HMO Conversions are for 7 bedrooms and plus in which you require a licence and planning permission. Whilst these generate large cashflow when the properties are fully tenanted, it is important to consider the maturity period which, from the point of agreeing a purchase, can last up 12 months. They are also capital intensive. However, these are attractive assets with higher yields, high cashflow and attractive equity creation.
- 7 bedrooms or more
- Large double fronted terraces
- Attic and basement conversions
- Planning permission required
- Licence required
- High cashflow
- Commercial Valuations
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Configuration – it’s very important that investors consider carefully what amenities go into HMOs of this size, both in terms of tenant market demand and in order to satisfy the council that a large HMO is suitable in the local community. Each council has guidelines for HMOs in terms of kitchen space,
bathrooms and communal living rooms depending on the number and size of bedrooms. These should be studied with your architect.
From a tenant perspective, largely HMOs become less personal and can feel like a hotel, therefore room size, en-suites and breakout areas like living rooms and kitchens are very important. Other things to consider for tenants are TVs, desks, sofas, coffee tables and kitchenettes in bedrooms, and other facilities like garden tables and number of washing machines suitable for the number of tenants.
Investment management – properties that are suitable for conversion to 7 bedrooms and plus generally are large Victorian properties with high ceilings. That, in turn, equals bigger a bigger internal area to heat and therefore higher energy bills. Managing utility bills on these properties is very important, so M&E designs for electrical and gas usage must be thought about early on. Heating control systems must be installed to manage usage remotely.
Licencing – these do require a licence to operate from the Council as a rule, so landlords should examine the cost of the licences because this can significantly eat into cashflow. The costs are always published on the council website.
Planning – these HMOs will always require permission to convert from C3 dwelling houses to C4 Sui-generis. From submitting the plans to the council it can, in our experience, take anywhere up to 5 months for an application to go through the full process so this isn’t for the faint hearted. Some councils also have a policy where all HMO applications must go to a committee hearing where councillors will debate the merits of the application before giving final approval.
Property Valuations – the banks value these properties as investment vehicles due to their change in planning class and having an HMO licence. Their valuations are based on an annual multiple of the income the asset generates and this can vary depending on location, yield and valuer. Getting the right team on board here to help know the market and get the right valuation is critical.