Buy to let property has been in and out of the news in recent years thanks largely to the perceived financial rewards enjoyed by the owners of such property. If you own suitably adaptable let property, you might consider the possibility of maximising rental returns by turning it into an HMO.
What does HMO mean and what is the conversion likely to involve?
House in Multiple Occupation (HMO)
- a property let to at least three people who comprise more than one family or household; where
- essential facilities such as a kitchen or bathroom and toilet are shared; and
- if the property is let to more than five people forming more than one household, in a building of three storeys or more, it is classified as a large HMO.
In the case of a large HMO, a special licence is required from the local council, although in some parts of the country it is necessary to apply for a licence even if the HMO is smaller. It is illegal to let an HMO without the required licence and may attract a fine of unlimited amount.
Councils insist on HMDs being licensed principally to help maintain standard in the quality of accommodation offered and its suitability and safety for tenants.
Smoke alarms and carbon monoxide alarms need to be installed, an inspection by a Gas Safety registered engineer and the certificate that is issued needs to be submitted to the council each year and an electrical safety certificate must be produced whenever the council asks. Licences are granted only to “fit and proper” landlords, free of any criminal record, who has never been in breach of the law and regulations relating to landlords.
So, you have converted your let property into an HMO, received the necessary licence from the council and are ready for your first tenants to move in. But there is one very important final preparation that needs to be made before you may safely take on the full role of the landlord. That is the need for landlord insurance.
It is important that you arrange the appropriate form of insurance – a standard home building and contents policy issued to an owner occupier, for instance, simply will not do. Your insurer needs to know that the property is let to tenants and, more than that, needs to know that it is let as an HMO. Therefore, specialist insurance is required that is specifically designed for landlords of HMOs.
This landlord insurance typically gives you protection against the risk of loss or damage to the structure and fabric of the building and the contents you own within it. The total building sum insured needs to reflect the cost of completely rebuilding the property in the event of a total loss, whilst the contents insurance may be adjusted to reflect the value of your own possessions within the HMO. Some landlord insurance policies – but by no means all – extend cover against the risk of malicious damage caused by your tenants.
Landlord insurance typically offers compensation for loss of rental income if the accommodation becomes uninhabitable following a major insured incident – such as flooding, a fire or subsidence, for example.
As the landlord and property owner, you also owe a duty of care to ensure that no one is injured or has their property damaged whilst in or otherwise affected by your property. This includes your tenants, their visitors, other visitors, neighbours and even members of the general public.
Landlord liability claims might assume quite substantial proportions – especially where physical injury has been sustained – so this element of cover typically provides an indemnity of at least £1 million.