How to convert a property into an HMO 2020 Update
19th April 2020
19th April 2020
A house in multiple occupation – commonly known as an HMO – is a property which is rented by three or more tenants who aren’t part of the same household (i.e. a family).
Many landlords let HMOs as they consider them a more efficient way to run a rental portfolio. Although there may be more work to do, the opportunity to collect rent from a higher number of tenants and a potential higher rental yield is appealing. What’s more, certain properties and locations are tailor-made for HMOs. For example, a busy student area with large, extendable properties. When it comes to tenants, HMOs are sometimes preferable due to potentially lower rent payments and the opportunity to live with more people.
As landlords have had to deal with increased regulation and financial setbacks in recent years, such as Section 24 and the 3% stamp duty surcharge, many have looked for ways to maximise the potential of their portfolios. Alongside incorporation, one of the most popular strategies has been to convert rental properties into HMOs in order to benefit from higher yields and rental returns.
If you're considering converting a property into an HMO, there are several things you'll need to do, from meeting legal requirements to making the property habitable for more people.
What are the first steps?
One of the most important legal aspects of letting an HMO is getting the relevant licence in place. The rules surrounding HMO licensing were updated in October 2018 and were expected to affect up to 177,000 additional properties at the time.
If you’re letting an HMO, it’s highly likely you’ll need some sort of licence. If your property is let to five or more tenants from more than one household, some or all of the tenants share toilet, bathroom or kitchen facilities and at least one tenant pays rent, then your property will be considered as a large HMO and will need a licence.
If some, but not all, of these criteria apply, then you may still need a licence and it's wise to check with your local authority. HMO licences are valid for five years at a time and you'll require a separate licence for each HMO you’re running.
HMO Fire Safety & Smoke alarms
As well as applying for a licence, there are various other compliance measures you’ll need to meet. These include sending a valid gas safety certificate to your local authority each year, installing the relevant smoke alarms and carbon monoxide detectors and having safety certificates for electrical appliances available on request.
At the same time as the licensing changes, guidelines for minimum HMO room sizes were also introduced with landlords needing to adhere to the following guidelines:
As part of these regulations, there were also new rules on overcrowding for landlords to comply with:
Depending on your local authority, there may be other criteria for you to meet in order to let a compliant HMO.
Does your property need converting to a HMO?
If your property is not HMO-ready, you may need to make some adjustments to make it suitable for three or more tenants from separate households. Always remember the HMO property needs to be habitable and provide enough space for tenants to live comfortably. As well as your compliance obligations outlined above, the key things you’ll need to consider are space, layout, facilities, furniture and appliances.
If you convert your property into an HMO, it will be visited by your local authority within five years. They will carry out a Housing Health and Safety Rating System (HHSRS) risk assessment to identify any issues. It’s worth noting, however, that the HHSRS was reviewed by the Government in 2019 and therefore its guidelines could be updated in the future.
If any unacceptable risks – such as asbestos, carbon monoxide or radiation - are found during the assessment, you will need to address them immediately.
HMO Room conversions
It's likely you’ll be converting the use of some rooms. For example, spare rooms may be converted to additional bathrooms and reception rooms to additional bedrooms. You may also need to move or construct walls in order to alter room sizes - these are all aspects you'll need to plan carefully before undertaking any work. It's also advisable to use a professional when working on the more significant parts of the conversion and determine whether you need planning permission for any major renovations.
Converting the garage into additional living space is another popular conversion option for HMO landlords. The likelihood is this will need planning permission, so again you’ll need to check with your local council before undertaking any work. In many cases, traditional Victorian terraced houses and similar properties are ideal for HMO conversion. This is due to their spaciousness and the size of the reception rooms.
For example, in a three-bedroom terraced house a landlord could convert one reception room and the loft into bedrooms to turn it into a five-bedroom HMO. Converting reception rooms is often essential, but not always the right decision. In the perfect scenario, the property will have two reception rooms - one of which can be converted, leaving the other room to remain as a dining or living space. Some renters might be put off properties with no living room or reception space, so it's something you'll need to consider carefully.
