HMO Conversion Guide: What you need to know

Houses in Multiple Occupation (HMOs) are growing in popularity. Landlords are increasingly looking to include HMOs in their portfolios and future strategies. And there are numerous benefits and considerations for doing so which we’ve covered in a previous article, which can be found here. However, for sale, ready-made HMOs are less common in the market because investors in this asset class are typically holding for cash flow.

An alternative route that many landlords are taking is to buy and convert other properties into HMOs. In fact, we’ve been seeing a trend of landlords buying older, tired properties and converting them into HMOs as a way of getting into this market. HMO conversions now account for 47% of properties being developed using our bridging loans.

What makes a good HMO?

Our data suggests older residential properties, which often have larger room sizes and potential for loft conversions, tend to be a popular choice for landlords. With room size requirements part and parcel of an HMO licence they are an obvious choice. But there are other properties that can also make ideal candidates for a successful HMO property, for example old commercial units like small guest houses, or the upper floors of retail units.

Whatever property you choose, it's important to ensure you have the correct approvals and financing in place before starting work on the conversion. A lot of properties will need significant investment to both convert, and bring the property up to the necessary high standard for your prospective tenants, so it’s useful to ensure you factor this in when choosing the property. 

Do I need planning permission to convert a property into a HMO?

Converting a property into an HMO may require planning permissions. This depends on whether you are converting the property into a small HMO (Class C4) or large HMO (Class sui generis). Large HMOs, those with over seven or more people sharing, will need planning permission in order to change the use of the building to an HMO, but residential property (Class C3) can often be converted to a small HMO under permitted development. Planning requirements can vary by area and property – it’s important to take professional advice or consult with the local authority to understand their various requirements before carrying out a conversion.

Regulations for HMO Conversions

If you’re converting a property, particularly a large HMO, it’s also important to understand the regulations prior to work commencing. For example, a property which will have two people sharing a room requires a bedroom size of 10.22 square metres or over. You will also need to ensure there are adequate cooking and washing facilities for the number of people you plan to accommodate within the property. Considering all these factors ahead of the build will ensure you are offering a quality property that qualifies for its HMO licence, but keep in mind that HMO licencing is dealt with separately to planning so you need both areas covered.

How to fund a HMO

Depending on the state of the original property and how much work is required to make the conversion, changing a single-unit home or other property type into an HMO can require significant investment. With the cost of labour and materials high, it's important that the project is budgeted for appropriately. Over recent years, the standard of finish in the market has improved, which has added to both the typical budgets needed to create a modern HMO, and also the rent achieved at the end.

Bridging loans can be an effective product to use in order to fund the project without impacting your capital reserves. As mentioned above, we’re starting to see increasing numbers of landlords utilising our bridging loans to do just that.