## Assessing Sui Generis HMOs for Investment
Related check: [Hmo Licence Evidence Pre Check](/tools/hmo-licence-evidence-pre-check).
Primary rule references for this decision are [Private renting: Houses in multiple occupation - GOV.UK](https://www.gov.uk/private-renting/houses-in-multiple-occupation) and [Mandatory HMO licensing order 2018](https://www.legislation.gov.uk/uksi/2018/221/contents/made).
Underwriting a sui generis House in Multiple Occupation (HMO) involves a detailed review to ensure compliance with regulations and financial viability. A property is generally considered an HMO if at least three tenants live there, forming more than one household, and they share toilet, bathroom, or kitchen facilities. Large HMOs typically require a licence from the local council.
### Licensing Requirements
Mandatory licensing in England applies to HMOs occupied by five or more people across two or more households, provided the HMO tests are met. Local housing authorities can also designate specific areas for additional HMO licensing under Section 56 of the Housing Act 2004, meaning properties not falling under mandatory schemes may still require a licence depending on local council policy. It is essential to check with the local council to determine specific licensing needs. Each HMO requires a separate licence, which usually lasts for a maximum of five years. Licence conditions often include requirements for an updated annual gas-safety certificate, installed and maintained smoke alarms, and electrical-appliance safety certificates when requested.
### Safety and Management Duties
Landlords have management duties for HMOs, including ensuring safety, services, and living accommodation standards are met. The Fire Safety Order applies to common areas within HMOs, such as communal corridors and stairways. Landlords must provide appropriate fire precaution facilities and equipment. Furthermore, councils must conduct a Housing Health and Safety Rating System (HHSRS) risk assessment on an HMO within five years of a licence application. Any identified unacceptable risks must be addressed by the landlord.
### Financial Viability and Underwriting Checks
When underwriting an HMO, assessing financial viability is as important as compliance. This includes reviewing potential rental income against operating costs and financing. A key aspect is understanding the potential Loan to Value (LTV) for financing. Most HMO lenders offer a maximum of 75% LTV, though some may offer up to 80% for smaller HMOs or applicants with strong profiles. Experience levels and property size can influence the available LTV.
Before entering into a non-consumer insurance contract, the insured has a duty to present the risk fairly, disclosing all material circumstances known or that ought to be known, or providing enough information for a prudent insurer to make further enquiries. The presentation must be clear, accessible, and substantially correct.
### Worked Example - Yield Calculation
To illustrate financial assessment, consider a property with the following figures:
* Purchase Price: £180,000
* Monthly Rent: £1,500
* Annual Rent: £18,000
* Management: 10% (£1,800)
* Maintenance: 5% (£900)
* Insurance: £600
* Void Allowance: 5% (£900)
* Other Annual Costs: £600
Using these inputs:
* Gross Yield: 10%
* Total Annual Operating Costs: £4,800
* Net Rent Before Borrowing Costs: £13,200
* Net Yield Before Borrowing Costs: 7.33%
This calculation, available via the [Gross Net Yield Calculator](https://bricksandyield.com/tools/gross-net-yield-calculator), helps gauge the property's potential return before factoring in mortgage payments, supporting the underwriting decision.