Is Investing In HMO Property Right For You?



Houses in multiple occupation (HMOs) have long been a popular mode of living, especially for people with less disposable income or who are saving diligently. The lower rent per bedroom makes HMOs especially popular among students and young professionals saving for their first home. 

Similarly, HMOs have long been an attractive investment route for many, promising higher and more secure rental income. However, with new legislation around HMOs making it harder to keep your property up to code, is investing in HMO property still something worth considering? 

In today’s blog post, we’ll take a careful look at the standards you’ll need to meet to get an HMO license and what to expect from your HMO mortgage application process. This way, you can weigh the pros and cons of this property investment route and make decisions accordingly.

What constitutes an HMO in Scotland?

Before we dive into Scottish HMO licenses, we should note that HMO legislation varies depending on your local authorities. That’s why you need to do your research into what counts as an HMO property and what standards you as the property’s owner have to meet.

In Scotland, an HMO property is classified as a flat or house where more than two qualifying persons from more than two separate households live together. They should also be sharing facilities like bathrooms and a kitchen and the HMO property should be their main residence. It’s also worth noting that owner-occupiers don’t count as “qualifying persons”.

Why invest in HMO property

When it comes to property investment, HMO flats and houses offer some unique advantages. First of all, your rental income is usually higher if you can let your property as an HMO flat as opposed to if you were to have a single family as tenants. This is because you can charge a higher rent per bedroom when renting to multiple individuals. Managing a small number of HMO properties can also be easier than caring for a larger number of smaller flats.

What’s more, receiving your rental income from multiple tenants for a single property means your rental income is somewhat more secure. Even if one of the tenants in your buy-to-let property finds themself unable to pay rent one month, the people they live with will still pay rent, making a smaller dent to your monthly income than if your tenant was a single occupier.

What do you need to qualify for an HMO license in Scotland?

There are many advantages to owning and renting out HMO properties, but getting there isn’t easy. In Scotland, as in other parts of the UK, there is strict legislation around granting HMO licenses to protect the rights of the tenants who live in them.

The rooms in your property have to be large enough to fulfil their purpose. The Scottish Government’s guidelines dictate that the minimum size for a single bedroom is 6.5 sq. metres and 10.5 sq. metres for a double room.

Additionally, you’ll need to ensure all gas and electrical appliances are safe, that your property has adequate fire alarms and self-closing fire doors and that you carry out a risk assessment of the property to be reviewed by local or fire authorities. 

In order to grant you an HMO license, your local authorities will also have to make sure you and any property managers you work with are “fit and proper persons” like they do with all registered landlords. This will include a check to see if you have any criminal convictions to your name.

All in all, making sure your property is up to code for an HMO license can be a complex process. You can find out more about qualifying for an HMO license in Scotland in this guide compiled by the Scottish Government. Please note that operating an HMO property without a proper license is a criminal offence punishable up to £50,000.

Applying for HMO mortgages

Another common difficulty around investing in HMO flats and houses is finding appropriate financing for purchasing the appropriate property. This is because lenders tend to see HMOs as riskier than other types of buy-to-let properties.

Because of this, prospective HMO landlords may find their best route is to go with a specialist lender. A highly experienced whole-of-market mortgage broker will be your best friend in this scenario, finding you the best deals among private banks and niche lenders. A larger deposit can also help sweeten the deal for potential lenders.

When applying for an HMO mortgage, potential lenders also like seeing a pre-existing HMO license for the property, meaning that purchasing a property that already holds this license is easier than converting a property to meet HMO standards. The former option also requires a good understanding of local planning legislation.

Some lenders will also want to see records for six months to two years’ worth of property letting experience from applicants. This can make investing in HMO property difficult for people without an existing property portfolio. Finally, in general, lenders like granting mortgages for smaller HMO properties, with most capping out at six bedrooms. 

Should you invest in HMO property?

Whether investing in HMO property is right for you depends on a large number of things. These include how big a deposit you’re able to put down, how much experience you have of letting out flats and whether you’re in an area where HMO properties are in high demand, with good local amenities and transport links.

As HMO investment can get complicated very quickly, we advise that you work with a property investment manager who is able to offer you support tailored to fit your exact needs every step of the way. This includes financial advice, sourcing you the best income-producing properties and managing your property, from finding and managing tenants to carrying out maintenance. 

Luckily, this is exactly what we do here at Cox & Co. If you’d like to learn more about our property investment service and what it could do for you, get in touch with us.

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