HMO Conversion Guide – How To Turn Any Property Into An HMO

Are you exploring the potential of an HMO conversion? You may have found an old police station, a former GP surgery, or some rundown townhouse, and the idea of converting it into a House in Multiple Occupation is on your radar. Property developers and landlords –seasoned and new– know that HMO conversions can come with high cash flow and valuation rewards but also with significant risks.

This transformation is a complex project where things can go awry without the proper knowledge, experience, or advice. So, read on as we delve into key details of HMO conversions, covering costs, risks, planning, building, licensing, and more.

The goal is to equip you with the information needed to make informed decisions about whether or not to convert your property into an HMO and, if so, how to navigate the process successfully.

What Is A HMO Conversion?

An HMO conversion is a legal change of a property from its current use class to either a C4 Class (House Of Multiple Occupation) or Sui Generis (HMOs with seven or more occupants).

This conversion enables the property to function as a shared house for three or more unrelated tenants. These tenants, usually from distinct households (at least two), share communal areas such as the kitchen and living room.

Types Of Properties To Convert Into HMO

So, what kind of properties would you want to convert into an HMO?

When considering properties for conversion into an HMO, choosing locations that align with the nature of shared living is truly important. Even with the ample space they offer and as tempting it may be, an old farmhouse in the middle of the countryside isn’t suitable. You’d struggle to find good tenants, if any unless they’re wealthy and don’t need to work, commute, or share accommodation. All of which defeats the purpose of HMOs anyway.

However, unconventional properties like old police stations, fire stations, guest houses, shops, churches, factories, theatres, nightclubs, GP surgeries, and even former prisons can be ideal candidates. Since they already operate as establishments with multiple rooms and communal areas, it’s easier to convince the local authority that it’s a good idea to utilise such a building as an HMO without risk to the area.

Larger Buy-to-Let (BTL) properties also present opportunities for HMO conversion. It could make for a decent HMO if you’ve got a BTL with three or more bedrooms and at least one living room.

Converting a property into an HMO can significantly increase returns, sometimes doubling or even tripling your monthly cash flow.

 

HMO Conversion — Risks Vs Rewards

Converting a property into an HMO offers the advantage of providing housing for more people and efficiently using available space. To determine its worth, let’s examine the rewards and risks associated with an HMO conversion.

Increased Cashflow (Reward)

Turning a property into an HMO can significantly boost cash flow and income compared to a standard Buy-To-Let. This financial boost is because tenants pay rent per room rather than for the property as a whole, leading to a higher return on investment.

For instance, a 3-bedroom BTL in Liverpool with a monthly rent of £600 could generate around £2,500/month post-HMO conversion; this represents an impressive increase in monthly income, exceeding 300%.

These numbers are perfectly achievable when you design your HMO to the best standards and optimise available space.

Tax Advantage (Reward)

Another advantage you can get is with the Tax Man. Good old HMRC.

The government provides a 5% VAT reduction for HMO conversions, and –while it doesn’t apply to professional services like solicitors and architects– this benefit helps you get a neat 5% off your building costs in the form of VAT relief.

Tenant Diversification (Reward)

Hopefully, you’ve never had to deal with a tenant in arrears, and you’ll never have to. But for the unlucky few, this is a challenging reality, more often with single-tenant properties where there is always the risk of the tenant not paying and running into arrears. Unfortunately, through the legal proceedings of eviction, the property can become a liability rather than an asset. Thanks to tenant diversification, this risk is far smaller in the case of HMOs.

The likelihood of multiple tenants simultaneously failing to pay rent is low, providing greater security. Additionally, the presence of various tenants also reduces the chance of void periods, as the probability of all tenants simultaneously vacating is slim.

The increased tenant diversity of HMOs often instils confidence and maintains a steady cash flow.

To give yourself that extra bit of coverage, check out our Tenancy Agreement Template. 

