If you want to increase your property portfolio profits, converting an existing buy to let into an HMO could be a great option. Here, we look at why HMOs are so popular, the process of converting your property, and the other factors you’ll need to consider before getting started.
HMOs are a widely popular investment type amongst landlords, offering competitive rental yields and security against void periods. Generating high levels of demand from various tenant groups, they’re a fantastic property type to own in your portfolio.
If you’re not looking to purchase a new property investment, you could consider converting one of your vanilla properties into an HMO to boost your rental income. This can be a fantastic opportunity for landlords looking to diversify their property portfolios and maximise rental profits. Here, we look at three simple steps you’ll need to take:
Turn Your Property into an HMO in 3 Simple Steps:
1. Make sure the property is suitable to be turned into an HMO
The government website defines an HMO as a property rented out by at least three unrelated tenants from more than one household who share the facilities. Before converting one of your existing properties into an HMO, you need to ensure it’s suitable. For example, it must have the capacity for at least three bedrooms, and the property type suits HMO tenants; terraced houses and semi-detached properties are particularly common.
2. Seek the local council’s approval
When starting the process, you must contact the property’s local council for approval before you begin the conversion project. There are three main factors that the council look at, including:
Planning permission (Article 4)
Many areas fall under ‘Article 4’, meaning you must apply for planning permission before doing any work on the property. HMOs have their own C4 Class, so in the conversion process, the change of use may mean you need planning permission. On the other hand, for some areas, HMO conversion falls under ‘permitted development’, so you won’t need planning permission.
Regardless of whether the property is in an Article 4 area, you must arrange planning permission if the HMO will hold six or more tenants. Speak to your local council if you have any doubts or questions.
Certificate of lawfulness
A certificate of lawfulness, or an application of lawful development (LDC), is a document issued by the council that allows you to convert a property into an HMO within permitted development guidelines. It acts as an insurance that you have the right to run your property as an HMO. These are particularly important if Article 4 is imposed within your area and can be applied to new and existing HMOs.
For existing HMOs, an application is approximately £450, but for proposed HMO conversions, it will cost you around £100.
HMO Licensing
Whether you need an HMO license depends on the property size and the local council. Each local council has different rules, so contacting the relevant local authority for the property is vital to find out exactly what’s needed. Failure to produce an HMO license where one is required can result in fines of up to £3,000.
For more on HMO licensing, read our blog here.
3. Carry out the works
Once you've had approval from the council and you're happy the property's suitable to be converted into an HMO, you can start the refurbishment work. There are several specific HMO building regulations that you’ll need to comply with, such as:
- Minimum room sizes: Valuers require that rooms for single adults are a minimum of 6.52 square metres and 10.22 square meters for couples.
- Fire safety: Smoke and carbon monoxide alarms and fire doors must be fitted in every room.
- Gas safety: A gas certificate must be submitted to the council.
- Electrical safety: An electrical safety certificate must be performed annually and kept at the property.
How to fund HMO Conversion works
When it comes to funding your HMO conversion, there are a few different routes to consider.
Bridging finance
Bridging finance is commonly used by landlords looking to convert a standard house into an HMO. The main benefit of using bridging is that it’s much quicker to access the funds, meaning you can get started sooner rather than later. Bridging loans are generally more expensive than standard mortgage rates, so you must have a clear timeline of the work you need to complete to keep the costs down.
Bridging lenders require you to have an ‘exit strategy’ from the bridging loan, which in this case will be a buy to let HMO mortgage.
Capital Raise
Following a review of your property portfolio, you may find you have sufficient equity in one of your properties to fund the works. This may be more appropriate for smaller refurbishment projects. In this case, one of our brokers can help you secure a remortgage to release the funds necessary.
It’s best to work with an expert broker who can cost-up the best option for you.
Other factors to consider:
Can you convert a reception room into a bedroom?
Yes, so long as it meets the minimum room sizing requirements. Many HMO properties use all the reception rooms as bedrooms. Just be aware that communal areas are important in HMOs, so the kitchen facilities need some room for socialising to compete with similar properties.
How can I make my property stand out from other HMOs?
Given the popularity of HMOs, it’s essential you make sure your property stands out. Consider the local area; will there be enough interest from prospective tenants looking for HMOs? Are there many other HMOs in the area for you to compete with?
The best way to stand out is to complete your property to a high standard. The better the rooms, the quicker the property will get rented out. Tenants will have their own priorities when searching for properties for which they will be willing to pay higher rents, such as proximity to public transport and outdoor space. Keeping your tenants' interests in mind will set your property apart from the competition.
Can I keep my BTL mortgage, or will I need a specialist HMO product?
An HMO property typically requires an HMO mortgage. Specialist buy to let lenders better understand HMO properties, so it’s best to work with a broker to find the right mortgage deal for you.
If you convert your house into an HMO with a standard mortgage, you may be in breach of your contract and the mortgage terms and conditions you have with your lender. Speak to one of our brokers, who can help you navigate the process.
Getting started with HMOs
Making informed property investment decisions is essential to running a successful portfolio, so it’s important you discuss your plans with a knowledgeable broker (like MFB!).
We can look at your investment goals and advise you on the best property finance options available to you. Whether you’re looking to start investing in HMOs, convert existing property, or diversify your portfolio with a new property type altogether, our experts can support you with your plans and answer any questions you may have.
To get in touch, call us on 0345 345 6788 or submit an enquiry here.
