Higher rental yields and growing demand for shared accommodation have made houses in multiple occupation (HMOs) increasingly popular with property investors.
But what does it cost to convert a standard residential property into an HMO?
HMO conversion costs
New research from property management specialist Rushbrook puts the average conversion cost in England at £82,084. That is equivalent to approximately £15,300 per bedroom for a typical HMO with 5.37 bedrooms.
Its estimates are based on regional construction costs for a five-bedroom conversion, including two en-suite shower rooms, a communal bathroom and kitchen, heating upgrades and other construction work.
Costs, though, will vary depending on the layout, condition and location of the property.
London is the most expensive region at £92,796, followed by the South East (£90,552) and South West (£89,737).
The North East, in contrast, has the lowest estimated conversion cost at £70,955, followed by the North West (£73,076) and East Midlands (£74,485).
Rules and regulations
Converting a residential property into an HMO involves complying with planning, licensing, building regulations and safety rules.
Planning permission is normally required for HMOs accommodating seven or more people. Those housing three to six occupants generally come under permitted development rights, unless the council has introduced an Article 4 direction.
In addition, HMO licensing is mandatory for properties housing five or more people from more than one household. Some councils also license smaller HMOs, and licensed properties must meet minimum bedroom-size standards.
Meeting the relevant regulations can add to both the cost and time involved in a conversion.
Property purchase price
Rushbrook estimates the average price of a suitable three- or four-bedroom house at £449,798. That would result in a total of £531,882 when the conversion costs are added.
In London, the estimated total would be £957,105, compared with £630,333 in the South East and £557,416 in the East of England.
The cost of buying an established HMO
An alternative is to buy an established HMO, avoiding much of the conversion work and potentially generating rental income sooner.
Rushbrook analysed advertised listings of licensed HMOs in England using property data platform PropertyData and calculated an average asking price of £340,264.
That’s £191,618, or approximately 36%, below the estimated cost of buying and converting a residential property.
There are substantial regional differences, too.
The biggest difference is in the North West, where the average asking price for an established HMO is £211,817, compared with £400,446 for buying and converting a property – a difference of 47%.
Next is Yorkshire and the Humber with a difference of 46.6%, followed by the West Midlands (38.5%) and East Midlands (36.9%).
The smallest difference is in the more expensive regions. In London it is 20.2%, compared with 30.7% in the South East.
As Rushbrook managing director Roma Sharma says:
“For those who would rather avoid undertaking a conversion, there is an established market of licensed HMOs available to purchase. However, buying an existing property doesn’t necessarily mean it will require no further work or investment, and landlords still need to carry out the appropriate due diligence.”
Converting an existing property
For landlords who already own a suitable residential property, the economics of conversion make more sense because there is no additional purchase price to fund.
And converting an existing rental property into an HMO could substantially increase rental income by letting individual rooms rather than the entire house to one household.
According to Paragon Bank, average HMO gross rental yields are around 8.80%, compared to 7.22% for standard rental properties.
There is the potential to increase the property’s capital value, too. Some HMOs are valued as investments based on their rental income, rather than simply on comparable property prices.
For example, a house worth £250,000 that is converted into a five-bedroom HMO generating £3,750 a month could see its value rise by £125,000*.
Anyone planning to convert a property into an HMO should also be aware, though, of the additional management and maintenance costs, particularly around communal facilities, multiple tenants and ongoing compliance.
Sources and methodology
HMO costs: Rushbrook regional data, Impact Construct and PropertyData. Conversion costs are estimates and existing HMO prices are advertised asking prices.
Rental yields: Paragon Bank research.
HMO regulations: GOV.UK licensing guidance.
Capital valuation: RICS guidance on buy-to-let and HMO valuations.
*Illustrative calculation: £3,750 monthly rent produces £45,000 a year. Deducting assumed running costs of £15,000 leaves £30,000 net income. At an assumed investment valuation yield of 8%, this gives a value of £375,000 (£30,000 ÷ 0.08), an increase of £125,000 before conversion costs. Actual valuations depend on market evidence.
