As an investor, how do you make sure your investment has the potential to give you a good return?
Whether you’re buying stocks or houses, you likely do your due diligence.
An example in stock investments could be looking at the financial health of a company, growth rate of the industry, P/E ratio and other things.
If you’re looking to buy and rent property, it’s important you can complete the project and rent it out.
What good is an investment property that can’t be rented?
HMOs (house of multiple occupation) are preferred by investors due to higher cash flow than traditional Buy-to-Lets (BTL).
But this advantage comes at a cost. HMO regulations and formalities are a lot stricter than Buy-to-Lets.
Among these is ensuring you’ve got the correct Use Class to operate an HMO (i.e., C4 or Sui Generis).
This article is Part 1 of a 2 Part Series. Part 1 focuses on the Feasibility of your project while Part 2 focuses on Viability.
I’ll talk about why you need to do due diligence before buying a property in an Article 4 Area and How to do it.
So, kick back, relax and let’s dig in.
- HMO Sandwiching and Density (Critical)
- Listed Building & Conservation Area (Critical)
- Local Plan And HMO Requirements (Critical)
- Is There Enough Space? (Critical)
- Public Transport
- Parking And Bike Storage
- Bins and Waste Disposal
- Flood Risk
Doing An HMO Conversion? Why Due Diligence Is Important?
Single-family residential homes mostly form the base for HMO conversions.
You can buy an existing HMO, but you often create the best deals by adding value to the property via an extension or loft conversion.
These come with a lot of planning challenges.
Understanding local regulations, the need for planning permission and the likelihood of getting it, is very important.
Just as you wouldn’t buy shares in a company without evaluating it, it would be non-savvy to buy property HOPING to convert it to an HMO.
An unfinished project could mean low or nil rental income and your deposit stuck in a deal that may take years to exit.
The pains grow if you’re borrowing finance to fund the deal, especially high interest bridging loans could make the deal non-viable.
I hope this highlights some of the reasons why due diligence is key before buying property in an Article 4 Area.
What To Check Before Converting A Property To An HMO In An Article 4 Area?
I’ve decided to share our internal due diligence process to help you decide if this is a property you should buy or not.
Article 4 restrictions remove the Permitted Development Rights that allow you to change the property’s Use Class within a local area.
This makes it necessary to go through a Full Planning Application. Here’s a non-comprehensive list of items I check before advising a client if they can get planning on a particular property.
HMO Sandwiching and Density (Critical)
HMO Sandwiching is the presence of an HMO that’s “sandwiched” between 2 existing HMOs.
HMO Density refers to the number of HMOs as a percentage of total homes in a local area.
In Article 4 areas, most Councils define an HMO Density figure on their website.
For example, a density of 10% means HMO can constitute no more than 10% of the total homes in the local area.
Councils dislike concentrated volumes of HMOs in a small area as they disrupt the spread of single-family homes.
These also cause parking challenges or nuisance (in the case of disruptive tenants).
Checking the local HMO Density policy on the Council Website and ensuring neighbour properties don’t operate as an HMO is a good first step.
Listed Building & Conservation Area (Critical)
I wrote about Listed Buildings in my article on Sui Generis Planning.
Listed Buildings are buildings of special architectural or historic interest considered to be of national importance and therefore worth protecting.
If the property you’re looking to buy is a Listed Building, you’ll need to work with a heritage consultant.
Your architect should produce a proposal of the project and send it to the heritage consultant. The heritage consultant will then prepare a heritage report.
At this stage, I’d recommend going for a Pre-Planning Application to learn what the chances of the proposal being accepted by the Local Council are.
It’s important to know whether the property is a Listed Building or lies in a Conservation area as it affects development plans.
Conservation areas are protected under national law and it’s often hard to convince the heritage department of the Local Authority to grant you planning permission.
I had a client who wanted to build an extra floor and after discovering the property was a listed building, he decided against it.
Conservation areas or listed buildings mean you likely won’t be able to change the exteriors, build extensions or do dormer conversions (which improves your rental income and valuation).
So ensure you check for these before buying the property.
Local Plan and HMO Requirements (Critical)
The next important thing to check is the local plans.
Each Council is unique and publishes its local plans and HMO Regulations.
If you don’t know which Council your property comes under, the first step is to go to the Planning Portal, enter the post-code and get the Council name.
Then you can visit the Council website and download the Local Plans.
