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Five reasons to consider including an HMO property in a portfolio

It’s hard to think of a time when landlords have faced such an uncertain playing field as today.

A raft of regulation and taxation changes have had a significant impact on bottom lines, whilst the market has slowed as we wait and see what the impact of Brexit will be.

Unsurprisingly then, landlords have been looking for alternative ways to increase yields as well as diversify their portfolio to minimise any potential risk.

For many, HMOs have been one such way.

The number of landlords who have gone down this route already speaks for itself: the BVA BDRC’s latest survey shows that one in five landlords now have an HMO property in their portfolio.

Knowing this, it’s highly likely that brokers will be facing an increase in enquiries from landlords considering diversifying into HMOs and wanting to know the considerations to factor in.

Higher yields

The well-publicised advantage of HMOs is that rental yields are often higher than for a typical rental property.

The same BVA BDRC research suggests the average yield for an HMO is one-fifth higher.

For example, a landlord taking in nearly £12,800 in rent each year for an HMO, compared to £10,750 for a standard property.

Before we get carried away, we should remember that costs are also likely to be higher than a standard rental property.

An HMO license can range considerably from under £100 to over £1,000 depending on the property location.

Work may be needed on the property to ensure that it is compliant with regulation.

This could involve ensuring bedrooms are a minimum size, providing the right number and location of bathrooms or even extending the kitchen worktop.

Day to day, the potential higher turnover of tenants and more intensive use also means higher costs in terms of maintenance.

It’s important to do your sums but if costs can be kept reasonably low, yields can still be good.

Rental voids have less impact

Letting each room individually, inevitably involves more work at the start due to vetting each individual tenant when they move in but careful investigation at the start will pay off when it comes to them moving out.

When a tenant moves out of a single let property, there’s a total loss of income but with a multi-let property, the remaining rooms remain tenanted therefore limiting total impact.

Less exposure to arrears

The same ‘eggs in multiple baskets’ logic applies to arrears. Having several sources of income – with tenants paying smaller monthly rents for a room within a property – a landlord is less exposed if a tenant falls behind on their rent.

In the current economic climate, with fears of a downturn post-Brexit and potential job losses being bandied around, this potential benefit might sit well with some landlords.

Tax advantages

One difference between HMOs and single-let properties is the potential to claim income tax relief on qualifying items.

This applies to the costs associated within the communal areas, which are treated as an expense of the rental business.

Normal rental losses are only rolled forward for offset against future rental properties.

However, capital allowances can be offset against non-property income to generate tax rebates, which could add up to a significant amount.

However it’s important not to advise on any tax related questions yourself, always point your clients towards a professional tax adviser.

There is a need for flexible, affordable housing

Keeping costs affordable for your target audience is particularly important as you want to try and attract long term tenants rather than a series of short-term lets.

Renting is popular with students, young professionals, mobile workers and single people so keep this mind.

The private rented sector as a whole has doubled since 2000, and now accounts for one fifth of all homes in Great Britain.

With the rising cost of living, particularly in cities, combined with population growth and a shortage of affordable housing, HMOs or “house shares” could help to fix the problems we face in the housing market.

HMOs offer a far cheaper alternative to renting an entire property by enabling tenants to split household bills, while allowing them the privacy of their own bedroom.

In this shifting market, brokers’ advice is likely to be valued even more by landlords. This area of the market requires brokers to stay one step ahead, always on the lookout for any regulatory changes and trends.

By Adrian Moloney

Source: Mortgage Introducer

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Objections To Turn Former Scarborough Care Home Into HMO

A proposal to turn a former care home in Scarborough into a House of Multiple Occupancy (HMO) has provoked reaction from local residents.

More than 70 people have objected to plans from Artz Ltd to convert Harewood House at 47 West Street into a property to house up to 30 people.

The objectors are concerned about the number of HMOs in the area and also about the increase in parking and traffic it could bring.

Fantasia Leisure Ltd, which would manage the HMO if it were to be granted permission, says in its supporting information that overseas workers would be housed in the building.

It adds:

“Fantasia currently is inundated with inquiries for working people from overseas looking for accommodation in Scarborough.”

The company added that it had recently been asked if it could find accommodation for 200 workers in the area.

A number of the objectors, in their letters to the council, bring up the case of the Breece, a former hotel in West Street that later became an HMO.

In 2014 a court ordered the closure of the Breece following more than 50 anti-social behavior complaints and allegations of stabbings and rape at the premises.

