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HMO conversions – make sure you have the right permissions

by | Oct 21, 2020 | Brokers, Client Lenders, Clients

Investors see HMOs as a way to extract a higher rental yield from a property and many are looking to buy single residential properties for conversion. However, we see investors making the same mistake, again and again, which means that they are not able to achieve their goals.

Investors frequently get confused between HMO licenses and planning permission. Many investors do not realise that they are separate and that they need both. Only by getting both parts, are investors able to obtain a commercial investment valuation and see the uplift in property value at the end of the works. This is critical for investors moving from a short-term loan onto an appropriate term loan. Most often investors get an HMO license but neglect to obtain the correct planning permission and is very hard to get planning permission retrospectively.

Case study: Single residential property conversion to HMO

A CPC Finance investor client purchased a single residential property in Nottingham, in January 2019 for £95,000. They wanted to convert the run-down single property into a 6-bedroom HMO. As a single property on a shorthold tenancy (AST) agreement, the existing rental income was £9,540 per annum. As a multiple rent HMO, the annual rental income was projected to be around £32,000 per year.

The investor spent £41,100 to create the six-bedroom HMO, with en-suite bathrooms for each bedroom, spread over three floors. The investor completed the works and obtained a license for a six household HMO in January 2020.

However, he did not have planning permission for an HMO, only for a single-let AST. This meant that the investor could not rent out the property as an HMO and the property was only valued at £160,000, as a single residential property. At this point, the investor was on a short-term loan, which he had obtained to purchase the property. We were able to move him onto a term buy-to-let loan, but only worth £120,000, as the property was only considered to be a single residential property – because he did not have the correct planning permission.

The investor appealed to the local Council and obtained retrospective planning permission in July 2020, at which point the property was valued at £210,000, with an annual multi-rental income of £31,740. This meant that the investor could release a further £37,560 in equity from the property, once it had been valued as an HMO.