Next in our HMO series, we discuss the ways to source your first HMO property investment and what planning permissions you might need. This article also contains professional tips from Property Forum’s CEO (multi-millionaire HMO property developer) Nicholas Wallwork.
Sourcing appropriate HMO properties
There are a number of ways you can source an HMO property:
• You can turn your existing home into an HMO.
• Or you can acquire a property to turn into an HMO. This will usually mean buying a property, although it is possible to rent a property and then, with permission, sublet it as an HMO (download our free rent-to-rent ebook for more on this approach).
There is a third option: buying an existing, up-and-running HMO. But since a well-run, high-earning HMO can command a premium sale price, the first two options are generally more realistic for beginner investors.
Whichever route you go down, it’s really important you keep your target audience – professionals, students or social housing tenants – firmly in mind as you evaluate your options.
Converting your existing home into an HMO
Renting out spare rooms within your existing home to fellow young professionals is a great, low-barrier entry to HMOs for any beginner investor. You could be a live-in landlord and live in the property alongside your tenants, or you could live elsewhere and continue to manage the property.
Pro tip: As well as considering any planning or licensing implications for your own home, you’ll also need to inform your mortgage provider. You may need to change your mortgage.
If your property is going to work for multiple tenants, you’ll need to ask yourself some practical questions, such as:
• Are there enough bathrooms in the property for the number of people who would be living there? Lots of people sharing one bathroom puts tenants off, so consider whether you could convert a small box room (one that isn’t realistically rentable as a bedroom) into an extra bathroom.
• Could you convert one or more reception rooms into additional bedrooms? Most professional tenants appreciate having some communal space, like a TV lounge. But they don’t necessarily need a separate dining room or formal sitting room.
• Is there potential to convert the loft, basement or garage into additional bedrooms? Converting the garage works particularly well, although you’d have to weigh up the overall costs and planning implications versus the increased rental income.
• What changes do you need to make from a health and safety perspective to ensure the property is safe for paying tenants?
• Will you have to upgrade your appliances to cope with the extra wear and tear? For example, a cheap and cheerful power shower won’t last long in a house with five tenants.
• What changes do you need to make in terms of décor and fixtures/fittings to appeal to your target audience? Young professionals will expect a good-quality kitchen, nice bathrooms and stylish, neutral décor throughout. Don’t forget you’ll need locks on individual bedroom doors, too (a must-have for the majority of tenants).
Buying a property to turn into an HMO
The questions listed directly above are also useful when evaluating properties to buy. But first you’ll have to make a decision on the best location for your HMO, and this will come down to your target audience. For example, young professionals will want to be either within walking distance of the city centre or close to good transport links.
Pro tip: This strategy works well in any area with a high influx of young people and is particularly effective in areas with high property prices, which means younger people can’t afford to buy a home or rent a whole property to themselves. But when setting up your first HMO, it makes sense to stick within a location that you know well.
When weighing up locations, look at the following factors:
• Local population. Do your homework on who lives in the local area: age, education, average earnings, largest source of work in the local area, and whether the population is growing. Mouseprice is great for this (try ), or you could seek out local council demographic data.
• Potential rental yield in that area. Rental prices vary wildly across the country, so check out SpareRoom to assess typical room rates. You can then weigh this up against how much it costs to buy property in that area.
• Supply and demand. Again, SpareRoom is great for this because you can see how many rooms are available to rent in an area and how many tenants are looking for rooms.
Aside from location, other key points to consider at this stage include:
• Securing a mortgage for your HMO property may be trickier than with a typical buy-to-let property. Generally, the bigger the HMO, the more challenging and costly it gets to find a suitable mortgage (costly in terms of fees and interest rates). You may find a commercial mortgage is your best bet, but always talk to an independent mortgage adviser – preferably one with experience of HMO mortgages – to find the best deal for you.
• Remember that, depending on your property and location, you may have to deal with planning permission and licensing. This takes time. Be sure to factor this additional setup time into your calculations on what you can afford. Until you get your planning permission, licensing and tenants in place, you’re the one paying the mortgage.
Pro tip: Nicholas Wallwork recommends it’s worth buying the biggest property that you can reasonably afford. Extra bedrooms mean better economies of scale and a higher income-to-costs ratio. In other words, a five-bedroom house will earn you much more in rental income than a three-bedroom house — for not much more in terms of effort, time, and costs.
Will you need planning permission to turn a property into an HMO?
It’s important to note that planning permission is entirely separate from mandatory HMO licensing, so you’ll need to consider both aspects.
Pro tip: Different local authorities have different attitudes to HMOs, and the rules can change often. Always check with your local authority regarding planning rules and licensing requirements. Trying to fly under the radar of your local authority is a sure-fire recipe for disaster.
To understand the planning side of things, we first need to understand the various property categories (known as ‘use classes’) in England:
• A regular home, occupied by a single person, couple or family is defined as a C3 property (Dwelling House).
• A small property shared by between three and six unrelated individuals is classed as C4 (HMO).
• A property shared by more than six unrelated individuals is known as Sui Generis (which translates as ‘of its own kind’ and is used to define large HMOs for planning purposes).
You always need planning permission to move in and out of the Sui Generis class. But the rules for moving between classes C3 and C4 are more fluid. In theory, changing a property from class C3 to C4 doesn’t require planning permission because it falls under permitted development rules (rules that were introduced in 2010 to simplify planning laws).
However, that’s not the case if your council has invoked something called ‘Article 4’ (or, to give it its full name, Article 4 of the Town and Country Planning Act 1990). If Article 4 applies in your area, then permitted development has been removed, meaning you will certainly need to get planning permission to change a property from class C3 to C4.
Several councils in England have already moved to restrict HMOs by invoking Article 4. There are many reasons why local authorities do this, but it usually comes down to problems associated with poorly run HMOs (such as an increase in noise complaints from neighbours).
Pro tip: If Article 4 applies in your area, it doesn’t mean you won’t be able to turn a property into an HMO. It just means you’ll have to get formal planning permission (a planning consultant will be able to help you with this). Contact your local authority to find out more, and always make sure planning permission is in place before you start renting a property as an HMO.
You can use the catagory search menu at the top right of the page to see all other HMO articles in this series. You can also download our free HMO ebook (written by our CEO Nicholas Wallwork) and ask any questions in the HMO forum.