Converting an auction property into a House in Multiple Occupations (HMO) is a popular strategy for property investors seeking to maximise rental yields. HMOs offer higher rental income compared to standard buy-to-let properties by letting individual rooms to multiple tenants. However, the process involves careful planning, financing, compliance with regulations, and effective project management.
In this guide, we’ll walk you through the essential steps for converting an auction property into an HMO, including financing options, legal requirements, renovation tips, and strategies for optimising returns.
What is an HMO?
Benefits of Converting to an HMO
Higher Rental Yield: HMOs typically generate 1.5 to 3 times the rental income of a single-let property.
Diversified Income: Multiple tenants reduce the risk of losing all rental income if one tenant moves out.
Increased Property Value: A fully compliant and tenanted HMO often has a higher valuation, especially when assessed on a yield basis.
Step-by-Step Process to Converting an Auction Property into an HMO
1. Secure Financing for the Purchase Before attending an auction, arrange financing to ensure you can complete the purchase within the required timeframe (typically 28 days). Bridging finance is often used for auction properties needing refurbishment.
- Key Financing Options: Bridging Loans: Short-term finance ideal for properties requiring renovation before becoming mortgageable.
- Development Finance: Provides funding in stages for larger conversion projects.
- HMO Mortgages:: Once the property is tenant-ready, refinance with a long-term HMO mortgage.
- Tip: Have a clear exit strategy, such as refinancing or selling the property, to reassure lenders.
2. Understand HMO Licensing Requirements
Key Licensing Considerations:
- Mandatory Licensing: Required for properties with five or more tenants forming at least two households.
- Additional Licensing: Some local councils extend licensing to smaller HMOs.
- Selective Licensing: Applies in designated areas to improve housing standards.
How to Apply for an HMO Licence: Submit an application to your local council with details of the property layout, amenities, and fire safety measures.
Pay the licensing fee (varies by council).
Ensure the property meets all legal standards before the inspection.
Step 2: Estimating Repair Costs
Once you have a clear understanding of the issues, the next step is to determine how much repairs will cost. To do this:
- Get independent quotes from at least two contractors.
- Consult specialists (e.g., a roofing expert for roof problems, a damp specialist for moisture issues).
- Prioritize urgent repairs versus those that can wait.
If repairs are expensive, it may be worth negotiating with the seller to cover costs or adjust the asking price.
3. Plan Your Renovation and Conversion
- Essential Renovation Tasks: Fire Safety Measures: Install fire doors, smoke alarms, and emergency lighting.
- Room Sizes: Ensure each bedroom meets minimum size requirements (e.g., 6.51 sqm for a single adult).
- Shared Facilities: Provide sufficient kitchen, bathroom, and communal spaces based on tenant numbers.
- Energy Efficiency: Improve insulation and heating to meet EPC standards (minimum EPC rating of E in the UK).
Tip: Work with a contractor experienced in HMO conversions to streamline the process and ensure compliance.
4. Furnish and Prepare for Tenants
Once the renovation is complete, furnish the property with tenant needs in mind. HMOs typically require basic furniture, such as beds, wardrobes, and desks in each room, as well as white goods in the kitchen.
Checklist for HMO Furnishing:
- Fire-retardant furniture.
- Locks on bedroom doors for privacy.
- Appliances and sufficient storage in shared spaces.
5. Market Your HMO Property
Market your property effectively to attract reliable tenants. Platforms like SpareRoom, Rightmove, and local letting agents are ideal for finding HMO tenants
Key Marketing Tips:
- Highlight shared amenities and proximity to local facilities or transport links.
- Offer inclusive rent that covers utilities, Wi-Fi, and council tax to appeal to tenants.
- Use professional photography to showcase the property.
Financial and ROI Considerations
1. Calculate Renovation Costs:
Prepare a detailed Schedule of Works to estimate costs accurately. This should include labor, materials, and contingency funds for unexpected expenses.
Example Renovation Budget for a 5-Bed HMO:
| Task | Cost (£) |
| Fire Doors and Safety | £5,000 |
| Kitchen Upgrade | £7,000 |
| Bathroom Renovations | £5,000 |
| Flooring and Decoration | £4,000 |
| Furnishing | £3,000 |
| Total | £24,000 |
2. Project Your Rental Income
- Estimate your rental income by researching local HMO room rates. For example:
- Rent Per Room: £500 per month.
- Number of Rooms: 5.
- Total Monthly Income: £500 x 5 = £2,500.
- Annual Income: £2,500 x 12 = £30,000.
Compare this to the income from a single-let property to understand the uplift in yield.
3. Calculate Your ROI
Use the formula below to calculate the Return on Investment (ROI):
- ROI (%) = [(Annual Rental Income – Annual Costs) / Total Investment] x 100
- Example Calculation:
- Annual Rental Income: £30,000
- Annual Costs (Mortgage, Utilities, etc.): £15,000
- Total Investment (Purchase + Renovations): £250,000
ROI = [(£30,000 – £15,000) / £250,000] x 100 = 6% ROI
Benefits of Converting an Auction Property into an HMO
- Higher Yields: HMOs consistently outperform single-let properties in rental income.
- Demand: Growing demand for shared housing among students and professionals ensures high occupancy rates.
- Value Uplift: A well-converted HMO can achieve a higher valuation, especially when appraised on a yield basis.
Key Takeaways
Converting an auction property into an HMO is a lucrative strategy that can deliver strong rental yields and increased property value. However, success requires careful planning, adherence to licensing regulations, and effective project management. By securing the right financing, understanding the conversion process, and focusing on tenant needs, you can turn an auction property into a high-performing HMO.
FAQs
Ans: Not always. Licensing depends on tenant numbers and local council rules. Check with your local authority for specific requirements.
Ans: Yes, auction finance, such as bridging loans, can cover the purchase and initial renovation costs.
Ans: Look for properties with enough space to meet HMO standards, close to transport links or universities, and with the potential for high rental demand.
