Are Houses of Multiple Occupation (HMOs) Worth More?
One of the most Googled phrases when it comes to HMO investments is:
Are HMO properties worth more?
I thought I knew the answer when I first started out in property training, and was convinced that an HMO would always provide more value in a property than other uses, because I had done some HMO-specific training and was told things that weren't true. So when I came to get my first couple of HMOs re-valued, I was quickly disabused of that notion! I learned very quickly when an HMO has value and when it does not.
The real question to ask is: If I create an HMO, will it be worth more than other properties of similar build and size in the area?
The answer is: It depends.
The reason why people think that HMOs are naturally worth more is because they're generally more profitable per annum than a single buy-to-let (BTL) property occupied by one tenant/family in a similar area.
If you take a 3-bed terraced house, and turn it into a 5-bed HMO, you can take the turnover from £7,800 per annum to £27,000 for example! That is a huge difference, so it's obvious that it would be more valuable to an investor. However, that does not represent your profit.
To do a true comparison, the operating costs must be considered for both properties. This will probably bring the profit down to around £6,500 for a BTL and £20,000 for a comparable HMO. That is still three times the difference, so still arguably three times more valuable to an investor. However, does this valuation translate to house prices?
The simple answer is no. Residential houses are not valued on the turnover of the house. Each house has a residual bricks-and-mortar value, what it would be worth, were it sold. The BTL would likely be bought by a single or single-family owner. Who is more likely to buy the converted property on the same street that has five sharing tenants in it? Well, if it is cost-effective to convert it back to a single-family house, then both investors and families are potential purchasers, therefore there would be no premium price to be had for that property.
Now, if you have spent money on the property to make it unrecognisable as a family home, e.g., moving rooms around, installing multiple en-suites, kitchens, etc., then this is no longer appealing to a family and is more of interest to an investor. An investor may be also happy now to pay a premium for the property, given the upgrades done to create higher rental turnover.
However, the investor may also be tempted to buy the house next door and replicate what you have done. Perhaps they think they can do it better or cheaper than you have. What does that mean for you? That the premium for these properties is generally no more than what you have spent on them.
Did the HMO need planning permission?
If yes, then you now own a more valuable property.
If you take a plot of land that has no permission to build on and then get planning permission granted, you have added value to that land. The same is true of houses that get planning permission to be HMOs: value is added, because planning permission isn't easy to get.
There are two instances where planning permission is needed for an HMO:
1. The council has implemented an Article 4 Direction for HMOs
In this instance, the council has decided that all new HMOs require planning permission. It also means that any existing HMO will have grandfather rights to continue to be an HMO. In this case, the instigation of an Article 4 Direction can add value to a pre-existing HMO beyond its previous bricks-and-mortar value.
2. Large HMOs
Any HMO of 7 or more unconnected tenants requires a full planning application (known as sui generis), so when this permission is granted, the value of the property can shoot up. We have more than doubled the value of a house this way on several occasions, when it became an HMO.
Once a property gains planning permission, it is then more attractive to investors who look to buy such a property, with tenants already in, for the yield that it creates.
For example, if a property generates £40,000 annual profit and the investor is happy with a 5% yield, then the property could sell for £800,000, even if similar -sized single-family properties only sell for £500,000 This is known as the commercial value of the property.
So, there are three instances where an HMO has a higher commercial value than its residual bricks-and-mortar value:
If it is unrecognisable as a family home
If it is located in an Article 4 Direction area
If it has sui generis planning permission (7 or more unrelated occupants)
The caveat is that if you are in a high capital value area, the price of a family home may be more than any commercial valuation a property can get, such as in certain areas in London and the South East.
In summary, gaining planning permission on an HMO is the only way to secure the best value. Bear in mind, however, that if you can't secure tenants for your property, it will have no commercial value whatsoever. The end value of your property is irrelevant without a well-researched and well-put-together HMO and co-living strategy.