How to convert a property to an HMO

In the dynamic world of property investment, converting a property into a House in Multiple Occupation (HMO) presents a lucrative opportunity for landlords. The concept of HMOs isn’t new, but its popularity among investors has soared due to the potential for higher rental yields and a more diversified tenant base. This comprehensive guide aims to walk you through how to convert a property to an HMO. 

What is an HMO?

First, let’s define what an HMO actually is. 

A House in Multiple Occupation is a property rented out by at least three people who are not from one ‘household’ (like a family) but share facilities such as the bathroom and kitchen. It’s a common choice among students, young professionals, and those needing affordable housing. The key characteristic of an HMO is that it houses multiple, unrelated tenants.

Why Convert to an HMO?

From financial gain to a more diversified tenant base, the opportunities that come with converting your property to an HMO are endless. 

Here, we take a look at the benefits of converting to an HMO in more detail. 

Higher rental yields 

One of the most significant benefits of converting a property into an HMO is the potential for increased rental income. By renting out individual rooms rather than the entire property to a single tenant or family, landlords can often generate more total rent. For instance, a four-bedroom house rented to a single family might bring in less monthly income than if each room were rented out separately to individual tenants.

Reduced vacancy risk

With an HMO, the financial risk associated with vacancies is spread out. If one tenant leaves, you still have income from the others, which can help cover the mortgage and other property-related expenses. This is in contrast to a single-tenancy property, where the departure of a tenant can mean a complete loss of rental income until a new tenant is found.

Diversification of tenant base 

HMOs attract a diverse range of tenants, including students, professionals, and sometimes short-term lodgers. This is equally advantageous for those who need to travel frequently or for extended periods of time as they do not need to commit to a long-term lease. 

Tenant diversification can provide a more stable income too, as the demand for affordable, shared housing remains consistent, even during economic downturns. This type of housing is becoming increasingly popular for those who cannot afford to rent on their own. 

Increased property value

A well-maintained HMO can increase in value, especially in high-demand rental areas. The potential for higher rental income can make the property more attractive to future buyers, particularly those looking to invest in the rental market.

There is also a rising trend of making HMOs more convenient and community-based, bringing forth living arrangements where tenants can take part in certain activities within the building, too. For example, properties with shared gyms or cinemas make the property and living arrangement that much more enticing and play a big part in increasing the property value.

Economies of scale in property management

While managing an HMO can be more intensive than dealing with a single-tenancy property, there is an added benefit of ‘economies of scale’, meaning that the benefits of having more than one tenant in a property can help reduce costs in various ways. These include: 

• Maintenance and repairs: multiple repair issues can be addressed in one visit, saving time and cost and streamlining the process. Equally, time is saved on communicating with tenants regarding any improvements that need to be made.

• Bulk purchases: landlords can buy supplies and services in bulk, often reducing the overall cost. 

• Streamlined utility management: with a single set of utility meters for gas, electricity, and water, the administrative burden is reduced.

• Efficient property improvements: improvements on the property can be made collectively, aiding in a more cost-effective approach.

• Risk mitigation: with multiple tenants in one property, the risk of total income loss is much lower if one tenant decides to hand their notice in. 

Flexibility in rental strategy 

As an HMO landlord, you are able to adapt to market changes more dynamically. For example, you can offer short-term lets, adjust room prices individually, or target specific tenant groups based on the demand. 

In this way, you have the opportunity to become creative and flexible in your strategy, conjuring up the most effective and lucrative one for you and your individual needs. 

Tax benefits

Certain expenses related to running and maintaining an HMO can be deductible for tax purposes. This includes costs such as utility bills, insurance, repairs, and property management fees, which can provide significant tax advantages for you.

Meeting housing demand

With the increasing need for affordable housing solutions, particularly in urban areas, HMOs play a vital role in the property market. They offer a feasible option for individuals who cannot afford or do not wish to rent an entire property. 

HMOs also offer security benefits for those who want to live in bigger cities, due to the likelihood of at least one of the tenants being home at all times. This is a big perk for students and young professionals looking to start their careers away from home.   

It’s important to note that while the benefits are substantial, the success of an HMO also depends on factors like location, property type, tenant management, and adherence to regulations. Careful planning and management are crucial to reap the full benefits of converting a property into an HMO.

Step-by-step conversion process

After deciding that an HMO is the way forward, you will need to follow some sort of process to convert your property into a suitable and attractive HMO for tenants. 

Feasibility and planning

Before diving into conversion, assess the feasibility of doing so. This includes understanding local market demand, potential rental yields, and the profile of prospective tenants. It’s also essential to evaluate the property itself – its size, layout, and condition – to determine how it can be adapted to an HMO setup.

Understanding legal requirements

Understanding the legalities that come with converting to an HMO is crucial. Depending on its size and occupancy, your HMO may require a licence from the local council. Licensing requirements vary across different regions, so it’s important to consult your local council’s guidelines. Generally, an HMO licence is mandatory if the property is rented to five or more people forming more than one household.

Building regulations

So, are building regulations needed for your HMO? You may need planning permission to convert a property into an HMO. This is especially true for larger HMOs or in areas with Article 4 Direction, which restricts the conversion of homes into HMOs. 

Also, the property needs to meet building regulations, particularly concerning fire safety, room sizes, and access to different amenities, including a shared kitchen. 

