Are you a property landlord and looking at an HMO Conversion?
Or maybe you’ve found an old police station, GP surgery or some ruined townhouse that you think might make a good HMO.
Whether you’re a new landlord or seasoned property developer, you likely agree that HMO conversions can be complicated.
The cash flow and valuation rewards are high but it’s also a high-risk project where things can go wrong.
Without knowledge, experience or correct advice, an HMO conversion can cost you dearly.
If you’re looking to learn about HMO conversions like costs, risks, planning, building, licencing and more, you’re in the right place.
I’ll cover these in great detail to help you make an informed final decision, whether you should convert your property into an HMO or not and how to do it.
So please read on.
JUMP TO
Types Of Properties To Convert Into HMO
HMO Conversion — Rewards Vs Risks
What Is A HMO Conversion?
An HMO conversion is a legal change of a property’s use class from the current class into a C4 Class (House Of Multiple Occupation).
It allows the property to be used as a shared house with 3 or more unrelated tenants.
The tenants can be from different households and share common communal areas (like kitchen, living room).
Types Of Properties To Convert Into HMO
So what kind of properties would you want to convert into an HMO?
For obvious reasons, you don’t want to convert an old farmhouse in the middle of the countryside into an HMO.
You’d struggle to find good tenants if any unless they’re wealthy and don’t need to work.
Which sort of defeats the purpose of HMOs anyway.
Some properties that usually find a second life as an HMO may include old police stations, fire stations, guest houses, shops, churches, old factories, theatres, GP surgeries or even prisons.
They already operate as establishments with several rooms and communal areas.
So it’s easier to convince the local authority that it’s a good idea to operate it as an HMO without risk to the area.
Other types of properties you may want to convert into an HMO are larger Buy To Lets (BTL).
If you’ve got a BTL with 3 or more bedrooms and at least 1 living room, it could make for a decent HMO.
This can double or even triple your monthly cash flow.
HMO Conversion — Risks Vs Rewards
An HMO conversion provides housing for more people.
After all, it’s an efficient use of space.
Let’s look at some rewards vs risks to find out if it’s worth it.
Rewards
Increased Cashflow (Reward)
An HMO offers more cash flow and income than a standard Buy To Let.
This is due to rent paid per room rather than for the property as a whole which makes it a greater return on investment.
For example, if the monthly rent of a 3 bed Buy To Let in Liverpool is £600/month, post HMO conversion it could fetch around £2,500/month.
That’s an increase in a monthly income of over 300%.
These numbers are perfectly achievable when you design your HMO to the best standards and optimise available space.
Tax Advantage (Reward)
Another benefit you can get is with the Tax Man. Good old HMRC.
The Government offers a 5% VAT reduction when converting your property to an HMO.
This helps you get a neat 5% off your Building Costs in form of VAT relief.
Tenant Diversification (Reward)
Hopefully, you’ve never had to deal with a tenant in arrears, and you’ll never have to.
But for the unlucky few, this is a reality.
When you rent the house to one tenant you always run the risk of the tenant not paying and running into arrears.
Unfortunately, as you go through the legal proceedings of eviction the property becomes a liability rather than an asset.
In the case of HMOs due to tenant diversification, the risk is far smaller.
It’s unlikely that 5 or 7 tenants will all stop paying rent at the same time. So you’re more secured.
There’s also less chance of tenant voids when you’ve got many tenants.
The chances of everybody moving out at the same time is slim.
This often gives you more confidence and keeps the cash flow coming.
Increased Valuation (Reward)
Another benefit of an HMO conversion is the increased appreciation of value.
An HMO often attracts more value than a typical brick and mortar house.
It’s possible for an HMO to get a commercial valuation.
Especially if there’s a similar commercial establishment like a guest house, shop or hotel close by.
The valuation gains are not guaranteed but a strong possibility.
Repurposing Old Properties — Satisfaction (Reward)
The feeling of satisfaction you get when you repurpose or give a new life to a property is also a reward in my eyes.
You’re not only increasing the economic value of the property but also giving it a new lease of life rather than lying dormant and falling to crumbles.
Risks
I’ve shared some massive rewards of an HMO conversion with you. But it wouldn’t be right without talking about the risks involved.
Let’s explore further.
High Entry Barriers (Risk)
HMOs have high entry barriers.
They are not as easy to buy, comply and find tenants as a standard Buy To Let.
The process is a more complicated one that involves,
Renovations are more expensive.
Finding a good deal that actually has a high likelihood of a successful HMO conversion is not an easy task.
I’ll talk more about what you need and the costs involved shortly below.
To Mitigate Risk? → Work with an expert in each of the areas above
Wrong Area (Risk)
Nothing is worse for a property investor than buying a property that you cannot fill. Agree?
When you convert a property into an HMO you have to be as close to 100% sure you can find tenants to fill it.
Buying in the wrong area with little to no demand for shared rooms can be financially detrimental.
Demand and demographics can change over time too for example — think shared accommodation in cities during a pandemic.
This has fallen drastically with the new working from home culture.
To Mitigate Risk? → Test and validate demand for shared housing as much as possible before considering an HMO conversion.
Misjudging Project Timeline (Risk)
Due to the complexity of HMO conversions, the project timelines are often misjudged.
Planning permission may take longer, fire assessments may fail or you may encounter licensing issues.
All sorts of unexpected delays may happen completely outside your control.
If not planned for, it may cost you time but also money.
For example increased mortgage costs, bridging costs.
To Mitigate Risk? → Seek local expert advice for timeframes and plan for the worst-case timeline and scenario.
No Exit Strategy (Risk)
Not having an exit strategy for your HMO conversion is dangerous territory.
With so many things that can go wrong, it’s important to know what to do if everything falls to bits.
For example, if you don’t find tenants, planning permission gets refused, article 4 introduced, can’t get an HMO license.
Having backup strategies is very important.
For example, converting it to a single let or flipping and selling it, should be part of your strategy.
Tip — always have few shared bathrooms because it’s easier to convert that back into a single let than an all ensuite HMO.
To Mitigate Risk? → Always have multiple exit strategies.
Can’t Get Planning Permission (Risk)
HMO Planning Permission is the formal approval from the council allowing you to change a property’s use in line with “Permitted Development”.
Different councils have different regulations on room size, the number of people etc.
Knowing and understanding what the council expects is a tricky task.
It’s best to work with an expert like an architect or planning consultant.
This will help you navigate and stay clear of tricky waters.
The risk of not getting your project through planning means you may pay huge lending costs and fees and even lose the deal, due to delays.
To Mitigate Risk? → Work with a planning expert like an architect.
Inexperienced Power Team (Risk)
Choosing to work with inexperienced people can also pose a risk to your HMO conversion plans.
It’s critical you have people who know what they are doing and have extensive experience to help and guide you along the way.
For example, a less experienced architect may submit wrong or incomplete plans or room designs to the council.
This may even lead to planning being rejected.
Or they may not give enough detail to the build team and the designs could result in wasted space.
All this affects your investment plans and costs you a lot of money to rectify later down the line.
I’ll cover the ideal power team shortly below.
To Mitigate Risk? → Build a solid power team
HMO Conversion — Costs
As you can see above, an HMO conversion comes with a whole lot of risks.
I don’t want to scare or put you off, but I’d rather be transparent with you to help you make the best decision for yourself.
These risks can be mitigated when you work with someone experienced who’s done 100s of HMO conversions.
Let’s talk about cost. It’s probably a big reason you’re reading this article.
HMO conversion costs vary from city to city, time of year, the economy, cost of material and various other factors which are impossible to predict ahead of time.
Here are some of the costs to keep in mind. You may or may not need all these.
- Renovation or Construction Costs — Materials and Building Costs
- Consultants
- Architect
- Structural engineer
- Party wall surveyor
- Acoustics consultant,
- Building control
- Planning consultant
- Quantity surveyor
- HMO licensing fee
- HMO planning application fee
- Council tax application fee
- Fire regulations compliance cost
- Fire assessments
- Fire alarms
- Smoke detectors
- Furniture costs
- Insurance costs
- Solicitor fees
- Lending costs
- Mortgage
- Brokers
- Bridging loan
- Private investors
- Management (lettings, tenant finding service, sourcing fees)
- Certificates Cost
- HMO License — Every 5 years
- Gas Safety Certificate — Annual
- Electrical installation Certificate — Every 5 years
- Fire Detection / Alarm System Certificate — Every 5 years
- Energy Power Certificate (EPC) — Once
- Building Regulation Certificate — Once, at the end of construction
HMO Planning Permission
In a lot of areas, you can convert a property into HMO as you please. This falls under the “permitted development rights”.
But, in some areas, the local authorities have introduced measures like Article 4 where you need to apply for HMO planning permission before you can operate the property as an HMO.
Do You Need Planning Permission To Convert A House To A HMO?
If the area falls within permitted development rights, then you don’t need planning permission to convert a house into an HMO (for up to 6 people).
However, if there is an Article 4 restriction in the area, you will need HMO planning permission to convert the property irrespective of the number of people living within.
Certificate Of Lawfulness
A certificate of lawfulness is formal documentation from the council allowing you to convert a property into an HMO within the permitted development guidelines.
At the time of this article, when working with HMO Architect, the fees are
- £600 to undertake the planning process
- £462 of Council Fees for application of Lawful Development (LDC) for existing use
or
- £116 of Council Fees for a Lawful Development Certificate for the proposed use.
The type of application depends on where you are with your HMO property.
If you are planning to start renting it as an HMO — you need LDC for the proposed use.
But, if you have been renting it as an HMO for a while — you need LDC for existing use.
For HMOs in areas with new Article 4 directions and no LDC, a retrospective change of use application will need to be submitted.
These applications are risky and the council may demand lots of documentation.
They like to make sure the property was actually used as an HMO before Article 4 came into force.
This may include
- Track record of tenants ASTs
- Former HMO licenses
- Building completion certificates from building control
- Before and after pictures.
The Council can ask for these documents to cover a long period of time, which can be even decades.
That is why is important to have the LDC in place for peace of mind and to avoid Article 4.
It is like insurance should the council change its mind or an Article 4 restriction come in place.
HMO Licensing
Another important thing you need to be aware of when doing an HMO conversion is HMO Licensing.
Licensing is a complex topic and deserves its own article. Here’s a basic overview.
There are 2 main types of HMO Licensing
1) Selective Licensing
This type of licensing applies to 3–4 bed HMOs and is only enforced by some councils.
It’s best to check with the local authority what type of licensing applies to the area
2) Mandatory Licensing
Mandatory HMO licensing applies to any HMO which has more than 5 people living within it.
This applies across the country so you will need to apply for it.
Top HMO Licensing Tip From Co-Founder Ryan Windsor
Ryan Windsor, Director of Windsor & Patania Architects and HMO Investor himself says,
“Always try to get the exact specifications from the council. As the council is the ultimate licensing authority, it’s best to try and find out exactly what they need in an HMO to grant a license.
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.”
If you don’t follow HMO licensing and continue to operate without a license, the council has the right to fine you.
This could be anywhere between £3,000 and £20,000 depending on the concern. This is called HMO Infraction.
HMO Fire Regulations
As you can imagine, due to many people living in an HMO, it poses a greater fire risk.
It’s important to understand the HMO Fire Regulations in depth while planning an HMO conversion.
Failure to complete a thorough Fire Risk Assessment and have adequate fire alarms, smoke detectors etc can have devastating consequences should there be a fire.
Our article on HMO Fire Regulations covers all you need to know about Fire Regulations.
HMO Building Regulations
When doing any construction work, it’s important to consider the Building regulations.
Often forgotten or neglected, this is a key part of your HMO conversion and can affect layout.
Building and construction work has rules and standard to follow like construction beam size or wall thickness size.
These vary by the council so it’s best to speak with an architect or builder to do this to maximise the layout and get planning permission.
Your Core Power Team
You can see how an HMO conversion is not as straightforward as it may seem.
There are a lot of moving parts and things can go wrong.
On the flip side, when you work with the right team they should be able to help you execute this very well.
The feeling of getting your HMO ready, letting it out to the perfect tenant and watching income flow in is unmatched.
Add to that the feeling that you have given a new life to the property and created housing for so many people.
It’s a beautiful feeling.
Here is a list of people you need in your power team
- Architect
- Mortgage broker
- Solicitor
- Builder
- Accountant
- Lettings Agent
- Council (environmental officer, planning officer, licensing officer)
- Maintenance man or company
Assembling a great power team is not a quick overnight task and takes time, effort and relationship building.
But it’s well worth it, not just for one project but all your projects.
Conclusion
There we have it. This has been a long one.
I hope this guide helped you learn a lot about HMO conversions.
We talked about what type of properties to convert to HMO and the rewards and risks of an HMO conversion (including how to mitigate risks).
Keep all the costs in mind (and we recommend making a spreadsheet) and start building your power team now.
Don’t neglect activities like HMO Planning Permission, Fire Regulations and Building Regulations.
These are very important and at the core of an HMO conversion.
And test for the right tenant demand before you even consider an HMO conversion.
In future articles, we’ll touch on more of these topics including how to find and manage tenants.
We’ll leave you with the last bit of advice, don’t forget to plan an exit strategy for your HMO like a flip or single let.
If you’d like to talk to an architect that’s helped convert 100s of HMOs in various councils across the country, please get in touch.
We’d love to help you.
