need to insure the building as part of your mortgage conditions, but as a landlord, you can also take out other insurance to cover void periods, for instance. It might also be worth considering liability insurance. This means that if a tenant or their visitor is injured because of a property default then you will be covered should they decide to claim for injuries. To find out more about HMO insurance, read our guide to insuring your HMO property.
If you have five or more tenants in your HMO then you’ll need to apply for mandatory licensing. This varies between local authorities. For instance, in Sheffield, it’s £750, Manchester £985 and in the London borough of Barking & Dagenham, it’s as much as £1300.
Even if your HMO is smaller, ie three or more tenants, you could still be subject to selective licensing conditions. This type of licence tends to be less expensive (usually by around £200 but again, depending on the area).
As well as having a licence (if required), there are also certain certificates you must obtain to stay within the law. These are an Energy Performance Certificate (EPC) to show how energy efficient your HMO is, a Gas Safety Certificate and an Electrical (EICR) inspection. The EPC costs are around £60, but it lasts for a decade. A gas check must be done annually and costs £30. The EICR, which is only required for properties in England, costs around £150 and needs to be renewed every five years. Find out more about statutory certificates in our Landlord’s Checklist
Fire safety provision
Councils are extremely strict when it comes to fire safety, especially in larger HMOs. They’ll want you to fit a fire safety door and sprinkler system. You’ll also be required to have working fire alarms on every floor, fire blankets and extinguishers or other fire fighting equipment. Carbon monoxide detectors are standard.
The above are by no means the only expenses involved in owning an HMO; there is also tax to pay on your earnings and your mortgage interest. No doubt you will probably also have to furnish your flat before renting it out.
Management services can help you run your HMO smoothly with fewer troubles. However, you need to consider that a letting agent usually costs you around 10% – 14% of your rental income. At Sourced Franchise, we can help you manage your HMOs by providing you with comprehensive training, HMO specialists to help every step of the way and ongoing tenant support.
HMO management tips and advice
If the above sound a bit overwhelming, or you have no time to manage your HMOs, don’t worry because we are here for you! We have a team of experienced HMO landlords ready to help you with advice, tips and anything else you might need. We also have free training resources that will answer many of your questions. To find out how Sourced Franchise can help you generate an income from HMOs, download your copy of our Sourced Network prospectus.