Converting a Rental Property to Create an HMO

Houses in multiple occupation (HMO) can be highly profitable for landlords, but there are a few things to be aware of before taking the plunge and undergoing an HMO conversion.

In this guide, we explain everything you need to know about the legalities and necessary building work. Plus, we discuss the best type of property and the task of finding multiple tenants and creating individual tenancies.

What is an HMO?

An HMO is a property rented out by at least three people who are not from the same family or household group. These separate people share facilities, such as the bathroom or kitchen, together with corridors and access points.

The idea behind converting a family home into an HMO is simple: more tenants can pay a higher rent. However, there are many things to be aware of before doing so.

How to Create an HMO: Getting the Right Property

The first task is ensuring you have a suitable property. HMOs don’t necessarily have to be large buildings, but they make the most sense. Bedroom size is more important in HMOs since the tenants are more likely to spend time in their individual rooms than in a family-occupied home. And of course, the more rooms in the property, the more potential bedrooms there are to convert and let.

Victorian or Georgian homes are ideal since they tend to be larger, with bigger rooms. The advantages include:

• You can add an en suite to some of the larger rooms
• A separate downstairs dining room can become another bedroom
• These houses tend to have more storage space, a utility room and larger communal areas, such as hallways
• With a larger garden, you might add a conservatory as a communal space, meaning you can turn the sitting room into another bedroom

Just how big a property you go for is up to you, although the purchase price might be the determining factor. Most experts would recommend you can fit in at least five tenants to cover your costs and ensure a decent profit. You will need to decide if you will let the whole property to a set of joint tenants, or if you will let each room individually. For houses with five beds or more, letting individual rooms makes the most sense. It is hard to find groups of more than four tenants who wish to cohabit, although students are an important exception to this rule. 

Size matters but so does location. If you are planning to let to urban professionals, think about a property that is no more than 15 minutes walk from a station or the town centre.  Your decision will also be driven by property price. There are some good tricks to find cheap properties that are still desirable to your target tenants. 

For example, families with children usually have no interest in renting HMOs, so you have an advantage in that you can look for properties away from good school catchment areas, which tends to make properties cheaper to purchase. You must get into the mindset of your potential tenants in order to find the best areas to buy. If you are, for example, over 60 but assume you will be renting to those in their 20s, then maybe ask some younger people what parts of town they would enjoy living in. 

The Legality of an HMO Conversion

The two main legal concerns are: securing planning permission to perform work on the property and gaining an HMO licence from the local authority.

Planning permission

If you are considering an HMO conversion, you must seek planning permission, but it’s worth noting you will not need further planning permission to change the property back to single usage again. You need different permission according to the size of the property/number of tenants: between three and six unrelated individuals need C4 HMO Planning; while and HMO with seven or more individual tenants requires Sui Generis HMO Planning.

In many areas, a change from a C3 dwelling to C4 HMO will have automatic deemed planning permission, however, local authorities can remove this right under what is known as an Article 4 direction, in which case, express planning permission will be required from the local planning authority (LPA).

Planning permission is devolved to local authorities and each has a different approach. You will need to contact your local authority planning department to confirm what permission you require and how to go about getting it. 

HMO licensing

Depending on how many tenants you let to and which local authority your property is in, you may require an HMO licence. There are three kinds of licence scheme that your new HMO conversion property could fall into. 

Mandatory licensing applies to all HMOs which have five tenants or more. Additional licensing schemes extend the requirement to obtain a licence to all HMOs: i.e. even those with only three or four tenants. Selective schemes may require all rented properties in an area to obtain a licence. Even if your property falls into all three schemes, you will only need one licence.

The cost of securing a five-year licence varies from one council to another. To secure a licence, you must make sure:

• The property is suitable for the number of occupants
• The house manager (which might be you or your agent) is fit and proper
• You send in a gas safety certificate yearly
• To install and maintain smoke alarms
• To provide electrical appliance safety certificates when asked
• That you have an up-to-date Energy Performance Certificate (EPC)
• The property is free of mould and damp
• Sleeping accommodation is large enough 

Your property can be inspected, so you must also be sure there are adequate fire and amenity standards.

What Work is Needed in the Property?

Just like any rental property, the building needs to be in a good, safe condition. Assuming it is structurally sound with adequate ventilation and no damp, your main expense will be dividing the property into separate bedrooms. How many rooms you can manage, perhaps including one of the downstairs rooms, depends on how the communal facilities can cope with the numbers.

More than one shared bathroom and toilet is ideal, plus if you can add an en suite to bedrooms, that will be more attractive for tenants living with strangers. The kitchen needs to be big enough to cope with the numbers, too.

There are guidelines for minimum HMO room sizes that landlords must adhere to. For example, any sleeping room for a person aged over ten must be at least 6.51 square metres. For two people over ten, it must be 10.22 square metres. And for a person under ten, it must be 4.64 square metres. Individual authorities may have larger minimum requirements, too. 

Fire safety is paramount, and there are strict rules to follow for fire extinguishers, emergency lighting, fire alarms and clearly marked fire exits. Further considerations include carbon monoxide detectors, locks for all bedrooms, and pest control.

You might also consider getting a regular cleaner for the communal areas. This person can also be asked to check fire and carbon monoxide detectors and will be valuable eyes and ears for you, the landlord.

Finding HMO Tenants

Once all permissions are in place, and your building work complete, you must turn to the task of finding multiple tenants. This is clearly harder than finding a tenant to let a whole property, so you might consider getting some help.

Using an online service like OpenRent will make finding multiple tenants simple and cost effective. 

With OpenRent you can advertise your property for as little as £49. You can then use OpenRent’s tenant referencing checks to be confident you have the right people. It’s worth noting that choosing a range of tenants for your property at once may cause some issues. For example, those with typical office hours may prefer not to live with students who keep less regular hours on weekdays. 

Creating Individual Tenancies

In HMOs, tenants turnover quickly – often staying for just six months or a year. That means you need an efficient and cost-effective way to create new, legally sound tenancies. The best way to do this is through OpenRent. 

We can set up your tenancy for just £69, including providing the contract and securing the deposit. We offer the ability to create one contract for all parties or multiple different contracts for each room in the HMO. We can also collect the rent on your behalf and keep track of what has been paid. This is very useful for properties with several tenants paying individually each month.

Budget and Rewards

Just like any other investment, you must create and manage your HMO like a business. Once you know how many tenants you will have, and how much rent they will pay, you can begin to work out your potential return in the form of rental yield.

When you know how much you will pay for the property, including the cost of conversion and bringing it up to local authority standards, your rental yield is easy to work out. 

You might expect to get a gross yield of around 12% or more. This will be a good target, although your net yield will be lower, taking into account any mortgage costs and ongoing fees, such as landlord insurance, agent fees (if you’re not with OpenRent), maintenance, etc.

By planning correctly and following all the rules and guidelines, there is no reason why your HMO conversion plans should not be a complete success.

---