One objector wrote:

“The Breece was a sizeable HMO and subsequent amendments were made to the relevant section of the Local Plan to provide powers to restrict the size of HMOs and control their location to avoid ‘clustering’.

It was deemed appropriate that the maximum number [of occupants] should be 10. The proposed number of occupants for Harewood House greatly exceeds this number.

Furthermore, such a development would greatly increase the number of HMO buildings and occupants in this area. The proposed site is close to three existing HMOs, the largest of which has made an application to significantly increase its numbers.”

Scarborough Civic Society has also objected to the plans, saying that, if granted, the number of tenants in HMOs in the area would double. It adds that it would also detract from the character of the Conservation Area.

The Harewood House care home closed in 2017 and despite two auctions being held no buyer has yet been found to take over the property.

By Carl Gavaghan

Source: Yorkshire Coast Radio

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Huge number of HMOs have no licence and are illegal, says new research

There is a non-compliance rate of 75% in unlicensed HMOs in London.

Research conducted by the private consultancy London Property Licensing for trade body safeagent – formerly NALS – has found over 130,000 unlicensed properties which should be licensed under mandatory, selective or licensing schemes.

The research, carried out through Freedom of Information requests, found there are over 310,000 private rented properties in London that require licensing.

However, non-compliance in the capital is rife.

Licence applications have been submitted for only 25% of the 138,500 private rented properties that require licensing.

Without a licence application submitted, these properties are being operated illegally and landlords and/or agents can face prosecution or a civil penalty of up to £30,000.

The landlord can also be ordered to repay up to 12 months rent.

Since October 2018, the mandatory HMO licensing scheme has applied to most HMOs shared by five or more people whereas it was previously restricted to properties three or more storeys in height.

In some boroughs, additional licensing schemes have extended licensing to properties rented to just three or four unrelated people.

The picture for selective licensing is markedly different, according to the research.

These schemes extend licensing to all private rented properties including single family lets within a certain geographical area.

Licence applications have been submitted for 85% of the 173,000 private rented properties that require licensing under selective licensing schemes in London– a non-compliance rate of 15%.

Added to the confusion over licensable properties, many London boroughs are struggling to process over 24,000 licence applications.

Currently, about 40% of boroughs still rely on paper applications.

Safeagent is calling for a simpler, more streamlined licensing process.

Safeagent CEO Isobel Thomson said: “The results of the survey are concerning.

“Consumers are not being well served and indeed many are being placed at risk through this mish-mash of licensing schemes.

“Right now, the system isn’t fit for purpose and councils are drowning in paperwork.

“Landlords needing property licences are either deliberately evading the schemes or are in the dark concerning their legal responsibilities, and tenants are being placed at risk.

“If the compliance rate for HMO licensing schemes is only 25%, how can these schemes be effective?

“Isn’t it time we went back to the drawing board to come up with a simple, streamlined system that works for all?”

By ROSALIND RENSHAW

Source: Property Industry Eye

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Agent is fined £80,000 over HMO failures discovered after blaze in attic

A letting agent has been fined £80,000 for HMO failures after a fire at one of the properties.

Orange Living, trading as Loc8me, had failed to license four HMOs, an investigation by council officials in Leicestershire revealed.

The investigation by Charnwood Borough Council was triggered by a fire in the attic of one of the homes managed by Loc8me in Loughborough.

All four properties were shared and had three storeys.

At Leicester Magistrates Court, the firm admitted four offences and was fined £20,000 for each. It was also ordered to pay costs of £3,690.

The attic blaze was attended by firefighters who found that the smoke detector had batteries missing, and that there were insufficient fire doors.

One of the occupants said they had emailed Loc8me’s maintenance team twice before the fire with concerns, but no one came.

There were no phone numbers for Loc8me displayed in the property, with tenants having to rely on email or a WhatsApp group.

Applications for HMO licences had been received by the local council, but had information missing, and so the properties went unlicensed.

Raffaele Russo, one of the directors of Orange Living Ltd, was interviewed by council officers and he confirmed that none of the four properties had a licence.

He stated that the lack of HMO licensing was a clerical error.

Russo said the fire alarms had been tested on a number of occasions.

With regard to failure to provide name, address and telephone number in a prominent position in the HMO, Russo did not know whether emergency contact details were displayed in the property. He said that tenants used a WhatsApp group.

During the court hearing, Russo accepted that there should have been mains-connected smoke alarms on an interconnected circuit and fire doors where needed.

After the hearing, Cllr Margaret Smidowicz, the council’s lead member for licensing, said it was a significant sentence and that she was pleased the courts had taken the matter seriously.

