With growing numbers of people seeking this type of accommodation, for landlords looking to make an investment while generating an income, buying a property to turn into a house in multiple occupation (HMO) could be a lucrative move. But although rental yields can be higher and there is the potential for money to be made, managing a HMO is not as easy as it seems.
What constitutes a HMO?
By definition, a HMO is a property that holds a number of residents that do not form a single household.
Generally, in order to be a HMO, the property also needs to be occupied by three or more people who share basic amenities and each pay rent separately.
Larger HMOs with more than five tenants or with three or more storeys will need a licence.
The rules surrounding HMOs often cause confusion, this is because the terms vary between local authorities. The rules applicable in one area may not be the same in another, which is why it is worth landlords contacting the local authority officer in their area to find out which rules apply to them before taking on any tenants.
All HMO properties also need to abide by the HMO Management Regulations which declare that it is a criminal offence not to have an electrical certificate or a notice somewhere in the property to say who the manager is.
HMO - The legal considerations
For many, HMOs could be an attractive option when investing in property because of the potential of higher yields. With so many legal factors to consider, HMOs often require even more hard work and dedication than typical rental properties do. There are a number of challenges involved in managing this type of property, and the growth in licensing and regulations over recent years often leaves new landlords in particular in a state of confusion. And if property investors get it wrong, the consequences can be severe and a lot of money could be lost.
With the help of industry expert, Tessa Shepperson, of Landlord Law, we outline some of the major legal pitfalls that many HMO landlords could face on their property investment journey.
Contact the local authority
It can often pay to make yourself known to the people at your local authority. By contacting them as early as possible into your journey as a landlord, you can find out what the rules and regulations are in your area.
Landlords often require licenses for HMO properties, but terms vary depending on where the property is, the type of property and the number of residents, so it’s worth finding out exactly which rules apply to you and which don’t.
Tessa Shepperson warns: “Do not ignore letters and notices from the Local Authority – they are not going to go away.”
Health and safety regulations
In order to meet your local authority’s rules and regulations, you’ll need to comply with certain standards to protect the health and safety of your tenants.
First of all, the property will need to be inspected by an installer registered by the Gas Safe Register before any tenants move into the property.
Electrical appliances will need to be tested every five years and given a certificate to prove that they are safe.
You will also need to have a notice in a prominent position in the building with your name, address, and telephone number for tenants to contact you. While this may sound extreme, and your tenants may have your details saved on their phones already, by failing to meet this requirement you may be at risk of a fine up to £5,000.
Conduct regular inspections
In regular non-HMO tenancies, landlords must notify their tenants before they visit or conduct inspections, because even though the property belongs to them, they will be entering someone else’s home. However, in the case of HMOs, landlords don’t need to request permission, and they are instead encouraged to visit the property regularly to conduct various health and safety checks and ensure that everything is in working order.
Many landlords who fail to do this risk getting in serious trouble if something goes wrong.
If there was a fire in the property, and the landlord hadn’t checked the fire alarm themselves for a few weeks, then they could face serious consequences, particularly if anyone was hurt or killed.
Tessa Shepperson recommends that landlords ensure they can provide evidence of interactions with tenants. She says: “Confirm in writing all requests made to tenants (for example to keep access ways clear) – otherwise how will you be able to prove that you have made the request, for example if you are prosecuted?”
Draw up a contract
Contracts are vital when renting out property, yet so many landlords fail to issue them to their tenants. If you’re a member of a landlord association you can download tenancy agreements from their websites. All agreements need to be assured shorthold tenancies and while tenants can request a short term, the landlord must offer a minimum of six months fixed term. If the tenant wants to leave they must give the landlord one month’s notice but if the landlord wants the tenant to leave then they must give two months’ notice or serve a Section 21 notice.
By failing to issue tenants with contracts, landlords are setting themselves up for problems in the future. A tenancy agreement can set out certain rules that needed to be abided by, such as the period of the tenancy, details of how the rent is to be paid and any information regarding maintenance. But even if there is no written agreement, the tenant will still be covered under a verbal agreement and will still be protected against unlawful eviction.
Don’t believe everything you read on the internet
As property expert, David Smith explains, it’s important not to believe everything that you read on the internet. So many novice landlords search online for answers to their queries and reassurance that the way they are running their HMO is right and won’t land them in legal trouble. But the response they receive from other – often well-meaning – landlords isn’t always factually correct.
You’re more likely to get better answers to your questions if you contact official authorities or those with knowledge of property law, rather than posting on forums and asking the general public.
Protect your tenants’ deposits
It’s important to protect tenants’ deposits under the Tenancy Deposit Scheme so that should any problems arise when the tenant is leaving, a third party will be able to get involved to iron out any discrepancies. It’s worth noting that the deposit needs to be secured within 30 days of receiving it in order for both the landlord and tenant to be protected.
By failing to secure the deposit in this scheme, you’ll also be unable to issue a Section 21 notice should you want to evict your tenant during the tenancy.
Although HMOs can be a great way of reaping the rewards of potentially higher rental yields, they can also be considered high risk and if you’re unsure about any of the legislation, it can really help to do some research and seek advice from your local authority before you invest. There are so many things to think about when investing in property, and not only should landlords be fully aware of the potential legal pitfalls, but they should also ensure that they have strong enough finances.
Aldermore is a British Bank that can provide HMO mortgages to new and existing landlords looking to harness the power of buy-to-let. By adopting an in-depth underwriting process and assessing cases on an individual basis, Aldermore can offer a fantastic service to landlords looking to fund their property ambitions. For more information, please don’t hesitate to get in touch.
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