These plans contain information around Article 4 Areas, Conservation Areas, Listed Buildings and other rules.
Depending on the council these may be in the form of an interactive map, PDFs or mentioned on the website.
Understanding local HMO Regulations and standards is important, for example
- Space standards — bedroom, kitchen, bathroom size per person
- How many cookers/fridges and other amenities
- Rules around dormer or loft conversions
Some councils have policies around losing family units and may not permit HMOs entirely.
For example, some London Councils recently adopted a policy to protect the existing family houses that block the conversion of any residential property which has a certain size.
In most of the cases, we noticed that when this policy applies properties below 120 sqm can’t be converted into HMO or even Flats.
This policy is a black or white scenario and can’t be negotiated. It’s a deal-breaker. So, checking the local plan before you buy a property is a wise idea.
Is There Enough Space? (Critical)
Imagine you buy a family home hoping to turn it into a 7 bed HMO. Then you realise you can only fit 5 rooms.
How would this affect your project plans and budget? Your deposit is now tied in a property that doesn’t work as well as an HMO.
Wouldn’t it be better to know beforehand if you can fit your expected number of rooms to get your desired rental income?
Existing drawings map out the property in its current form via a Measured Survey.
Once you have this you can explore new schemes, including adding rear or side extensions, dormer conversions, hip to gable conversions, loft conversions.
You’ll also need to plan for communal space in line with local HMO regulations.
If you don’t have existing measurements, you can get them from previous planning applications or via Rightmove or Zoopla floor plans.
Another point to note is ensuring your plans are not considered “overdevelopment” of the property and or affect natural light to your neighbour’s property.
Good access to public transport increases the odds of your HMO planning application being accepted.
Proximity to bus stations, train stations or metro/tube lines means less chance of tenants requiring cars (and hence parking).
Parking And Bike Storage
As above, understanding parking availability and bike storage facilities around your property are necessary.
Some councils provide parking requirements on their website for e.g. in London you can show proximity to public transport which reduces any need for parking.
In the case of more complex developments, you’ll need to appoint a transport consultant who can advise on the local parking availability.
A good rule of thumb that we follow is
- For HMO < 6 occupants, you don’t need a transport statement and can show a bike storage location in the plans along with information around local parking/public transport.
- For larger HMOs > 7 occupants, we recommend hiring a Transport Consultant to produce a transport statement.
You can show Bike storage locations on the plans in the front/rear yard or an inner room (in case of no yard or garden).
Bins and Waste Disposal
With more people comes more waste. And it’s no surprise the Council want to see how you plan to handle it.
Showing the locations of bins in your Design and Access Statement as part of your planning application is important.
This can be usually in the front of the property but in some cases, you can have a dedicated room for waste storage.
Another aspect to check is if your property comes under a High Flood Risk zone.
There are websites that can tell you the flood risk level of your property.
1 — Low Risk, 2 — Medium Risk, 3 — High Risk
If you find that your property comes under a high-risk zone, I recommend getting a flood risk assessment done before submitting a planning application.
Key Takeaways — HMO Article 4 Due Diligence Checklist
To summarise here’s a quick Due Diligence Checklist before buying property for HMO Conversion in an Article 4 Area.
- HMO Sandwiching and Density — Do any of your neighbours operate an HMO? What’s the HMO Density tolerance of the Local Council and how many HMOs are present on your street?
- Is the property in a Conservation Area or classified as a Listed Building?
- Do you understand the Local Plan and HMO requirements i.e. regulations and standards?
- Is there enough space in the property to fit the desired number of bedrooms satisfying local HMO standards?
- Is there adequate public transport nearby or is there enough parking space?
- Is there enough space for bins and bike storage?
- Is the property in a Flood Risk Area?
By evaluating the above, there’s a higher chance that you can get planning permission on this property and the deal goes through.
I hope this article gave you insight into how to do your due diligence when converting HMOs in an Article 4 Area.
Having worked on over 150+ HMO projects and consulted on over 700 with a 90%+ Planning success rate, I know a thing a bit about HMO Planning.
We looked at why you need to do your due diligence and what can go wrong if you buy the property and cannot convert it to an HMO.
Most importantly, we discussed several due diligence checkpoints to make sure you’re buying the right property.
If you’d like help with your due diligence, my team at HMO Architect offers an HMO Design Appraisal service where we do all this for you and produce a helpful report that you can also use in your Pre-Planning Application.
So please get in touch. We’d love to help you too.