She said: “Licensing is there to ensure living and safety standards are met, and we will not hesitate to take action and use the full force of the law to make sure those standards are being met.”

By ROSALIND RENSHAW

Source: Property Industry Eye

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Landlord of dangerous HMO where foreign tenants spoke little English hit with huge fine

A landlord has been found guilty and fined £40,000 for letting out a dangerous and unlicensed House in Multiple Occupation.

It is the second largest fine levied against a landlord obtained by City of Lincoln Council.

Julie Churchill’s property was deemed dangerous by the magistrates for failing to comply with a number of safety breaches under the Housing Act 2004.

It had no fire doors to the bedrooms, ground floor lounge or kitchen, no working fire alarms on the ground floor, and one of the bedroom doors had a large gap to the top which would allow smoke to pass in the event of a fire.

Three of the bedroom doors could be locked by a padlock which if in use would not allow for a quick exit.

The court heard that if a fire had erupted in this building, these inadequate fire warning systems and lack of fire containment measures would have put the tenants at extreme risk.

The stairs were painted gloss black and had no slip resistance in the event of a tenant falling, and the kitchen did not have adequatefacilities for the seven tenants living in the property. One of the occupied bedrooms was below the legal minimum size for an adult.

It was heard in court that the repair of these defects would have cost Churchill as little as £6,000.

When the four-bedroom property was inspected by police and housing officers under a magistrates’ court warrant in January, the occupants were found to be seven unrelated eastern European and sub-Saharan immigrants in four bedrooms.

The tenants spoke little English and were unaware of their rights, receiving no tenancy agreement, rent book or rent receipt during their tenancy. Only two of the seven tenants knew what the landlord’s name was.

It was discovered that Churchill was taking up to £1,480 per month in rent, which at that rate would give her an income of approximately £35,520 over the two years she had owned the property.

Cllr Donald Nannestad, portfolio holder for quality housing at City of Lincoln Council, said: “We’re extremely pleased to bring another case to justice as part of our ongoing battle to crack down on rogue landlords.”

By ROSALIND RENSHAW

Source: Property Industry Eye

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Tenants in flat-shares lose their living rooms as landlords make the most of space

Tenants in shared houses are facing the end of the sitting room for Generation Rent, as landlords increasingly convert every possible space into bedrooms.

According to The Times, analysis of room rentals on house and flat sharing portals found that just one third of properties have communal space.

In London, only one-tenth of flat-shares have communal space such as a lounge.

The Times says that even upmarket properties in exclusive postcodes are being turned into bedsits, with landlords turning reception rooms into bedrooms.

The Times also says that some conversions result in tiny bedrooms, and that some conversions ignore Building Regulations and are potentially unsafe.

It also says that illegal bedsits are being advertised with impunity online, including on one property website that has received taxpayer funding to help it grow.

The Times also says that some bedsits are in HMO properties which should be licensed, but are not, pointing out that licensing is mandatory for rental properties with five or more unrelated sharers.

The paper analysed 100 rooms offered in five-bedroom properties on the most popular house-share website and found that only 12% were registered as approved HMOs.

Susie Crolla, of the Guild of Letting & Management, described the figures as “shocking but not that surprising”.

The Times says that the biggest website, Spareroom, does not routinely check whether its rooms are legally compliant or are in a property with an HMO licence.

However Spareroom told the paper that checking every property is not straightforward because there is no central database and each council holds the information differently.

The Times investigation also highlights Spotahome, whose chief operating officer is a founder of Uber.

The Times says: “The website does not allow prospective tenants to view rooms, instead posting pictures and videos online. Nor does it check whether homes have a licence.

“In one case, it was listing a 49 sq m, two-bed flat that had been converted into a five-bed. Every bedroom was smaller than the minimum allowed. One was 4.92 sq m, little bigger than a double bed. The illegal conversion had been visited and ‘approved’ by a Spotahome checker.

“In 2015, the taxpayer-backed British Business Bank invested £17.5m in a venture capital fund called Passion Capital, which used part of the money to invest in Spotahome.com.”

The Times also quotes an un-named traditional letting agent who said he had reported half a dozen unlicensed HMOs to several councils six months ago but had heard nothing back.

He said: “These homes are not difficult to spot, they are brazenly advertised online. The failure of councils to enforce the rules is allowing these landlords to get away with it and is making the job of diligent agents much harder.”

By ROSALIND RENSHAW

Source: Property Industry Eye