A house in multiple occupation (HMO) can be highly profitable for landlords, but you need to think carefully 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, the task of finding multiple tenants and creating individual tenancies.
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 in an HMO, 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. There are many hoops to jump through, however.
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, 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 license from the local authority.
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 seven or more individual tenants requires Sui Generis HMO Planning.
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.
Depending on how many tenants you let to and which local authority your property is in, you may require an HMO license. There are three kinds of license 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 license 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 license. Even if your property falls into all three schemes, you will only need one license.
The cost of securing a five-year licence varies from one council to another, ranging from £350 to £850. To secure a licence (you or your agent can apply), 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
- Install and maintain smoke alarms
- Provide electrical appliance safety certificates when asked
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 an 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 agent like OpenRent will make finding multiple tenants simple and cost effective.
OpenRent will arrange online rental advertising. 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.
FInd tenants for just £29.Learn more
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.
They can also set up your tenancy for just £49, including providing the contract and securing the deposit. Their intelligent system handles the bulk of your paper work for you. They 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. See our guide here.
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, 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.