HMO: What is it and how to convert your property

Renting out a House in Multiple Occupation (HMO) can be a lucrative buy-to-let business, offering higher yields than a single-family home.

But is it a guaranteed cash cow?

With average annual rents of more than £28,000, climbing to £46,000 in the South East, according to property investment platform Lendlord, HMOs are a popular form of buy-to-let investment.

However, without the proper research, planning and adherence to licensing rules your HMO could wind up costing you more than you make.

Telegraph Money talks you through what you need to know before you convert your property into a House in Multiple Occupation:

• What is an HMO?
• Converting your property into an HMO
• Do I need planning permission?
• Getting an HMO licence
• Cost of converting an HMO
• Are HMOs a good investment?

What is an HMO?

It’s a property that’s let out to three or more tenants from two or more households. For example, you could have a couple sharing one room and a single person renting another to form two separate households.

Under the Housing Act 2004, the term HMO also covers historic conversions of properties into flats that have their own front door, but where they don’t comply with the minimum standards of the 1991 building regulations. And less than two thirds of the flats are owner-occupied.

Converting your property to an HMO

Here are four key considerations when converting your property into a HMO:

1. Understand your local market and the standard of the property expected, i.e. are you targeting students from the nearby university, or young professionals near transport links or business parks?
2. How much competition is there? If you’re in a market that’s saturated with HMO properties you may struggle to let all your rooms out or be forced to lower your rents.
3. Maximise the bedrooms you can rent out by extending up into the loft or converting a dining room.
4. Don’t assume you can convert your property without planning permission. Check with your local authority first.

Do I need planning permission to convert my property to a HMO?

Before you convert your property to a HMO you must check if you need planning permission for the change of use (as well as any building works).

The need for planning permission varies depending on the number of occupiers and your local authority’s specific planning requirements governing HMOs.

A trap that many landlords fall into is not realising that planning permission and HMO licensing are separate considerations and must be applied for separately. You may also need building regulations consents where applicable.

Here’s five things you need to know about the planning landscape for HMOs:

1. Converting a single-family home (C3 use class) into a small multi-let property (C4 use class, no more than 6 tenants) is usually allowed under Permitted Development Rights in England & Wales, so no planning permission is required.
2. However, if your local authority has what’s known as an Article 4 Direction Order in place for your area, that means Permitted Development Rights have been removed so you must apply for full planning permission even for a small HMO.
3. Landlords converting properties to HMOs let to 7 or more tenants fall into the sui generis use class and almost always require full planning permission. It is always best to check your local authority’s rules.
4. Your plans to extend, structurally alter or change the layout of the property may not be allowed under Permitted Development Rights – check with your local planning officer.
5. Depending on how you’ve altered the property – your conversion may need to be signed off by a building regulations inspector.

Neil Smith, head of surveying at Paragon Bank, said: “Councils introduce an Article 4 Direction Order to remove or restrict permitted development rights, to control certain types of conversions or alterations to homes taking place and consider any wider social implications. If it has been introduced because of concerns that too many homes have been converted into HMOs and they want to control numbers, getting planning permission for your conversion could be challenging.”

Getting an HMO licence

Not all HMO landlords need a licence to let out their properties. It depends on the number of occupiers they let to and the rules of their local authority.

Licences tend to be granted for five years but shorter terms are sometimes given to new landlords. You can expect a visit by the local authority at least once during the term of your licence to ensure you are complying with its requirements.

Here’s the three licensing schemes HMO landlords must be aware of:

Mandatory licensing

This is a nationwide requirement whereby landlords who let to five or more tenants, forming more than one household with shared facilities must have a licence to operate.

Selective licensing

This scheme is usually put in place by a local authority in areas with anti-social behaviour. Any landlord operating a single or multi-let property of any size must have a licence.

Additional licensing

Introduced by individual councils to capture smaller HMO landlords to force licensing requirements on them. It is often used to improve housing standards in areas where there are lots of HMOs.

Average cost of converting your property to an HMO

The cost of converting your property into an HMO can vary depending on its size, the condition of the property to begin with and the standard of finish you’re aiming to achieve.

Analysis from lender Octane Capital found that the full cost of converting a single room to a HMO would be on average £10,267 raising the cost of converting a four-bed family home to £41,067.

However, some landlords spend much more.

Robert Leatherland, HMO landlord and owner of Southsea Co-Living, spends more than £200,000 on his conversions.

“We never do the minimum amount of work on our HMO conversions,” said Mr Leatherland who buys Victorian properties and adds an extra storey to them. “I would never let out a property I wouldn’t live in myself and if you don’t aim for the top end of the market, where you can be the best, you’re lost somewhere in the middle or the bottom.”

As well as spending money on the way the property looks, he adds, there can also be costly adjustments needed to meet safety requirements and fire regulations and each council has its own set of specifications of what must be included in a HMO, such as the number of sinks.

Is converting your property to an HMO a good investment?

Yes, converting your property into a HMO can be a great investment decision if you’ve done your research into your local market before going ahead.

According to buy-to-let lender Paragon, the average yield from a HMO property was 8.46pc in February compared to a 6.09pc for flats and 6.05pc for a terraced house.

“If your business objective is cashflow, then a HMO is great because it does generally create more cashflow than a single-let property would,” said Mr Leatherland.

“But they are not as easy to sell once they’ve been converted as they are no longer a standard home, they are an investment purchase rather than simply a property purchase.

“Landlords are usually looking for a property they can buy at a cheaper price so they can add value to it themselves by improving and extending it. The idea is, once you’ve invested in the conversion you hold on to the HMO and let it out for the long term.”

Landlords are also less exposed to the risk of a completely empty property too. If you have six rooms to let and one is empty, the other five are still generating cash. If you rent out a single-family home and your tenants leave, there is no money coming in at all.

Mortgage rates, however, are around 1.5pc higher than for a standard buy-to-let loan and landlords are responsible for paying the council tax for their tenants. Utility and broadband bills are also taken care of by the landlord.

Mr Smith added: “For those who do it well, it’s a very lucrative, attractive investment but there’s a lot more management involved with a HMO. Landlords shouldn’t enter this market light-heartedly.”