Within the investment community, houses in multiple occupation (HMOs) have gained a reputation for being complex, costly and high-risk ventures. While there’s some truth in this, they also have the potential to offer substantial returns. With the right knowledge and careful planning, many investors find that the high rental yields provided by HMOs far outweigh the additional effort and expense.
In this article, we’ll demystify the costs associated with acquiring, developing and running a profitable HMO. Whether you’re a first-time investor or an experienced landlord looking to diversify your portfolio, this guide will help you understand what costs to expect. Let’s get stuck in!
HMO acquisition costs
Acquisition costs are the expenses associated with purchasing a property so that it can be used as an HMO. They typically include the following:
1. Property purchase price
Most HMOs are larger than your traditional buy-to-let. The most profitable HMOs usually have at least five bedrooms to align with current market demand and maximise income potential. Many investors look for properties with multiple reception rooms and then convert these rooms into additional bedrooms.
The recent relaxation of “commercial to residential” planning legislation has created new opportunities for investors. It means that large old buildings that were formerly used as offices can now be converted into HMOs under permitted development rights. Once converted, these buildings often qualify for commercial valuation, which can boost refinancing potential and increase overall returns.
It goes without saying that properties of this size, whether residential or commercial, usually come with a higher price tag than your average traditional buy-to-let.
2. Stamp duty and legal fees
The stamp duty due when purchasing a property for HMO development varies depending on your circumstances.
During the October 2024 budget, Labour increased stamp duty surcharge rates on additional residential properties from 3% to 5%. If you are purchasing an HMO as an individual, then you will pay the standard SDLT rate plus the 5% surcharge. However, if you’re buying the property through a limited company, you may be subject to a higher SDLT rate.
It’s also worth noting that if you’re considering buying a commercial property to convert into a residential HMO, you could make savings on SDLT. SDLT rates for non-residential properties are 0% on properties up to £150,000, 2% on properties £150,001 to £250,000, and 5% on properties above £250,000.
The legal fees associated with purchasing an HMO are usually comparable to those for a traditional buy-to-let. However, if you’re buying an operational HMO where tenants are in situ, the costs can be higher because additional legal checks will need to be carried out to check compliance and review the tenancy agreements.
3. Surveyor and valuation fees
Property surveys and valuations play an important role in due diligence and providing peace of mind that your investment is sound.
So, what kind of survey do you need when purchasing an HMO? Your two main options are a lender’s valuation survey or an RICS survey. A lender’s valuation survey focuses on the property’s value, whereas an RICS survey goes beyond surface-level checks and examines the property’s structural integrity, sometimes helping to identify potential issues that might have otherwise gone unnoticed.
When buying an HMO, it’s always wise to invest in an RICS survey, even if a lender’s valuation survey is also required.
If a lender’s valuation survey is not required because you’re purchasing the property with cash, getting an RICS survey is more important than ever. It can provide you with peace of mind that you haven’t overlooked any significant defects.
The cost of an RICS survey for an HMO is usually the same as or very similar to that for standard properties, particularly if the property hasn’t yet been converted into an HMO.
4. Homebuyer reports
Some investors also choose to invest in a homebuyers report to help flag up any issues with the property. The problem with these reports is that if any concerns are noted, you must then hire a specialist to find out more.
Sometimes, it’s more cost-effective to hire trusted specialist contractors to inspect the property instead. Requesting an inspection from a builder, damp specialist, gas engineer, and electrician could cost less than a homebuyers report and provide a more detailed assessment of the property’s condition.
5. Valuation fees
An accurate valuation provides a clear understanding of the property’s current market value and is crucial for securing the right financing. Valuation fees vary depending on the type of property you’re buying and the type of financing you require.
Valuing your typical buy-to-let property is generally a straightforward process with low fees. However, when purchasing a property for HMO use, valuation fees tend to be much higher. This is because HMO valuations require a more detailed valuation that considers factors like rental income potential, occupancy rates, and market demand. Valuations for commercial buildings or operational HMOs can be up to three times as expensive as your standard buy-to-let valuation.
