A house in multiple occupation can out-earn a standard buy-to-let by renting room by room, but the upside comes with more to manage. Before you buy, check whether the property needs a licence, whether an Article 4 direction blocks conversion in that area, and how HMO lenders will value the deal, since pricing works differently to an ordinary mortgage.
Budget for a deposit of around a quarter to a third of the price, and treat licensing and planning as questions to answer before you commit, not after you’ve bought.
A house in multiple occupation, or HMO, is a property let to several tenants who are not one household, with shared facilities such as a kitchen or bathroom. Because each room earns its own rent, a well-run HMO can produce a noticeably higher yield than a standard single let, which is why so many landlords are drawn to them.
If you are considering your first, here is what to understand before you start.
Why landlords choose HMOs
The main appeal is income.
Letting a house room by room usually brings in more total rent than letting the same property to one household, and spreading the rent across several tenants can soften the blow when one room falls vacant.
The trade-off is more work: several tenancies to manage, more wear and tear, and more compliance to stay on top of. HMOs reward landlords who treat them as a hands-on investment rather than a passive one.
Know what counts as an HMO
In broad terms, a property is an HMO when at least three tenants live there forming more than one household and they share facilities.
A large HMO, the type that always needs a licence, has five or more occupants from two or more households. Knowing which category a property falls into matters, because it drives both the licensing you will need and the kind of mortgage and valuation that will suit it.
Licensing and planning: check before you buy
This is where new HMO landlords most often come unstuck. There are three licensing regimes to be aware of, and they can overlap:
- Mandatory licensing applies across England to any HMO with five or more occupants from two or more households.
- Additional licensing is a scheme a council can bring in to cover smaller HMOs, usually three or four occupants, in a designated area.
- Selective licensing covers all privately rented homes in a designated area, not just HMOs.
Licensing is entirely local, so always check the council’s own pages for the specific property.
Separately, planning matters too: an Article 4 direction can remove the automatic right to convert a home into an HMO, meaning you would have to apply for planning permission with no guarantee of success. Many established HMO areas near universities sit under Article 4, so it is essential to check before assuming you can convert a property.
How the mortgage works
You will need a specialist HMO mortgage rather than an ordinary buy-to-let.
Lenders value HMOs either on a bricks-and-mortar basis, like an ordinary house, or on a commercial basis tied to the rental income, with the income-led approach more common on larger, well-run properties and often supporting a larger loan.
Expect to borrow up to around 70 to 75 per cent of the value, so budget for a deposit of roughly a quarter to a third of the price, and remember lenders stress-test the rent at a rate higher than the pay rate to be sure it still works if rates rise.
Personal name or limited company?
HMOs can be held in your own name or through a limited company or special purpose vehicle. Many investors use a company for tax reasons, but the right structure depends on your circumstances and is a question for a tax adviser or accountant. It is worth deciding early, as it affects which lenders and products are open to you.
A sensible first step
HMOs can be an excellent investment, but the licensing, planning and mortgage all need to line up for the specific property before you commit.
As a whole-of-market broker, Drake Mortgages helps first-time HMO landlords work out what a property can borrow, which lenders fit, and whether the licensing and planning position stacks up, and handles the case through to completion.
To talk through your first HMO, call 020 8301 7930
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