Converting a terraced property into a House in Multiple Occupation (HMO) offers a pathway to significantly higher rental returns and investment potential than standard buy-to-let setups. In an ever-competitive rental market, this strategy allows landlords and property investors to tap into a steady income stream by offering affordable, flexible living spaces tailored to professionals, students, and those seeking shared accommodation.
However, achieving a successful HMO conversion and securing the right HMO mortgage requires careful planning, an understanding of local regulations, and a structured approach to financing and renovation.
Why Consider Converting a Terraced Property to an HMO?
Boosted Property Valuation Potential
Demand for Affordable Shared Housing
Types of Properties Suitable for HMO Conversion
1. Traditional Terraced Properties
2. Alternative Property Types for HMO Conversion
3. Key Factors in Choosing the Right Property
Steps to Convert a Terraced Property to an HMO
Step 1: Securing Funding with a Bridging Loan
Converting a property requires upfront capital, and a bridging loan can provide quick access to funds, making it an effective financing solution for HMO conversions. Bridging loans are designed for short-term use, allowing you to purchase a property, complete the required renovations, and then exit to a long-term mortgage. Here are some key considerations for using a bridging loan:
- Loan-to-Value (LTV): Bridging loans typically offer up to 70–75% of the purchase price.
- Interest Costs: These loans often come with higher interest rates than traditional mortgages, so having a clear exit strategy is essential.
- Exit Strategy: To repay the bridging loan, most investors either refinance with an HMO buy-to-let mortgage or sell the property once it’s converted.
Step 2: Planning and Completing Essential HMO Renovations
To operate as an HMO, a property must meet specific regulatory requirements, particularly around fire safety, room sizes, and amenities.
- Fire Safety Compliance: Install fire doors, smoke alarms, and emergency lighting. Many local councils require fire-safe corridors and secure fire doors in each tenant’s room to ensure safety.
- Upgrading Kitchens and Bathrooms: HMOs require facilities that can support multiple tenants. Ensure there are adequate kitchen and bathroom facilities with proper ventilation and durable, easy-to-clean finishes.
- Room Layout and Minimum Space Requirements: Each tenant’s room must meet minimum size requirements. It’s essential to research local HMO standards on room sizes to ensure compliance and create a comfortable living space for tenants.
- Security and Comfort Features: To attract tenants, ensure each room has secure locks, and consider adding CCTV in common areas for additional security. Thoughtful upgrades like modern lighting, efficient heating, and shared amenities like laundry facilities can also add value.
Step 3: Obtaining a Valuation Based on the HMO Conversion
Once renovations are complete, obtain a professional valuation to reflect the property’s new HMO status. This valuation serves as the foundation for refinancing and affects the mortgage terms you can secure. Here are some tips to achieve a favourable valuation:
- Work with an HMO-Specialist Valuer: An experienced valuer familiar with HMOs can accurately assess the rental yield and increased value due to the conversion.
- Complete All Renovations: Ensure all work is finished and present a well-maintained, tenant-ready property for the best appraisal.
- Document Upgrades and Improvements: Keep a record of all renovations, safety certifications, and licensing paperwork to show added value and ensure compliance.
Step 4: Refinancing to an HMO Buy-to-Let Mortgage
After successfully converting your terraced property into an HMO, the next crucial step is refinancing. An HMO-specific buy-to-let mortgage can offer long-term financing and release some of the equity you’ve built through the property’s increased valuation.
Refinancing Process: Key Steps
Select an HMO Mortgage Lender Not all lenders offer HMO products, so choosing one with experience in multi-tenant properties is essential. HMO lenders understand the unique requirements and income potential of HMOs, often offering higher Loan-to-Value (LTV) ratios and competitive terms.
Prepare Your Documentation When applying for an HMO mortgage, you’ll need to present specific documentation:
- HMO License: Proof that the property meets local council regulations.
- Valuation Report: Reflecting the updated property value and rental income potential.
- Rental Income Records: Projections or tenant agreements, if possible, to demonstrate cash flow.
Maximise Your Mortgage Value Based on New Valuation
Funding Options for HMO Conversions
1. Using Bridging Finance Mortgage Value Based on New Valuation
Bridging loans are popular for financing HMO conversions due to their flexibility and speed. This financing option is often ideal when quick property acquisition or renovation is necessary. However, bridging loans come with higher interest rates, so they’re best suited for short-term use with a clear plan to refinance or sell the property once the conversion is complete.
Pros: Fast funding and flexible loan structures
Cons: Higher interest costs and short-term repayment requirements
2. Capital Raising on Existing Properties
If you own other properties, you might consider a capital raise through remortgaging. This approach allows you to release equity from other assets and fund your HMO conversion without taking on additional short-term debt. Capital raising is typically more cost-effective than bridging finance and can be particularly useful for smaller refurbishment projects.
Pros: Fast funding and flexible loan structures
Cons: Higher interest costs and short-term repayment requirements
Common Pitfalls in HMO Conversions and How to Avoid Them
Failing to Meet HMO Regulations
HMO properties are subject to strict regulations. Failing to comply can result in fines or the revocation of your HMO license.
Consult Local Authorities Early:Reach out to the local council to understand specific HMO standards in your area.
Hire Experienced Contractors: Working with contractors who understand HMO requirements helps ensure that the property meets all regulatory standards.
Choosing the Wrong Mortgage for HMO Refinance
Not all buy-to-let mortgages accommodate HMOs. Using a standard buy-to-let product could lead to breaching your mortgage agreement.
Review Loan Terms Carefully: Ensure the repayment structure and terms align with your projected rental income, safeguarding cash flow.
Additional Tips for a Successful HMO Conversion
Additional Tips for a Successful HMO Conversion
Making Your HMO Stand Out in a Competitive Market
Understanding Mortgage Requirements for HMOs
An HMO typically requires a specialist mortgage product that accounts for multiple tenants. Unlike standard buy-to-let mortgages, HMO-specific mortgages cater to the unique demands of managing a multi-tenant property.
- Work with HMO Mortgage Brokers: These specialists understand the nuances of HMO properties and can help find the right mortgage to maximise your investment.
- Align with Mortgage Terms: Verify that the property complies with the lender’s requirements, as failure to do so could lead to contract breaches and financial penalties
Conclusion
Converting a terraced property to an HMO is a powerful strategy to boost rental income, increase property value, and appeal to a growing market of tenants seeking affordable, flexible housing. However, success hinges on careful planning, meeting regulatory standards, and selecting the right financing options. By following these steps—from securing funding to completing renovations and refinancing—you can unlock the potential of your property and achieve a stable, profitable investment.
FAQs
Loan amounts depend on the property’s post-conversion value and the lender’s LTV ratio, typically around 70–75% for HMO properties.