6. Broker fees
Another fee that’s often inflated when purchasing a property to convert into an HMO is the broker fee.
Your traditional buy-to-let usually requires straightforward financing, so brokers tend to charge a low fixed fee or a small percentage of the loan amount. On the other hand, if you’re purchasing an HMO or a property for conversion, you may need commercial or development finance. These deals are often more complex and require brokers with specialist knowledge. As a result, the fees tend to be higher and may include a combination of fixed fees and a percentage-based charge.
Looking for a specialist broker you can trust? Speak to the team at Purseglove and we can refer you to our trusted broker who we’ve worked closely with for many years. They have a thorough understanding of the HMO market, access to all the relevant lenders, and an excellent track record of supporting both us and our clients.
7. Insurance costs
HMOs require more comprehensive insurance coverage than your standard buy-to-let because of the increased risks associated with multiple tenants and the more complex HMO regulations.
As with all rental properties, you’ll need landlord insurance to cover risks like property damage, liability claims, and loss of rent. Premiums tend to be higher for HMOs. If your property will be vacant while it’s redeveloped, you’ll need to pay an empty property premium due to the increased risk of vandalism and theft, as standard rent loss cover is usually tied to the reinstatement value. However, for HMOs, the higher rental income generated can sometimes mean the standard cover isn’t sufficient. To make sure you’re adequately protected, speak to your insurer or broker about increasing the rental cover to reflect the property’s income potential.
HMO development costs
Development costs are the expenses associated with adapting a property to convert it into an HMO and making sure it can operate legally. They typically include the following:
1. Planning applications
When converting a property into an HMO, you may need to pay for planning applications if your property is going to house more than six occupants or is within an Article 4 area.
It’s important to consult with your local planning authority at the start of your project to identify potential challenges and restrictions and prevent unexpected costs or delays later down the line.
2. Architect fees
When redeveloping a property to be used as an HMO, architects play a key role in ensuring it meets legal requirements while also maximising its potential rental yield. Architect fees are rarely required when developing a standard buy-to-let.
Many HMO projects require reception rooms to be converted into bedrooms and additional bathrooms added. An architect can create detailed plans to lay out the best way to use the space while meeting regulatory requirements. These plans are invaluable for effective project management later down the line.
3. Construction and renovation costs
The costs associated with converting a property into an HMO tend to be substantially higher than the cost of renovating your average buy-to-let. This is because HMOs must adhere to strict regulations surrounding fire safety and tenant welfare. Common costs include adding en-suite bathrooms and installing fire doors and emergency lighting. It’s important to plan and budget carefully for the renovation to help keep costs down.
4. Project management fees
Using a project management service can help keep the project running to schedule and within budget, as well as reduce stress. Coordinating an army of contractors, managing timelines, ensuring compliance, and keeping track of the budget can quickly become overwhelming, particularly if it’s your first time developing an HMO!
Project management fees are usually charged at about 10% of the total development cost but often pay for themselves by preventing costly mistakes and delays. Here at Purseglove, we offer specialist HMO project management services to ensure a successful redevelopment project, including stress-free end-to-end services and access to our network of trusted contractors.
5. Utility installations and upgrades
Utility upgrades are often required when converting properties into HMOs, particularly if new ensuites are being added. It’s often necessary to upgrade the diameter of the property’s incoming mains water pipe to help maintain water pressure throughout the property if multiple ensuites are being used simultaneously – a standard combi boiler is unlikely to handle the hot water requirements. Instead, a heating system with a tank is typically needed, as it can store and distribute hot water more efficiently. This represents a significant expense compared to a basic combi boiler and requires additional space for the tank, which should be factored into both the budget and the property layout during planning. If additional gas appliances are being installed to account for increased heating demands, then the property’s existing gas supply may need upgrading too, although this is unusual. These expenses add up and can significantly increase the total project cost.
6. HMO licensing fees
Most landlords require an HMO licence to run an HMO. However, the cost of obtaining one of these licences varies from one local authority to the next and is typically calculated per bedroom. A licence for a small HMO may cost in the region of £500-£800, while a licence for a large HMO with six or more bedrooms could cost more than £1,500.
