Tenancy agreements and pros and cons of investing in HMOs
Find out about tenancy agreements, as well as the advantages and disadvantages of investing in HMOs
An Assured Shorthold Tenancy agreement (AST) can be used for both individuals and groups, and this is the most common tenancy agreement used for HMOs in England.
In Wales, you should use an occupation contract (which must contain the various fundamental and supplementary clauses as prescribed in regulations, suitably adapted), and in Scotland a private residential tenancy agreement.
Tenancy agreements differ between properties, but some essential elements apply to all tenancy agreements. The names of everyone involved, cost of rent, deposit amount, address of the property, tenancy start and end date, and landlord and tenant obligations must always be included.
And for HMOs where the rent includes most or all bills, you should clearly state exactly what these are.
For more information on what should be included in any HMO tenancy agreement, see our separate article on HMO tenancy agreements.
If your tenants don’t know each other, they should each have a separate tenancy agreement. This means they are only responsible for their own rent and for taking care of the property.
However, if your tenants all know each other well and are moving in and out at the same time – as tends to be the case with students – it may be wise to use a joint agreement. In this case, they agree to be ‘jointly and severally’ liable for the rent, so if one person moves out or doesn’t pay, the other tenants are obliged to make up that person’s share of the rent.
Despite the increased risks and legislative requirements of being an HMO landlord, HMOs can be a lucrative investment, with many landlords benefitting from two to three times more rental income than they would get from letting the same property to a single household.
Even taking the higher management costs into account, healthy profits are the overriding reason landlords invest in HMOs.
Read more about how to maximise profits in our separate guide to student lets and our ultimate guide to buy to let property investment.
In addition to rental yields being typically much higher than for standard single lets:
HMOs can be in high demand, as all-inclusive room rents offer an affordable option for the many tenants that are priced out of the traditional rental market
Collecting individual rents from multiple tenants can lead to improved cash flow – if one tenant leaves or fails to pay the rent, you still have an income from the other tenants, so the risks associated with void periods are greatly reduced
There can be tax advantages as there are generally more costs that you can offset
Government reforms over the last five years or so - such as shifting HMO licensing, bringing in minimum room sizes and banning administration fees - have been cited by landlords as reasons why they are considering exiting the HMO sector.
As we have seen, HMO requirements are more complicated and there are additional regulations to comply with because there are more safety aspects to consider when a group of people from separate households live together.
Failure to comply with the legal requirements aimed at HMO landlords can result in heavy fines.
Due to the fact that more people are living in the property, it will face more wear and tear, so regular repairs and maintenance will inevitably be required.
And because HMO tenants tend to move more frequently than those renting a whole property, there are higher administrative demands, such as issuing tenancy agreements, carrying out tenant referencing and right to rent checks, and taking check-in and check-out inventories.
Overall, managing an HMO property is undoubtedly more labour intensive and complex than overseeing a single buy to let.
In addition to having more extensive responsibilities as the landlord, you also need to be on hand to settle any issues that may arise - or pay for the property to be professionally managed by a letting agent.
So, some of the potential disadvantages of letting out an HMO property to bear in mind are:
Some areas have too many HMOs and rents are either falling or static
Higher set-up costs, particularly with regard to HMO-specific health and safety laws
Higher turnover of tenants
Sorting tenant disagreements and issues
Additional administration demands
Increased risk of damage and wear and tear
Higher running costs, including supplying and maintaining furniture and paying for cleaning and gardening
Increased need for property and tenant management, which can be time-consuming and expensive
Higher running costs
Not as lucrative as a single buy to let
Improved Cashflow