Further things to take into consideration include: 

• Ensuring that fire safety measures are in place, for example working smoke alarms
• Ensuring that annual gas safety checks are carried out
• Checking the safety of the electrics every 5 years
• Ensuring the property isn’t overcrowded
• Ensuring that there are enough cooking facilities and bathrooms 
• Maintaining communal areas and shared facilities
• Providing enough rubbish bins and bags

Design and layout changes

Optimising the layout of your property is a key part of the conversion process. This might involve partitioning larger rooms to create additional bedrooms, upgrading kitchens and bathrooms to cater to multiple occupants, and ensuring communal areas are functional and appealing.

Pros and cons

As with most things in life, there are pros and cons, and this is no different with converting your property to an HMO. However, if the pros outweigh the cons for you, then investing in making your property an HMO is worthwhile. 

Financial Investment

Converting a property into an HMO often requires a significant upfront financial investment. This includes costs related to refurbishment, licensing, and meeting safety standards. To manage this, it’s essential to have a detailed budget and possibly consider financing options such as a buy-to-let mortgage tailored for HMOs.

On the upside, you will be receiving a larger amount of monthly rental income due to the property being let out to more than one tenant. 

Management intensity

Managing an HMO can be more labour-intensive than a standard rental property. With multiple tenants, issues like maintenance, conflict resolution, and turnover could be more frequent. 

But, landlords also have the choice of hiring professional property management companies to handle these aspects effectively.

Keeping up with regulations

The regulatory landscape for HMOs can be complex and ever-changing. Staying informed and compliant with the latest regulations is essential to avoid penalties and ensure the safety and well-being of your tenants.

Your responsibilities as an HMO landlord

Your responsibilities will be slightly different as an HMO landlord from your responsibilities as a landlord letting out a property to one tenant or family. Let’s take a look at your responsibilities as an HMO landlord in more detail. 

Annual gas safety check

All landlords need to ensure that gas appliances, pipework, and flues in their residential properties are maintained in a safe condition. This involves an annual inspection by a Gas Safe registered engineer, following which a Gas Safety Certificate, or CP12, is issued.

Electrical installation condition report

Every electrical installation in an HMO must be inspected and tested every five years, with an Electrical Installation Condition report provided. Also, note that if the report is requested by the local authority, this report must be produced within seven days.

Compliance with Plugs and Sockets (safety) Regulations 1994

All plugs, sockets, or adapters supplied for domestic use must comply with the current standard, ensuring that live and neutral pins on plugs are part-insulated to prevent shocks when removing plugs.

Legionella risk assessment

HMOs are legally required to conduct annual checks for Legionnaires’ disease due to the increased risk in these types of properties. Records of these checks should be kept for five years.

Room size regulations

Room sizes in HMOs must meet specific regulatory measurements:

• At least 6.51 square metres for an adult.
• At least 10.22 square metres for two adults.
• At least 4.64 square metres for a child under 10 years old.

Rooms smaller than 4.64 square metres must not be used as sleeping accommodation, and properties must not be overcrowded.

Kitchen and bathroom facilities

Adequate cooking and washing facilities must be provided relative to the number of tenants. Failure to meet these standards can result in your licence being denied or revoked.

Refuse facilities

Appropriate refuse storage facilities and sufficient waste bins must be provided, adhering to local authority guidelines on refuse and recycling.

Fire safety measures

Due to the higher risk of fire in HMOs compared to single lets, compliance with building regulations and higher fire safety standards is essential. It’s advisable to consult the local HMO Enforcement Officer for specific fire safety requirements, which could include installing fire doors, fire blankets, and smoke and carbon monoxide alarms.

HMO furniture and furnishings

While not legally required, HMOs are generally expected to be furnished. Any provided furniture must meet the fire resistance requirements outlined in the Furniture and Furnishings (Fire) (Safety) Regulations 1988. Furniture manufactured since March 1989 usually complies with these regulations.

Maintenance and repair

As an HMO landlord, you are responsible for the maintenance and repair of several aspects of the property, including:

• Shared or communal areas

• Water and gas pipes, heaters, fixed radiators, and water heaters

• Electrical wiring

• Exterior elements like structure, window frames, and walls

• Plumbing fixtures such as sinks, showers, baths, and toilets

Information notice board

An information notice board should be installed to display:

• Emergency contact details

• Fire escape information

• Health and safety information, including a copy of the gas safety certificate

• Landlord or property management details

• Rubbish or recycling collection timetable

Council tax and utilities

Typically, HMO landlords cover council tax, television license, phone, internet, and utilities. Providing central broadband and a TV license covering all TVs in the property is often an effective approach.

The long-term perspective

While the initial effort and investment can be substantial, the long-term benefits of converting a property into an HMO are often worth it. Along with higher potential rental income, landlords can benefit from spreading risk across multiple tenants. This diversification can mean a more stable income stream, even during times of economic uncertainty.

Converting your property into an HMO is a strategic decision that can offer substantial financial rewards. However, it requires careful planning, a solid understanding of legal requirements, and a commitment to maintaining high safety and management standards. With the right approach, converting to an HMO can be a smart move for property investors looking to maximise their returns and diversify their portfolios.

With your new HMO property, you may need to figure out the best HMO Landlord Insurance coverage. CIA Landlords is never been beaten on price; contact our team of experts today at 01788 818 670 for more information.