The big attraction of converting a property into an HMO (House of Multiple Occupation) is that the yield can be excellent. Whereas you might let out an average three-bed home for £600 a month in a mid-sized English city, you might achieve more than £2,000 a month after HMO conversion.
Further attractions include the challenge of converting interesting old buildings – police stations, fire stations, churches, factories, theatres, prisons – into HMOs, giving them a new life and exercising your creative talents as a property developer.
From an operational and cashflow point of view, HMOs are attractive since you’re unlikely to suffer complete void periods – there will still be income from tenants, even if one or two people move out. (Part of the definition of an HMO is that the tenants are unrelated). Plus, the UK government offers incentives including a 5 per cent VAT reduction on building costs involved in the conversion.
Once you’ve completed the conversion and the tenants are in place, the longer-term benefits include a potential uplift in valuation, above residential or buy-to-let rates, since HMOs can be valued as commercial property.
There are quite a few catches. Number one is the initial cost of the conversion, which will likely be higher than for single lets, due to the many regulations you’ll have to comply with.
Then there’s the risk of not filling the rooms, if you pick a property in the wrong area, or there’s too much competition (unlikely in the current environment, at least in major cities). Finding new tenants is likely to be a regular exercise, so many HMO owners delegate this work to agencies, for a fee.
HMOs have to be licensed by the local authority, so you’ll need to find out exactly what they require. Technically, an HMO conversion means changing the legal status of a property to C4. But the specific requirements can vary according to which council district you’re in, so it’s best to hire an architect or planning expert to advise you, preferably someone with a history of HMO conversions in your area.
In fact, you’re well advised to assemble a team of experts before you start an HMO conversion. These may include a materials consultant, architect, structural engineer, party wall surveyor, acoustics consultant, building control/planning consultant and a quantity surveyor. Once you’ve started work, you’ll need building contractors, plumbers, electricians and decorators.
It’s quite an army!
You’ll need to have a fire assessment carried out, to ensure that fire alarms, smoke detectors and fire doors are in place and that there are fire-retardant materials in furniture. If the assessment is OK, you’ll get a fire certificate which must be renewed every five years. Your gas safety certificate has to be renewed annually.
The overall HMO license also lasts five years, as does the electrical installation certificate, whereas the Energy Performance Certificate is a one-off, along with the Building Regulation Certificate, awarded at the end of construction.
Depending on where the building is located, you may need an Article 4 exemption. This regulation means that an HMO conversion may need planning permission. It’s generally applied to HMOs with more than six occupants.
HMO conversions expert Ryan Windsor of Windsor & Patania Architects has this advice:
“Always try to get the exact specifications from the council. Don’t hesitate to ask them for the exact specs of the fire alarms, smoke alarms etc. A few of our clients have been unfortunate where the council requires certain specs and the HMO used other specs which led to the license being declined. Finding this out can be hard to do but if you try you may be surprised at how easily they give out information.”
The local authority will also carry out a Housing and Health and Safety Rating System (HHSRS) risk assessment every five years, to see if there are any problems with damp, ventilation, drainage, hazardous materials or infestation. You can read the HHSRS manual to see if your property has any of the 29 hazards that it lists.
The size of the rooms you let out is regulated: for anyone over the age of 10, they have to be at least 6.51 square metres, and 4.64 square metres for each person under 10. There are further rules on the maximum number of people who can use a property, relative to its size.
Besides complying with all the regulations, there’s a host of things you can do to make an HMO more attractive to prospective tenants.
The shared areas – kitchens, bathrooms and living rooms – should be furnished to a good standard, clean and newly decorated. Also bear in mind that they’ll get a lot of use, so buy robust white goods and furniture, and use materials that will withstand plenty of wear.
Draw up interior plans to maximise the number of bedrooms, while maintaining sufficient shared space for your tenants. This may involve some structural work, with consequent expense, but if an extra bedroom brings in £6,000 a year, it won’t take long to pay for itself.
Fit locks to all bedrooms and add emergency lighting. Keep pest control treatment records.
Seasoned HMO conversion experts advise having a plan B, in case something goes wrong. Planning permission can take months, or not be granted for an unforeseen reason. The costs can become too high, making the project unviable. Plan B could involve shifting to a single let, where you look for a tenant to take over the whole property, or selling it altogether. When you’re considering places to buy for HMO conversion, prioritise those which could work under other scenarios, as an insurance policy.
If you have a regular turnover of tenants in one or more HMOs, there’s a strong chance that some of them will have physical or mental health challenges. They may need adaptations to a building to make it more accessible, or support in other ways.