The rewards and considerations of an HMO conversion

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Increasingly, buy-to-let landlords are looking at the yields that others are getting from Houses of Multiple Occupation (HMOs) with envy.

On paper, standard buy-to-let properties can’t compete with HMOs when it comes to cashflow and income potential. In turn, a number of landlords are converting their properties into HMOs. But is it worth it and what do landlords need to consider before taking the plunge?

For the uninitiated, a House in Multiple Occupation (HMO) is simply the definition of a property that is shared by three or more tenants who are not members of the same family. The improved income potential from HMOs is easy to understand; because landlords will earn per room rather than the property as a whole, the rental return will be greater. In fact, one could be looking at up to three times as much per month.

Another positive factor to consider is that in almost all circumstances, losses due to void periods will be lower, because it is very unlikely that all of the tenants in an HMO will move out at the same time.

Finally, there is a good chance that the HMO will be worth more than a traditional buy-to-let should the landlord want to sell up.

Of course, converting a property to an HMO is unlikely to be an insignificant undertaking, either in terms of time or money. In addition, with inflation running at levels not seen for 40 years, materials, labour and energy costs are constantly rising, which can have the effect of quickly decimating the budget for a property conversion.

Landlords will need to ensure they have a fire risk assessment on an HMO (for a number of good reasons). Unlike in a regular buy-to-let, it is unlikely that the tenants will know each other much beyond nodding terms in the corridor and so will not have a joined-up view on fire safety and procedures. In addition, doors - which will need to be fire doors - are much more likely to be locked than in a buy-to-let property.

On the positive side, it is worth noting that landlords can claim 5% off of their building costs in the form of VAT when converting to an HMO, but it’s always worth investors talking to a specialist tax adviser to confirm how their investment might affect their tax position.

There are no guarantees that converting any property into an HMO will automatically generate improved yields. Landlords need to have done their homework to ensure that there will be demand for an HMO in the area of the property.

All HMO landlords need to obtain a licence from the Local Council Housing Department, which validates that that the property is managed properly and meets certain safety standards. Licences need to be renewed every three years and there is no guarantee that a landlord will automatically be given a licence for an HMO if it is not deemed to be up to scratch.

One of the largest threats to a landlord’s HMO plans can be an Article 4 Direction, which are at the discretion of a local authority. This is a direction under Article 4 of the General Permitted Development Order which enables a local council’s planning department to withdraw specified permitted development rights across a defined area. This means landlords may need planning permission for development that would normally be permitted.

These factors should not necessarily put landlords off; more that they need to do their homework thoroughly before embarking on an HMO conversion. If so, then they could well find their yields are significantly increased – welcome news at a time when finances are being squeezed from all sides.

When it comes to financing an HMO conversion, bridging can provide the perfect solution, helping to fund the purchase and the cost of the works in the short-term, before refinancing onto a longer-term product. At London Credit, we have a lot of experience in providing bridging loans for this purpose and our BDMs are always on hand to discuss a case.

 

As published in Financial Reporter:

https://www.financialreporter.co.uk/the-rewards-and-considerations-of-an-hmo-conversion.html

The rewards and considerations of an HMO conversion
11 July 2022

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