Increased Valuation (Reward)

An additional advantage of opting for an HMO conversion lies in the potential for increased property value appreciation.

HMOs often attract higher valuations compared to traditional residential properties. An HMO can sometimes receive a commercial valuation, especially if it shares proximity with other commercial establishments such as guest houses, shops, or hotels.

While the exact gains in valuation are not guaranteed, they present a compelling and realistic possibility. HMOs’ unique characteristics and income-generating potential contribute to their perceived higher value in the eyes of property valuers. This aspect adds another layer of financial incentive for investors looking to maximise returns through strategic property conversions.

Repurposing Old Properties — Satisfaction (Reward)

The feeling of satisfaction from repurposing and breathing new life into a property is a significant reward in my eyes.

By undertaking such conversion projects, you’re enhancing the property’s economic value and revitalising it, preventing it from falling into a state of neglect and decay.

This dual impact on the property’s financial worth and its overall vitality adds a fulfilling dimension to the process of property transformation. Beyond financial considerations, it’s a gratifying experience, contributing positively to the community and the broader landscape of property utilisation.

I’ve highlighted some substantial rewards associated with HMO conversions, but addressing the potential risks involved in such ventures is essential. Let’s explore further.

HMOs have high entry barriers. They have a more complex process than standard Buy-To-Let investments and are often more challenging to buy, stay compliant and find tenants than a BTL.

The HMO conversion process is a more complicated one that involves various regulatory parts:

• Planning Permission
• Article 4
• Fire Regulations
• Fire Doors
• Licensing

Renovations for HMOs tend to be more expensive, adding to the overall investment. Finding a viable HMO conversion with a high likelihood of success takes work, necessitating a thorough exploration of requirements and associated costs, which we’ll look at in more detail below.

To Mitigate Risk? → Work with an expert in each of the areas above

Wrong Location (Risk)

For a property investor, few scenarios are as disheartening as buying or investing in a property that remains unoccupied. Wouldn’t you agree?

When undertaking an HMO conversion, expecting absolute assurance may be unrealistic. But, in terms of finding tenants, your level of certainty must be as close to 100% as possible.

Investing in an area with little to no demand for shared accommodations can have severe financial repercussions. Likewise, the dynamics of demand and demographics are subject to change –think shared accommodation in cities during a pandemic, when demand dropped, influenced by the rise of remote work culture.

To Mitigate Risk? → Test and validate demand for shared housing as much as possible before starting an HMO conversion.

Misjudging Project Timeline (Risk)

Due to the complexity of HMO conversions, the project timelines are often underestimated.

In a real scenario, the duration for securing planning permission might take longer than expected, fire assessments could face setbacks, or you may encounter licensing issues. Unexpected delays can happen, often entirely out of your control. Failing to anticipate these issues can cost you additional time and money, for instance, due to elevated mortgage expenses or increased bridging costs.

To Mitigate Risk? → Seek local expert advice for timeframes and plan for the worst-case timeline and scenario.

No Exit Strategy (Risk)

Venturing into HMO conversions without a well-thought-out exit strategy is a dangerous move.

In the face of potential challenges, it’s crucial to have a contingency plan for various scenarios –to know what to do if things fall to bits. For instance, if you don’t find tenants, planning permission is refused, article 4 introduced, or you can’t get an HMO license.

Having backup strategies is very important. For example, converting it to a single lease or flipping and selling it could be part of your strategy.

Tip –always incorporate shared bathrooms in your design; this offers greater flexibility for converting back into a single let, compared to an all-ensuite HMO.

To Mitigate Risk? → Always have multiple exit strategies.

Can’t Get Planning Permission (Risk)

HMO Planning Permission is the formal approval from the council allowing you to change a property’s use in line with “Permitted Development”.

Councils have different interpretations and regulations concerning room size, occupancy limits, and other factors. Knowing and understanding what specific councils expect is a tricky task.

