Diversifying your property portfolio is tough. Squeezing the best returns out of your investments can be even tougher.

What if you could do both – and skip the whole property acquisition process while you’re at it? 

HMOs can offer stunning returns and great protection against void periods. Turns out, you might already have the solution sitting in your portfolio; waiting to be transformed…

What is a HMO?

If you’ve never heard of them before, a house in multiple occupancy (or HMO – also known as a ‘house of multiple occupancy’) is a property which consists of multiple independent living units plus shared ‘common areas’.

A HMO is shared by three or more individuals from more than one ‘household’. For reference, a single ‘household’ might consist of a married or cohabiting couple, a family, or perhaps a single individual.

HMOs generally fall into two categories:

• Shared house HMOs are let to a group of tenants, who share the whole house together (but in practice usually get their own private bedroom). The tenants often have some kind of relationship to each other (e.g. a group of students). Legally, the group is treated as a single ‘joint tenancy’; more on this later.
• Bedsit-style HMOs are subdivided into independent living spaces and let out to separate tenants who are typically unrelated. Again, these tenants will share a kitchen and/or bathroom, but their tenancies are otherwise entirely separate.

A certain subset of properties converted prior to the 1991 Building Regulations are defined as Section 257 HMOs. 

For the purposes of this guide, we can ignore these for now. If you’d like to learn more about Section 257 HMOs, keep an eye on our knowledge hub for a followup article soon.

What are the advantages of a HMO for property investors?

We’ve talked before about HMOs and their benefits, but let’s go over the advantages in more detail.

• Higher yields: HMOs can offer double or even triple the rental income you might get from traditional buy-to-lets, with multiple tenants providing multiple revenue streams.
• Protection from void periods: Even if one tenant moves out, you have others still contributing rent.
• Strong demand: HMOs can be highly attractive to certain tenant types (e.g. students) for their social aspects and their lower rents per person (even if the overall combined rent is higher for you!)

It’s a win-win situation for everyone!

But there’s one more key advantage to HMOs for investors. You might already own a HMO – or at least the foundations of one – without even knowing it…

Converting an existing property into a HMO

Purchasing a new HMO can be expensive; and in the case of some investors, possibly unnecessary.

Can you turn an ordinary property into a HMO to maximise your rental yields? 

Absolutely; and it might be easier than you think.

It goes without saying that while almost any kind of property can be converted into a HMO, some properties are better suited to conversion than others. 

And of course, different tenants will value different property features.

You’re ideally looking for an existing property in your portfolio which already offers a lot of space and has good access to local amenities. Students may be more interested in a larger communal kitchen, while young professionals might appreciate more bedroom space instead.

We’d recommend looking into rear extensions and dormer loft conversions. These can add an entire extra room and therefore an extra revenue stream, without typically requiring planning permission (instead falling under permitted development).

That said, it’s always best to seek out an expert who can advise on the legal aspects of your conversion project.

Be sure to measure the size of the property’s existing rooms before any conversion work, too; as this can be very important if your HMO will require licensing…

Will I require a HMO license?

There are two types of property licences specific to HMOs which you might need to apply for:

• HMOs with five or more occupants from at least two households will legally require a mandatory HMO license, often known as a large HMO license. This is essential no matter where your property is based; and you’ll need to renew it every five years.
• The local council in your property’s area may also require licensing for all HMOs within a particular area or district. This licensing is known as additional HMO licensing.

Your property will need to meet certain conditions in order to secure a large HMO license; including minimum room sizes and gas/fire/electrical safety certification. The conditions for an additional HMO license are usually similar but may be more restrictive.

Applying for a HMO license often comes with a fee to pay. Keep in mind, if you have more than one HMO, you’ll need separate licenses for each one. 

Again, we’d recommend consulting with an expert before embarking on any conversion works.

You can find out if your property will need additional HMO licensing – and what extra conditions they might require – by contacting the local council authority.

Other considerations for HMOs

Whether you’re fully on board with a HMO conversion or still on the fence, we’d be remiss not to cover some of the potential negative factors that you’ll need to consider.

For one, more tenants means higher startup and running costs; not just in terms of maintenance and wear and tear, but also furniture, and also utility bills like heating, water and electricity. Many HMOs on the market come with bills included, which means you’ll be managing those costs yourself.

Of course, it’s ultimately your choice whether or not you want to offer all-inclusive rent to your tenants, but be sure to think about what competing landlords are doing and plan accordingly.

HMO capital growth can also be a mixed bag. 

Sometimes they can bring better returns on resale versus a regular property, but also keep in mind that the pool of buyers will be smaller. HMOs are appealing to other investors, but most homebuyers will be looking for a more traditional property.

And don’t forget, you’ll need the financing to fund the renovation works in the first place. The good news is, there’s plenty of HMO-friendly financing options on the market…

HMO development finance solutions

Depending on the size and scope of your HMO conversion project, you can typically finance the works either via:

• a bridging loan (better suited to smaller projects), 
• HMO development finance (for more extensive works), 
• equity release remortgaging, or
• a second charge mortgage.

Depending on which option you go for, you might need to refinance onto a dedicated HMO mortgage once the conversion works are done. 

The rates for these can be a little pricier than other buy-to-let mortgages, so be sure to consider the costs versus returns before committing to a big refurbishment project; and remember, speaking to a specialist broker can help you find a deal that works.

That’s where we come in. The team at SPV Mortgages are experienced in finding affordable and flexible solutions for all kinds of HMO conversion projects; including providing 100% build cost development finance to cover rear extensions/loft dormer conversions, and HMO mortgage refinancing when your property is multi-occupancy ready.

Get in touch to discuss your plans; and let’s find your perfect HMO finance deal today.