When you’re starting out on the journey to become a landlord, houses of multiple occupation (HMOs) can appear to be a goldmine. Everyone knows that when a four-bed semi becomes an HMO, the rental income is likely to be much higher than it would be when you let it as a house-share or a family home.
There are several issues to consider.
1. When people don’t choose their housemates they tend to want more privacy, and
that often means an ensuite bathroom for each bedroom.
2. Four strangers sharing a kitchen (or five if you turn a dining room into a bedroom)
can be unmanageable. You’ll need to upgrade the kitchen too. Maybe locked storage cupboards, two sinks, two cookers, a bigger dishwasher.
3. You won’t be able to get a buy-to-let (BTL) mortgage to let your property as an HMO.
If you don’t tell your mortgage lender you plan to operate an HMO you’ll be
committing fraud. As well as risking a substantial fine for running an unlicensed
HMO. Remember too your house insurance will be invalid.
4. When you come to sell - the premises will need to be proven to be a proper HMO -
not a 4-bed home with locks (and maybe numbers) on the bedroom doors. If your
property can’t be categorised as substantially different to the house next door, the
surveyor will value it as a normal semi, in line with the house next door.
The moral of this tale is that, when you consider buying a property to convert to an HMO you’ll need to factor in the costs of doing a proper conversion in order for the property to be valued correctly.
This means you need to buy it, do the conversion - and THEN apply for a mortgage as an HMO. Unless you have a nice big pile of cash in your bank account, the only sensible way to do this is to use bridging finance.
Bridging provides the funds to make the initial purchase - and, with the right bridging, you can get your loan based on the actual market value, rather than whatever you pay for the property. This means that, if you have a motivated seller and can negotiate a deal below market value, you could already be ahead of the game.