That’s why collaborating with an expert, such as an architect or planning consultant, is highly advisable. Their expertise will help you navigate and stay clear of tricky waters, avoiding potential pitfalls.

The risk of not getting your project through planning means you may pay substantial lending costs and fees and possibly lose the deal due to project delays.

To Mitigate Risk? → Work with a planning expert like an architect.

Inexperienced Power Team (Risk)

Working with inexperienced people can also pose a significant risk to your HMO conversion plans. Collaborating with knowledgeable and experienced professionals who can guide you effectively along the way is critical.

By way of illustration, a less experienced architect may submit incorrect or incomplete plans or room designs to the council; this can even lead to planning rejection. Or they may give insufficient details to the build team, and the designs could result in wasted space. All this can affect your investment plans and potentially cost you a lot of money to rectify later.

An ideal power team is essential for a successful HMO conversion, and I’ll discuss this further below.

To Mitigate Risk? → Build a solid power team

HMO Conversion — Costs

As you can see, an HMO conversion comes with a whole set of risks. I don’t want to scare you or put you off, but I’d rather be transparent to help you make the best decision for yourself. On the plus side, these risks can be effectively mitigated by working with an experienced professional with a track record of successful HMO conversions.

Now, let’s talk about costs, certainly a key consideration for most investors. HMO conversion costs are influenced by various aspects such as location, time of year, economic conditions, material costs, and other factors that are impossible to predict.

Here are some costs to be mindful of, although not all may apply to your specific project:

· Renovation and Construction	o Materials and Building Costs o Furniture costs
· Consultants	o Architect o Structural engineer o Party wall surveyor o Acoustics consultant, o Building control o Planning consultant o Quantity surveyor
· Solicitor fees
· HMO planning application fee
· Fire regulations compliance	o Fire assessments o Fire alarms o Smoke detectors
· Council Tax
· Insurance costs
· Management	o Lettings, tenant finding service, sourcing fees
· Lending costs	o Mortgage o Brokers o Bridging loan o Private investors
· Certificates Costs	-Once o Building Regulation Certificate (at the end of construction) o Energy Power Certificate (EPC)  -Annual o Gas Safety Certificate -Every 5 Years o HMO License o Electrical installation Certificate o Fire Detection / Alarm System Certificate

HMO Planning Permission

Converting a property into an HMO can be done without restrictions in many areas, as this falls under “permitted development rights”. However, some local authorities, in an effort to regulate HMOs, have implemented measures like Article 4. In such areas, obtaining HMO planning permission is necessary before you can operate the property as such.

Do You Need Planning Permission To Convert A House To A HMO?

If the area falls within permitted development rights, then you don’t need planning permission to convert a house into an HMO (for up to six occupants).

However, if there is an Article 4 restriction in the area, you’ll need HMO planning permission to convert the property, irrespective of the number of people living within.

Remember, if you’re planning to house more than six occupants, you need full planning applications anyway. At this point, the use of property is classified as Sui Generis HMO.

Certificate Of Lawfulness

A certificate of lawfulness is an official document from the council allowing you to convert a property into an HMO within the permitted development guidelines.

The type of application depends on where you are with your HMO property. If you plan to begin renting it as an HMO, you need LDC for the proposed use. If it has been rented as an HMO for a while, you need LDC for existing use.

A retrospective change of use application must be submitted for HMOs in areas with new Article 4 directions and no LDC. These applications are risky, and the council may require extensive documentation to ensure the property was genuinely used as an HMO before Article 4 came into force. These documents may include:

• Track record of tenants’ ASTs (Assured shorthold tenancies)
• Former HMO licenses
• Building completion certificates from building control
• Before and after pictures

The council may request documents covering an extended period, potentially spanning decades. A Lawful Development Certificate (LDC) is crucial for peace of mind and to prevent Article 4 complications. It serves as insurance if the council changes its stance or an Article 4 restriction is implemented.

HMO BUILDING REGULATIONS

When doing any construction work, it’s vital to consider the building regulations.

Often forgotten or neglected, they’re crucial in an HMO conversion as they significantly influence the layout. Building and construction work must adhere to specific rules and standards, such as construction beam size and wall thickness.

These standards can vary between councils, so consulting with an architect or builder is best. This proactive approach ensures compliance, maximises the layout, and enhances the likelihood of obtaining planning permission.

HMO FIRE REGULATIONS

As you can imagine, there’s a heightened fire risk due to the number of occupants and the nature of living in an HMO.

Understanding the HMO Fire Regulations in depth is essential while planning an HMO conversion.

Failing to conduct a comprehensive Fire Risk Assessment and install essential fire safety measures, such as fire alarms and smoke detectors, can lead to severe consequences in the event of a fire.

Our article on HMO Fire Regulations covers all you need to know about Fire Regulations.

For an even more in-depth look into how you can manage fire testing and maintenance, download our guide.

HMO LICENSING

Another essential requirement you need to be aware of when doing an HMO conversion is HMO Licensing, a complex topic that merits detailed exploration. Here’s a basic overview.

There are two main types of HMO Licensing

1) Selective Licensing

• Applies to 3–4 bed HMOs
• Only enforced by some councils
• It’s advisable to check with the local authority to determine the applicable licensing type in the area

2) Mandatory Licensing

• Applies to any HMO with more than five occupants
• Mandatory nationwide, requiring application

TOP HMO LICENSING TIP

Ryan Windsor, Co-Founder and Director of Windsor & Patania Architects and HMO Investor, advises to “Always try to get the exact specifications from the council. As the council is the ultimate licensing authority, it’s best to find out exactly what they need in an HMO to grant a license.

Don’t hesitate to ask them for the exact specs of the fire alarms, smoke alarms, etc. A few of our clients have been unfortunate, where the council requires certain specs, and the HMO used other specs, which led to the license being declined.

Finding this out can be challenging, but if you try, you may be surprised at how easily they give out information.”

If you don’t follow HMO licensing and continue to operate without a license, the council has the right to fine you –called HMO Infraction, and it could be anywhere between £3,000 and £20,000, depending on the concern.

YOUR CORE POWER TEAM

There are many moving parts in an HMO conversion, and pitfalls are a real possibility. On the flip side, a competent team should be able to guide you through the process smoothly, helping you complete a well-executed HMO conversion.

The satisfaction of preparing your HMO, finding ideal tenants, and watching a steady income flow is unmatched. Add to that the rewarding feeling that you’ve given new life to a property and created housing for so many people. It’s a beautiful experience.

Building the right team is crucial for a successful HMO conversion, and here is a list of people you need in your power team:

• Architect
• Mortgage broker
• Solicitor
• Builder
• Accountant
• Lettings Agent
• Council (environmental officer, planning officer, licensing officer)
• Maintenance man or company

Assembling a great power team is a gradual process that requires time, dedication, and relationship building. But it’s well worth it, not just for one project but all your projects.

SUMMARISING HMO CONVERSION

I hope this guide –even if long– helped you learn a lot about HMO conversions. Let’s recap some key points:

• Good prospects for HMO conversions include old police stations, fire stations, guest houses, shops, churches, and some larger BTL
• HMOs offer increased cash flow, higher returns on investment and tax benefits
• Tenant diversification in HMOs reduces the risk of arrears and void periods
• HMO conversion costs vary based on numerous factors and expenses such as planning fees, council fees, and construction costs –we recommend making a spreadsheet
• Adhering to planning, fire and building regulations and licensing is critical for compliance –rules may change from council to council
• Working with experienced professionals, including architects and a well-rounded power team, is crucial for successful HMO conversions
• Always plan an exit strategy for your HMO –a must for investors

If you’d like to talk to an architect who’s helped convert 100s of HMOs in various councils across the UK, get in touch. We’d love to help you.