Why is an HMO Conversion better than a BTL?
What is an HMO Conversion?
HMO conversions refer to the process of converting a single family residential property into a house share.
Instead of renting the whole property to one tenant the property is split into separate dwellings.Where three or more unrelated tenants share communal facilities such as kitchens, bathrooms and living areas.
Typically the process involves completely reconfiguring the interior of the property in order to maximise rentable rooms and meet the strict legal and safety requirements, such as fire safety measures, room size regulations, and adequate ventilation.
HMO conversions are particularly appealing to landlords and investors looking to boost rental yields, as they enable the property to accommodate multiple tenants, each paying rent individually, thereby generating significantly higher income compared to traditional single-tenancy Buy-to-Let properties.
The Key Differences between an HMO Conversion and a BTL
While both HMOs and BTLs are popular property investment models, they differ significantly in their structure, management, and returns.
Rental Income: A BTL property generates income from a single tenant or family, whereas an HMO collects rent from multiple tenants, leading to much higher yields.
Regulations: HMOs require licensing and stricter compliance with safety standards, while BTLs have fewer regulatory hurdles.
Management: HMOs demand hands-on management due to the number of tenants, whereas BTLs are simpler to oversee.
Tenant Type: BTL tenants are often families or professionals, while HMOs cater to students, young professionals, or key workers looking for affordable housing. HMO tenants are typically more transient, the average Assured Shorthold Tenancy (AST) is 6 months rather than 1 year.
For me, the higher returns and diversified tenant base of HMOs outweigh the added complexity and upfront effort.
How Big is an Average HMO
Most HMOs typically range from 3 to 7 bedrooms, with shared spaces like kitchens, living areas, and sometimes bathrooms.
The good ones all have en-suite bathrooms and rooms quite a bit larger than the minimum space standards.
Local council guidelines often dictate minimum room dimensions and communal space requirements, ensuring the property is suitable for multiple occupants.
The HMO Conversion Process
Expert planning is essential for a successful HMO Conversion. Getting the plans right can mean the difference between getting top market rents and not being able to rent the property.
Adherence to local HMO licensing requirements is essential but there are a lot of grey lines when it comes to grant licences.
For instance a council's HMO requirements will always specify the size requirement for a kitchen however some councils I’ve worked with don’t even measure the kitchen when inspecting the property.
Experience with councils pays dividend both from the relationship you build with your local HMO licensing officer and the knowledge of what they care about and what they don’t
HMO’s generally require a lot of development. A back to brick renovation is typical because of the need to improve the layout and maximise usable space..
Moving interior walls, removing chimney breasts, moving kitchens and adding ensuites into every room with soil stacks going all over the place is normal.
Despite this planning permission is rarely needed as all of the work is internal.
Development typically takes between 15-18 weeks to complete including furnishing.
After development is completed you need to get your local HMO licensing officer to come to inspect the property in order to grant an HMO licence.
HMO licensings are required for properties with 5 bedrooms or more.
However you retain the right to rent to property as long as an HMO licence application is in progress.
How Long Does an HMO Conversion Take?
The timeline for an HMO conversion depends on the scope of work and your ability to overlap as many stages as you can.
You should overlap all pre-construction with conveyancing so that as soon as you get the keys development starts.
A light touch development may take 8-12 weeks, while a more extensive project could take 18 weeks.
Development should not take more than 18 weeks to complete, even with larger projects. After all, your contractor can always put more trades on sight to handle the increased work load.
Factors like contractor availability, material lead times, and unforeseen challenges can also impact the timeline.
Proper planning and working with experienced HMO developers can help minimise delays and ensure the project stays on track.
Managing an HMO vs BTL
Managing an HMO requires a proactive approach to meet the needs of multiple tenants while maintaining the property to a high standard.
Since HMOs often include all bills in the rent, managing utilities is necessary.
Cleaners are organised either every 3 weeks or 4 to keep the communal areas clean. This is essential for keeping tenants happy. Managing an HMO effectively is all about reducing friction between tenants.
Using a professional letting agent experienced with HMOs is highly recommended.
How much better are the returns?
The returns on HMOs significantly outperform those of traditional BTLs. While a typical BTL might yield 4-6% annually, an HMO can deliver yields of 8-12% or more.
In addition the property often gains value from the development work providing another boost to returns.
Why is an HMO Conversion less risky
At first glance, HMOs may seem riskier due to stricter regulations, higher management demands and higher tenant turnover. However, they can actually mitigate key risks associated with property investment:
Void Periods: With multiple tenants, a vacant room doesn’t impact your income as much as a vacant BTL property.
Tenant Turnover: The demand for affordable, shared accommodation ensures a steady pool of potential tenants.
Income Diversification: Relying on multiple tenants reduces the financial impact of late payments or non-payment.
These factors make HMOs a good investment, especially in uncertain economic climates. Demand for HMOs typically increases in downturns.