Renting out a house as a multiple-occupancy let can be very lucrative, allowing landlords to rent out rooms on an individual basis rather than via one tenancy. However, government plans to crack down on the sector are about to make this type of investment less attractive than it once was.
The Department for Communities and Local Government published a consultation paper on houses of multiple occupancy (HMOs) last October, setting out its plans to "raise the standards". The rules are expected to come into effect next spring, later than expected (probably because of June's surprise general election). But despite the fact that thousands of properties could be affected by the government's proposals, as many as 85% of landlords are still unfamiliar with the proposed changes, according to a survey by Simple Landlords Insurance.
One of the main aims of the legislation is to widen the definition of properties that require a licence to be legally let. At the moment, a property is classed as being a HMO if three or more people from more than one household live there, and share toilet, bathroom or kitchen facilities. Currently, only houses that are classed as "large HMOs" properties rented to five or more people (from more than one household) and set over three or more storeys, need to have a licence. However, the new legislation would mean that all large HMOs regardless of the number of storeys would require a licence. The government also plans to extend mandatory licensing to flats above and below business premises. Currently around 60,000 HMOs across the UK require a licence, but the government reckons that a further 174,000 properties will need a licence if the rules come in.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Although the cost of a licence will vary between local authorities, a five-year licence typically costs about £500. Landlords may also be subject to new, enhanced "fit and proper" tests before they can be granted a licence, which, if introduced, would probably require them to submit a Disclosure and Barring Service (DBS) check, at a cost of £25. Note that if your HMO should be licensed, but isn't, you can be fined and ordered to repay up to 12 months' rent.
The government also plans to impose a new minimum room size of 6.52 square metres for a single person, in line with the current standard for overcrowding. For couples, the minimum is likely to be 10.23 square metres. Importantly, this new minimum may affect the number of rooms in a home that can be legally let. For example, if a "box room" in a four-bedroom student house falls below the minimum room size, the property would be considered a three-bedroom house. Landlords letting a room smaller than the prescribed dimensions would be liable for an unlimited fine or a civil penalty of up to £30,000. Finally, owners of licensed HMOs will need to provide "adequate" waste-disposal facilities.
Once the rules are confirmed, landlords should be careful to budget for any added expense they bring. The changes also come at a time when many landlords are already under increasing financial pressure, with lenders now required to take a more stringent approach to buy-to-let mortgage applications from those who own four or more mortgaged properties. That's on top of the recently introduced 3% stamp-duty surcharge on second homes, and the scaling back of mortgage interest tax relief. If you didn't already have the message, buy-to-let looks like an increasingly risky bet as an investment.
Yours for £25m: a 30ft hole
Emma Lunn is a multi-award-winning journalist who specialises in personal finance and consumer issues. With more than 18 years’ experience in personal finance, Emma has covered topics including mortgages, first-time buyers, leasehold, banking, debt, budgeting, broadband, energy, pensions and investments. Emma’s one of the most prolific freelance personal finance journalists with a back catalogue of work in newspapers such as The Guardian, The Independent, The Daily Telegraph, the Mail on Sunday and the Mirror. As a freelancer she has also completed various in-house contracts at The Guardian, The Independent, Mortgage Solutions, Orange and Moneywise.
She also writes regularly for specialist magazines and websites such as Property Hub, Mortgage Strategy and YourMoney.com. She’s particularly proud of her work writing about the leasehold sector and a Guardian front-page story about a dodgy landlord. She has a real passion for helping people learn about money – especially when many people are struggling to get by in today’s challenging economic climate – and prides herself on simplifying complex subjects.
Act now: First Direct’s £175 switching bonus ending soon
First Direct has launched a £12,500 prize draw on top of its £175 cash bonus - but they both finish soon, so you’ll need to be quick
By Vaishali Varu Published
Credit card providers slash 0% balance transfer deals
Customers face a double whammy of rising interest rates and shorter 0% balance transfer periods. We look at what’s going on in the credit card market and why you’ll need to act fast to get the top 0% balance transfer deal
By Ruth Emery Published