November 28, 2024

What exactly is an HMO?

A ‘House in Multiple Occupation’ (HMO) is a property rented by three or more people who are not from a single household and share facilities like bathrooms and kitchens.

As commercial finance brokers, you might notice a growing demand for HMO mortgages and funding to convert standard Buy-To-Let (BTL) properties into HMOs.

Informing your clients about HMOs can help them make informed investment decisions.

HMO landlords have some extra considerations:

  • A large HMO (five or more beds) requires council licensing in England and Wales
  • PAT testing, annual gas and electrical certificate requirements, fire safety, and smoke detectors
  • Increased levels of property management due to a larger number of tenants

The returns and increased yield from HMOs are attractive, along with other benefits:

  • High level of tenant demand
  • Lower-income vacancy rate issues, as tenants departing don’t remove the whole property income
  • Easily identifiable areas of increased demand, such as hospitals and universities

HMOs come in all shapes and sizes, from three beds to unlimited. We’ve seen student accommodation in this category of mortgage with over 100 rooms!

Plenty of lenders are willing to back HMO investments, but they all have different criteria on LTV, bed numbers, landlord experience, etc.

Encourage your clients to search the market for their perfect HMO investment property and let you handle finding the most suitable funding.

HMO Conversions - The FAQs

If your client is an existing or prospective landlord, what should they consider when converting a single-unit residential property into an HMO?

We take a look at FAQs so that you can help point clients in the right direction – and into a converted HMO property:

What exactly is an HMO Conversion?

This is the conversion of a single residential dwelling into a House in Multiple Occupation (HMO), which is normally labelled as a C4 category property under planning regulations.

Do HMO Conversions require planning permissions?

In short, it depends on your local planning authority, and whether they do or not is based on the property’s location. Planning won’t be mandatory in permitted development areas but will be if it is located in an Article 4 Direction (A4D) area.

We recommend always confirming planning requirements with the local authority.

What rate of VAT is applied to construction costs for HMO Conversions?

Where the conversion increases the number of dwellings in a property, for example, if a 3-bed property is converted to a 5-room HMO, VAT relief is available so that 5% is applied instead of 20% on the contractor costs in the conversion of the physical property itself.

It’s especially useful if your landlord client isn’t VAT-registered!

Licensing

Their local council or authority will confirm their criteria for HMO Licensing, but as a rule of thumb, properties with five rooms or more will require licensing.

What else does an HMO landlord have to consider in the conversion?
  • Fire regulations – smoke detectors and self-closing fire doors

  • While checking local authority planning requirements – it’s worth also confirming if they have any specific construction standards that the conversion will have to meet

There are well-known positives for landlords letting HMOs over standard Buy-To-Let properties, but they should approach a conversion project fully aware of all the regulations and costs involved, as these all play into their Return On Investment calculation.

To discuss Fiducia Commercial Network or to apply to become an Appointed Representative email the team via by clicking this link.