How To Convert A Property Into An HMO
These days, landlords are dealing with a number of new regulations and financial setbacks. Over the course of the last five years, those have only become more and more complicated. From Section 24 to the new 3% Stamp Duty surcharge, many landlords are looking for more ways than ever to maximise the potential their portfolios have to offer. While there are many different strategies landlords are using to make that happen like incorporation, increasingly, they’re turning to converting their rental units into an HMO, meaning Houses in Multiple Occupation. If you’re thinking of using this strategy, you’re not alone, but there are a number of different things you’ll need to do. Not only are there legal requirements you’ll need to meet, but also a number of different steps you’ll need to take to make the property more habitable for your tenants.
What Is An HMO?
An HMO is just an acronym. What is HMO? It stands for Houses in Multiple Occupation, and HMO housing is one of the most popular options today for tenants looking to save some cash. HMO properties offer a number of benefits for tenants, too. They are far less hassle than renting other kinds of properties. The bills with HMO property tend to be quite a bit smaller because they’re usually shared. Often this includes council tax, water rates, and heating. In most cases, they’re usually included in the monthly rent. In some cases, tenants even find broadband access to be part of the overall package. Some property HMO arrangements decide to offer additional benefits to tenants like weekly cleaning services and additional security.
No matter what benefits an HMO offers tenants, though, the reality is that they can offer landlords far greater benefits. The yields on HMOs are often higher than standard rental rates, so it means you have access to a better ROI than you might get with a traditional property. Additionally, thanks to the higher-than-ever rental prices many markets are seeing, there’s a strong demand for HMO properties, particularly in areas where there are students. More than that, though, you have far less exposure to problems many landlords face like rent arrears. If you have four or five tenants under separate private tenancy agreements, each is responsible for their own rent. If one tenant defaults, you can simply talk to their guarantors while you’re collecting rent from the other four or five people and making the required payments to the mortgage company on your end.
Deciding To Convert A Property
If you do decide a house of multiple occupancies might be the right way to diversify your own portfolio, the process of making it happen may be less complex than you think. An HMO house is easy to create whether you’re converting a property you already own or you’re dealing with one you’d like to buy.
Obviously, if you don’t already own a home you’d like to convert to a house in multiple occupations, you’ll need to search for an HMO property for sale. There are many tricks to get a council house that you can convert, but often it comes down to simple research and hard work. Use your connections in the industry to find out what HMOs are going for great prices and which ones might make the perfect investment to meet your needs.
If you already have a property you hope to convert, or you’re buying one specifically for that purpose, there are a number of steps you need to take. It’s a fairly complex process, but it is absolutely worth the investment in the long run.
Initially, you’ll need to take a closer look at whether the property will need to be licensed. In most cases, a property with five or more occupants from more than two households will require an HMO license. Every local authority, though, has different rules, which is why it’s so important that you look into them. Many people ask “Do I need an HMO license for three tenants?” The answer to this question and those who like it, though, is that it depends. Talk to your local authority. They’ll be able to quickly direct you to the rules in your area so you know exactly who might need a license and how to avoid an HMO license if you’re not one of the people who might need one.
The next step is to ensure the property you’re considering actually meets HMO standards. There are several standards that are simply nonnegotiable when it comes to HMOs. Maybe the most important one of those is the fact that the landlord has to have a valid gas safety certificate to the local authority every year, have the relevant smoke alarms and carbon monoxide detectors installed, and have safety certificates for any electrical appliance on request. That’s not the only one, though. Instead, there are other requirements as well. In 2018, the guidelines for HMO minimum room sizes changes considerably. Now, the floor area of any sleeping accommodation must be at least 6.51 square metres. When you actually begin renting out the property, you’ll also need to make certain that any room isn’t being used by more than the maximum number of people specified in the license itself. Additionally, you must make sure all gas appliances are maintained, and a gas safety check is carried out each year. Your electrical installations have to be safe to use, and the furniture you provide has to meet the fire resistance guidelines that have already been laid out by the government. Fire doors are required, exits must be clear at all times, and tenants must know what to do in case of fire. Emergency lighting must be provided throughout the home, and it must be regularly treated for pests. Locks must be available on each bedroom as well.
In the event your property doesn’t meet any of these guidelines, you will need to make the necessary changes to the space before you can even apply for a license. That may mean various things, but it often means connecting with a contractor who specialises in working with HMOs and ensuring they meet all of the regulatory guidelines. If you must make these changes or you were already intending to renovate the property, you’ll need to check to see whether planning permission is required. Depending on where the property is located, how extensive the renovations are, and its overall size, you may actually need planning permission just to convert it to an HMO. Talk to your local planning authority to see what those requirements might involve. Additionally, if you’re purchasing the property so that you can renovate it to become an HMO, be sure you chat with your conveyancing solicitor to better understand whether you’re even in an area where converting it into an HMO might be possible.
