With the new tax regulations putting the squeeze on landlords many have rebalanced portfolios of investment properties towards more profitable multiple occupancy (HMO) formats. Nominally, the classification criteria of whether or not an investment property with tenants is an HMO is that it houses five or more independent renters who are not from one family but share some facilities such as a bathroom or kitchen. However, beyond that, the property also needed to be on at least three floors before landlords were required to have an HMO license for the property.
As of October 1st that has changed and the number of tenants only has become the defining criteria for whether investment properties count as an HMO. The change to the legal definition means an estimated 160,000 rental properties that did not previously require an HMO license now do. Landlords must be aware of the changes and make sure they obtain an HMO license immediately for any investment properties affected. Properties classified as HMOs must meet minimum standards on bedroom sizes, designed to stop overcrowding, as well as meet local council refuge collection guidelines.
HMO legislation is being extended to smaller homes in an attempt to extend the improvement in standards considered to have been successfully achieved by the original legislation covering larger properties. Overcrowding in rental properties targeted at migrant workers is considered both a general minimum acceptable living standards issue as well as with regards to health and safety, such as the increased fire hazard risk it leads to.
HMOs make for attractive investment properties as, while the involve more work, rental returns can be significantly higher. With mortgage interest repayments now only 50% tax deductible, which will taper to zero and replaced by a tax credit by 2020/21, landlords who wish to remain in the sector are being forced to adjust their business model to remain profitable. Assessing the viability of existing portfolios within the new landlord tax environment can lead to the sale of certain properties with HMO replacements often the chosen new direction.
Buy-to-let mortgage lenders are even widely scaling back products for standard single-family or occupant buy-to-let properties or require significant deposits of 40% and over. However, reflecting the new market trend, HMO buy-to-let products are now coming to market, sometimes at even more attractive rates than available for owner-occupier residential mortgages.
However, landlords who are unsure whether or not investment properties within their portfolio will be classified as HMOs as of this month should take steps to clarify their position or risk a hefty fine.