At Purseglove, we can help you streamline the process of securing your HMO licence by providing support with navigating the process and liaising with local authorities.
7. Fire safety and furnishings
Fire safety is one of the most important aspects of HMO development, with the requirements varying depending on the size of the property and its layout. Every bedroom and high-risk area must have a self-closing fire door installed, with each door costing between £150 to £300. A heat detector should be installed in the kitchen, and large HMOs may require a Grade A fire alarm system, which is significantly more expensive than the typical interlinked grade D system.
Resources like the LACORS Housing Fire Safety Guidance provides detailed recommendations for HMOs. When developing a large HMO, it’s sensible to engage a professional to conduct a fire risk assessment to ensure that all regulations are met.
When furnishing your HMO, it’s important to balance durability, compliance, and aesthetic appeal. Opt for durable, long-lasting furniture that meets fire safety standards.
The operational costs of running an HMO
Operational costs refer to the ongoing expenses involved in managing and maintaining an HMO. They typically include the following:
1. Letting, management, and maintenance
Managing an HMO can be a demanding and time-consuming job that calls for specialist knowledge and experience. If using a property management service, it’s important to choose a specialist company that understands the unique requirements of HMOs.
Management fees are usually charged as a percentage of the incoming rent, and these rates can vary depending on the area. Always check what’s included in the service as many property management companies charge additional fees for services such as inspections, facilitating gas safety certificates, or organising maintenance. At Purseglove, all this and more is included as part of our monthly management fee.
If you’re considering self-management, take into account that you must be able to visit the property at short notice if required. If you live a long way from the property, some local authorities may refuse to grant you a license if they don’t believe the property will be managed effectively.
If you buy cheap, you buy twice. Investing in durable, high-quality materials during the development phase can help to reduce ongoing maintenance costs. For example, investing in copper pipework, heavy-duty shower screens, and robust waste fittings can mean fewer repairs are needed later down the line.
2. Cleaning and gardening
When managing an HMO, one of your responsibilities as a landlord is to maintain clean and hygienic communal spaces, such as kitchens, hallways and bathrooms. To ensure compliance and increase tenant satisfaction, many landlords choose to hire a cleaner to keep communal areas clean. You’re also responsible for maintaining the property’s garden if it has one because this is classed as a communal space. Hiring a gardener to come and cut the grass or trim back plants on a regular basis is an important aspect of maintaining the property’s appearance and can help to improve tenant satisfaction.
3. Utility bills
Most HMO landlords include the cost of utilities in the price of rent. This means that if prices fluctuate, it is the landlord who is responsible for covering them, which can impact profitability. When estimating utility costs, it is best to err on the side of caution and build in a small buffer to account for unexpected fluctuations. It’s important to note that two thirds of gas usage is typically used between November and February. This means that winter bills are often very high, but will even out during the summer. Installing energy-saving measures like insulation and energy-efficient lighting and boilers can help keep energy bills down.
4. Council tax
Most HMOs are classified as single dwellings shared by multiple tenants, which places them under a single council tax band, with the landlord responsible for paying the bill. However, if individual rooms meet the Valuation Office Agency’s criteria for separate dwellings, this could complicate things, as council tax would then be charged on a per-room basis. Seeking professional advice during the development planning stage will help you ensure that the property meets the requirements to be classified for single-band council tax.
5. Renewal fees
HMO licences are valid for five years, after which time they must be renewed. Renewing your HMO licence is generally less expensive than the initial application, but fees are steadily rising in many areas, so it’s important to budget for this expense. Not renewing on time will put you in breach of the law and could result in a penalty.
Achieve HMO investment success with Purseglove Property
At Purseglove, we put people first. We’re passionate about providing friendly and personalised advice and support to help investors find where they fit. From locating the best property investment deals to structuring and negotiating successful property deals and developing safe and compliant HMO rental properties, our property investment services can help.
Have a read about what we offer – sourcing consultations, HMO management, and refurbishment management – and get in touch if you need help or advice. We’re only a phone call away!