As you plan your conversion, don’t forget to think about what the selling points might be for potential tenants so you can begin to add those to your overall plans. Part of this will depend a bit on your definition of the ideal tenant. Whilst many investors believe the only possible HMO tenant is a student, that’s simply not true. Sure many students do select HMO properties as an option, but these days, many universities are providing housing options, so students don’t always select HMOs. If you are creating an HMO for students, though, you’ll want to ensure you include lots of communal study spaces, laundry facilities, and a fairly large kitchen area. Students expect properties that are fully furnished with a bed, a wardrobe, a table desk, lamps, and window dressings like curtains or blinds. If you’re looking to increase the rent for a property like this one, you could supply a few extras likes televisions in the common areas or lovely furnishing options in the bathroom areas. Keep in mind, though, that you’ll likely see increased wear and tear on student HMOs.
Students, though, are just one type of tenant to consider. You may also want to work to attract young professionals. These people are typically in their early twenties or thirties. They’re usually university graduates who are just beginning their careers. They’ve likely lived in a shared house before, and they’re going to choose a property like yours because an HMO is a great way to begin building professional, and social connections in their new adult life. They may also be looking for a furnished space, but given that you won’t see quite as much wear and tear, you can provide a higher level of luxury for these individuals, as they’re eager to get rid of the status they may have carried as a student and they’re ready to step into something a bit better. Broadband is a great attraction for these people, as is garden space and en suite bathrooms. Additionally, they may want something like an on-site workout room and maybe even shared office space. Working professionals are the last group many landlords choose to cater to as they decide how to convert their HMO. These are typically individuals who do not have a university degree but are looking for an inexpensive space to live near their current position. While some of these individuals are looking for furnished bedrooms, others already have some furniture available. They’re typically looking for well-furnished common areas, though, and amenities like parking and garden spaces to unwind.
Once you’ve planned the conversion carefully, the next step is typically to get the necessary financing in place to make it happen. Keep in mind that HMOs are some of the hardest to finance property investments out there today, so you may want to work with a particular lender before you ever even decide to make the conversion. If you’re converting a property you already have financed, you’ll want to check with the requirements of the lender to make sure that it’s okay to convert the property. If you do need to get an HMO mortgage, it’s important to note that the minimum property value for these is typically between £75,000 and £100,000, and you typically will have to demonstrate the fact that you have at least a few years of experience as a landlord. In some cases, you may be asked to document the fact that you have experience as an HMO landlord. Most lenders won’t make an HMO loan on a property that has more than eight bedrooms or is higher than four storeys, either. Additionally, lenders look for properties that have no more than one kitchen and at least one communal seating area. You’ll also need to provide a deposit of at least 25% on this kind of loan.
HMO mortgages are typically taken out on an interest only basis, so you’ll need to prove to the company that the rent you expect to get will cover more than just the interest payments on the loan. In fact, most lenders will ask you to have a rental income of at least 125% of the interest payment on the loan. Expect to pay higher interest rates with this type of loan overall.
Once you have your financing in place, you’ll need to get HMO insurance, as well. The premium on this type of insurance policy will vary significantly based on the level of protection you need on your investment as well as when you need the coverage itself to start. HMO rules do require you to have landlord insurance, but there’s no clear solution as to what might work for you. Think about what you need covered most. Is it something like unexpected loss of rental income? Is it something like the cost of alternative accommodations should your HMO suddenly become uninhabitable? There are buildings and contents insurance policies, legal expenses policies, and accidental damage insurance policies available to HMO landlords, and understanding what might be right for your specific situation simply means chatting with an agent to better understand what each one covers and what you value most in this situation.
Creating the Right HMO Can Be a Great Investment!
What is an HMO property? For you, it’s a way to diversify your investments and ensure you have a steady stream of property-based income coming your way for quite some time. HMO rules can be fairly strict in certain areas. You will often be required to get a landlord license for an HMO. In fact, HMO licensing isn’t always easy to obtain. The simple reality, though, is that this type of investment is often worth it in a number of different markets. If you’re interested in doing more with your property investment dollars, an HMO might be the way forward. It’s more than just a bedsit these days. It’s an all-access property that is perfect for many different kinds of tenants at a variety of different life stages, and it might be the ideal opportunity to meet your needs. To learn more, connect with other HMO owners, and do your research. Simply asking “What is an HMO property and how can it benefit me as an investor” is likely to get you many different answers that will help you better understand whether this type of investment might be the right choice to help you build a stronger property portfolio that can easily withstand the changes in the property market over the years to come as it begins to shift into the unknown spaces that many investors have yet to see. What is an HMO? It’s a consideration you simply have to make if you’re considering an investment in any kind of property in the next few years.