Depending on the property, converting it into an HMO is going to be expensive and take some time. You need to make sure you budget properly and don't expect instant financial returns.
Five quick HMO renovation tips
While converting your property to make it suitable for multiple tenants to live in, there are also a range of additional safety requirements you’ll need to follow in order to let a compliant HMO. Fire safety will be one of your principle considerations. You will need to install smoke alarms, keep them in working order and be able to provide your local authority with a declaration of their safe condition on request.
Alongside this, as with all lets, you'll need to ensure that all gas appliances are maintained, with a Gas Safe registered engineer carrying out a gas safety check each year. All electrical installations and appliances you provide will need to be safe to use, while any furniture and furnishing you provide must meet the fire resistance regulations. Meanwhile, you will need an Electrical Installation Condition Report (EICR) and test certificates for your electrical appliances. It's likely you'll also need to install fire doors in certain places - make sure that your tenants know not to obstruct them or prop them open.
What's more, you'll need to keep all exits clear from obstructions (and advise tenants to do so too), while marking fire exits and providing tenants with instructions on what to do in the event of a fire.
Some other safety requirements you’ll need to consider when preparing your HMO to let could include:
The safety requirements for HMOs are very extensive and are likely to differ depending on your local authority. Therefore, it's always best to check with them first to get a full list of safety requirements before embarking on your conversion plans.
What else do you need to consider when creating a HMO?
Another piece of legislation landlords need to comply with - including those letting HMOs - is the Homes (Fitness for Human Habitation) Act 2018, which came into force in March 2019. The legislation means all rented accommodation must be suitable for human habitation at the start of the tenancy and throughout. It also provides tenants with greater powers to hold their landlord to account if their property is substandard.
To ensure your property is fit for human habitation, there are a range of potential issues you’ll need to avoid. Some of these include:
What's more, if the property contains any of the 29 hazards outlined in the HHSRS regulations, it's likely to be deemed unfit for human habitation by the courts. As a landlord, you'll be exempt from 'acts of God' and any issues caused by tenants.
One of the key differences between an HMO and a standard rental property is that you could encounter a higher turnover of tenants. Therefore, it's advisable to put aside at least two months' worth of rent each year to cover potential void periods. You’ll also need to make sure you have all the right tenancy documentation in place and an efficient referencing process for new tenants.
Another crucial factor to remember is that, due to the nature of having more tenants, the property is likely to come under more stress over the course of a tenancy.
Bathrooms, kitchens, floors and doors will all take a lot more wear and so you need to make sure you're ready for this and are prepared to respond to all reasonable repair requests with speed and efficiency – as with any other tenancy.
Be sure to check that your landlord insurance policy, if you have one, is suitable for a HMO – as not all landlord insurance policies cover a house of multiple occupancy.
Buy-to-let mortgage terms for HMOs
When preparing to let an HMO, you’ll need to check your buy-to-let mortgage terms. Not all agreements allow properties to be let as HMOs, so check your terms and conditions.
If you’re not sure about something, you can check-in with your lender or speak to a buy-to-let mortgage broker. Your agreement may allow you to get started right away or you may need to arrange a different type of mortgage to proceed.
Research and budgeting
As mentioned above, you’ll need to prepare the property fully before letting it, taking no shortcuts and making sure you have enough money put aside to cover maintenance costs during and after the tenancy.
Converting a rental property to an HMO can be an effective investment with highly profitable rental yields, but it does require more work and upkeep.
Therefore, before jumping straight in, you'll need to do your research, take your time and carefully compare the additional work and expense against the additional profit you're likely to make.
As with all projects of this nature, a considered combination of research and budgeting can help you to make the right decisions and ultimately benefit from the greater yields on offer from HMO properties.