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HMO or HM-No?

This month has been all about HMOs here at Romans, as specialists in investment properties we are delighted to of agreed sales on 3 such properties. Whilst the prospect of purchasing and/or converting a property into a HMO is extremely appealing to landlords there are various complexities that need to be taken into consideration before proceeding with any purchase.

A house in multiple occupation – commonly known as an HMO – is a property which is rented by three or more tenants who aren’t part of the same household (i.e. a family). Many landlords let HMOs as they consider them a more efficient way to run a rental portfolio (sometimes due to being able to collect rent from a higher number of tenants, although location, property type and value are also drivers in the decision).

Some tenants may elect to live in a HMO for financial purposes i.e. cheaper monthly rental payments, others for social reasons, perhaps preferring to live with more people. House-shares are particularly common among younger tenants and students and as more people rent for longer HMOs continue to be a viable option for some landlords.

If you’re considering converting a property into an HMO, there are many steps that you’ll need to take; from meeting legal requirements to making the property habitable for more people.

Before you start –

Most HMOs require a HMO licence. If your property’s let to five or more tenants from more than one household, is at least three storeys high and the tenants share toilet, bathroom or kitchen facilities, then you’ll need a licence.

If some, but not all, of these criteria apply, then you may still need a licence and it’s wise to check with your local authority. HMO licences come at a cost and are valid for five years at a time, you’ll also require a separate licence for each HMO you’re running.

To comply, you’ll need to make sure that a valid gas safety certificate is sent to the council each year, while smoke alarms need to be installed and safety certificates for electrical appliances must be available on request. Different authorities may add additional criteria, so there may be other things you need to consider ensuring you comply.

Depending on how much work needs to be done to the property to convert it, you may also need planning permission to be able to make certain changes. When carrying out these sorts of activities, it’s always wise to make sure you keep a record of all correspondence, applications and approvals to ensure you’re covered in the future.

The practicalities of converting a property –

Firstly, you’ll need to consider what your tenants are going to need and how much space they’re going to require. It’s also important to think about what level of furniture and appliances you’ll be providing.

Within five years of converting to an HMO, all rental properties will be visited by the council, who’ll carry out a Housing Health and Safety Rating System risk assessment. If any unacceptable risks are found during the assessment, they must be addressed. You need to make sure your HMO is habitable and provides enough space for tenants to live comfortably.

It’s likely you’ll be converting the use of some rooms. For example, spare rooms may be converted to additional bathrooms and reception rooms to additional bedrooms.

You may also need to move or construct walls to alter room sizes – these are all aspects you’ll need to plan carefully before undertaking. It’s of course advisable to use a professional when working on the more significant parts of the conversion.

Some landlords convert garages to create additional space. These often require planning permission, so you’ll need to check with your local authority.

In many cases, traditional Victorian terraced houses could be ideal for HMO conversion, due to their spaciousness and the size of the reception rooms. For example, in a three-bedroom terraced house a landlord could convert one reception room and the loft into bedrooms to turn it into a five-bedroom HMO.

Converting reception rooms is often essential, but not always the right decision. In the perfect scenario, the property will have two reception rooms – one of which can be converted, leaving the other room to remain as a dining or living space. Tenants can sometimes be put off properties with no living room or reception space, so it’s something you’ll need to consider carefully.

Depending on the property, converting it into an HMO is going to be expensive and take some time. You need to make sure you budget properly and don’t expect instant financial returns.

What else do you need to consider?

One of the key differences between an HMO and a standard rental property is that you could encounter a higher turnover of tenants. Therefore, it’s advisable to put aside at least two months’ worth of rent each year to cover potential void periods.

Another crucial factor to remember is that, due to the nature of having more tenants, the property’s likely to come under more stress over the course of a tenancy. Bathrooms, kitchens, floors and doors will all take a lot more wear, so you need to make sure you’re ready for this and are prepared to respond to all reasonable repair requests with speed and efficiency – as with any other tenancy. The standard property management fee for HMOs is usually around 10% so this is also worth factoring in when calculating any return on investment. Managing a HMO independently is particularly ill-advised if you are a relatively inexperienced landlord.

It’s wise to prepare the property fully before letting it, taking no shortcuts and making sure you have enough money put aside to cover maintenance costs during and after the tenancy.

Converting a rental property to an HMO can be an effective investment, but it does require more work and upkeep. Therefore, before jumping straight in, you’ll need to do your research, take your time and carefully compare the additional work and expense against the additional profit you’re likely to make.

Useful links:

The links below explain the Government’s HMO requirements and how you can apply for a licence for your property: