It’s no surprise that many investors are turning to HMOs due to the often superior yield when compared to standard BTL investments. Whilst they inevitably include more intense management, are subject to greater wear & tear and attract some additional costs for licensing etc. the numbers tend to stack up for these investments and the steady demand for this type of accommodation means that it is an asset class which is here to stay. The fact that some HMOs can also be valued on an investment basis, creating additional value over & above the bricks & mortar value of the building plus the cost incurred to convert it for HMO use means that manufacturing HMOs has become a solid strategy for investors looking to build their portfolios.
Given the attractive returns from HMO investments, many have turned to this strategy to boost cash-flow from their portfolios or diversify their investment strategy. HMO conversions can be hugely successful, but proceed unprepared and they can be a nightmare. This post aims to provide some practical advice for HMO conversions based on the projects that we have seen.
IS PLANNING PERMISSION REQUIRED?
Many local authorities have started to seek further control over the number of HMOs in certain areas, typically where there is already a high concentration of HMOs or where there are concerns about the impact of HMO conversions on the local housing market, community or infrastructure.
Whilst conversion of a house into a small HMO (with up to 6 occupants) is usually allowable under permitted development rights, local authorities can issue an Article 4 Direction which removes the ability to convert a house into a small HMO, meaning that a planning application will need to be submitted to determine whether the property can be converted. Details of any active Article 4 directions that might affect your plans are usually available from the local council’s website.
In cases where a property is to be converted to a large HMO with 7 or more occupants, planning permission will always be required.
One of the first points to consider when planning an HMO conversion is whether planning permission will be required.
IS THE PROPERTY SUITABLE?
As with all property investments, HMOs are still all about location. Unless you are providing accommodation to a very specific niche, properties should be well-located in areas with good transport links, proximity to amenities and employment centres.
The size & layout of the building is also crucial, you will no doubt need to fit a minimum number of rooms in the property for the return to be commensurate with the effort and cost to convert the property to an HMO. As there are strict standards for room sizes, amenities & facilities it is crucial to carefully plan the layout of the property to ensure that you can achieve the number of rooms needed and that they all meet the required standards.
Is there already a proliferation of HMOs in the area? If there are already a high number of HMOs in the area, that can indicate that there is a strong demand for this type of accommodation, however some areas can become ‘hotspots’ which can lead to (amongst other things) the introduction of planning requirements by local authorities, decreasing rents through competition caused by an oversupply of accommodation and sometimes degradation of an area.
WHO ARE YOUR TARGET TENANTS AND WHAT DO THEY EXPECT?
Before planning & designing your HMO, it is worth deciding on your target tenant profile so that the accommodation on offer meets the expectations of your occupants and that the level of rents they are willing to pay are in line with your assessment.
Supply within the HMO sector has definitely increased as more investors have turned to this strategy and as potential tenants have more choice, they tend to be more discerning about the level of amenities and quality of finish at the property.
Many professional tenants will expect some private facilities such an en-suites & small kitchenettes in their own rooms, whereas student tenants will likely appreciate a great degree of shared communal space.
WHO IS COMPLETING THE CONVERSION?
It helps to have a builder/contractor who is familiar with HMO properties due to the size & amenity standards required to obtain an HMO license. They will also be able to advise on the appropriate facilities/materials & installations to ensure that your HMO property runs as it needs to, e.g. ensuring that your tenants have enough hot water, that the electrical supply is sufficient etc.
WHO WILL MANAGE THE PROPERTY?
HMOs do not run themselves and they do tend to be more management intensive than a normal BTL property, requiring an amount of specialist knowledge to manage effectively. It therefore pays to ensure your HMO is being professionally managed by a reputable agent, preferably one who specialises in HMO properties if you are unable to manage the property yourself.
Alongside the usual management tasks of finding and vetting tenants, it is important to ensure a degree of cohesiveness in the tenants that occupy the property to avoid disagreements. Given the number of occupants at the property, there will need to be regular cleaning & maintenance to avoid the property falling into disrepair.
HAVE YOU CONSIDERED ALL OF THE COSTS?
Whilst HMO properties often generate a strong return, you still need to consider all costs to determine the level of return on your investment. You should factor in the following:
- Mortgage costs
- Insurance
- Utility bills
- Management costs (if the property is being managed on your behalf)
- Repairs & upkeep
- Furnishings
- Cleaning & gardening
- Safety certificates & checks
- Licensing costs
- Void periods
- Professional services
You should also regularly review your management costs to ensure that the investment remains profitable.
Whilst an HMO can be a great way to diversify your portfolio or boost overall cash-flow, they are without a doubt a more specialist asset type that require careful consideration as this post has covered.
We have assisted with funding a number of HMO conversions and know the sector very well. Our refurbishment loans can be a great way to finance the creation of an HMO property, if you would like to discuss a potential project, we would love to hear from you.
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