How to convert a property into an HMO in 2023

Nikka Sulton

How to convert a property into an HMO in 2023

How to convert a property into an HMO in 2023. As landlords face more regulations and financial challenges, like Section 24 and the 3% stamp duty surcharge, many seek ways to optimize their portfolios. Converting rental properties into HMOs for better returns has become a popular strategy.

If you’re thinking about this conversion, there are steps to take, including meeting legal requirements and making the property suitable for multiple occupants. What should you do first?

What is an HMO?

HMO stands for House in Multiple Occupation, which can be a building, bedsit, hostel, or flat rented by multiple households. This includes families or over two tenants sharing amenities like a bathroom, toilet, or kitchen.

Key characteristics of HMO housing:

It’s the primary residence of occupants
Three or more tenants live there
Residents aren’t a single household
Tenants pay rent

Certain properties and areas are well-suited for HMOs, such as busy student areas with spacious, adaptable properties.

Why convert into an HMO?

Many landlords opt for HMOs as they see them as an efficient way to manage their rental portfolios and increase income. Collecting rent from multiple tenants and the potential for higher rental yield is enticing.

It offers more security for landlords as they aren’t reliant on a single household for income. If one tenant leaves or falls behind on payments, rent from the others continues to flow.

HMOs can be a win-win for tenants and landlords. Tenants may appreciate the potential for lower rent and the chance to live with more people.

Does your property need to be converted to an HMO?

To prepare your property for HMO rental, adjustments may be necessary. Apart from compliance requirements mentioned earlier, factors to consider include space, layout, facilities, furniture, and appliances.

Upon conversion to an HMO, your local authority will inspect it within five years. They’ll conduct a Housing Health and Safety Rating System (HHSRS) risk assessment. It’s essential to be aware that the HHSRS guidelines have been updated since 2019.

Should the assessment reveal unacceptable risks like asbestos and radiation, prompt action will be required to address these issues.

Four quick HMO renovation tips

Utilize outdoor space – To attract long-term tenants seeking a home, outdoor areas are vital. Consider adding seating and BBQ spaces for modern renters.
Focus on kitchens and bathrooms – These rooms can make or break a rental choice. Furnish them to high standards and add thoughtful details to meet tenants’ high expectations.
Invest in essential appliances – While cost-cutting is necessary, crucial features like fridges, sofas, and beds should not be compromised. Skimping on these can lead to higher expenses in the long run.
Ensure readiness for occupancy – Tenants prefer a finished property, not a construction site. Have everything ready before they move in to reduce the risk of damage or early tenancy issues.

Types of properties to convert into HMO types

When considering HMO conversions, it’s essential to choose suitable properties. Converting an old countryside farmhouse wouldn’t attract tenants unless they are wealthy and not in need of work, defeating the HMO’s purpose.

Properties like old police stations, fire stations, guest houses, shops, churches, factories, theaters, GP surgeries, or even former prisons often find a second life as HMOs due to their multiple rooms and communal spaces. It’s easier to gain local authority approval for such conversions without risking the area.

Larger Buy To Lets (BTL) with 3+ bedrooms and at least 1 living room are also good candidates for HMO conversions. This can significantly boost your monthly cash flow.

Deciding To Convert A Property

Converting a property into an HMO is a feasible undertaking, whether you own the property or plan to buy one. If you’re starting from scratch, search for an HMO property for sale, relying on research and industry connections for the best deals.

For existing properties, the process can be complex but rewarding. Begin by checking whether the property requires an HMO license, which is often necessary for homes with five or more occupants from different households. Local authorities have varying rules, so contact them to clarify your situation.

Ensure the property meets HMO standards, including gas safety certificates, smoke alarms, and other safety features. Adherence to minimum room sizes and other guidelines is crucial. If the property falls short, you’ll need to make necessary changes and possibly secure planning permission.

Think about the ideal tenant profile for your HMO. It’s not just for students; young professionals and working individuals are also potential tenants. Tailor the property to their preferences, whether it’s a well-furnished space or additional amenities like broadband and workout rooms.

Securing financing can be challenging for HMO conversions. Collaborate with a lender experienced in HMO financing. Check if your existing property’s lender permits conversion. HMO mortgages typically require a deposit of at least 25% and a rental income covering 125% of interest payments.

Don’t forget HMO insurance, which should suit your needs, whether it’s loss of rental income or alternative accommodations. Consider various policy types like buildings and contents insurance, legal expenses coverage, and accidental damage insurance based on your specific situation. Discuss options with an insurance agent to make an informed choice.