Over the last 2 years we have seen a huge increase in demand for Houses of Multiple Occupation (HMO’s).
High yields and the ability to spread tenancy risk across multiple rooms have led a raft of new client investing in HMO’s.
A House in Multiple Occupancy can be a number of things including a bedsit, a shared house, a hostel, a privately operated halls of residence or accommodation for workers.
From 1st October 2018 if your property is let out to five or more people from two or more separate households and they share facilities (kitchen, bathroom etc) then the property requires a license.
Obviously any HMO refurbishment is going to be restricted by space, however, are en-suite bedrooms really that important?
We have found that the smaller student HMO’s don’t tend to have en–suites where as any professional lets with 5 or more bedrooms do normally have them.
Personally I would always preference en suites as I believe it gives you more exit strategies. A student HMO with en suites can be changed to a professional let more easily than one without. In a recent survey it was one of the highest things on tenants requirements.
We have found the professional lets that are not close to a city centre should have good transport links. In Manchester, Liverpool and Birmingham we aim for a door-to-door commute of less than 20 minutes.
This can be carried forward to student HMO’s but with an overriding preference for closeness to their chosen university campus.
When sourcing an HMO investment educate yourself on the local train lines, there may be areas further away as the crow flies but quicker as they are on the main line. You could pick up a bargain in an area with great transport links because its not a conventional HMO area.
HMO’s with less than 6 beds can potentially be harder to gain HMO mortgages on, (meaning they are more likely to be valued on bricks and mortar). This may not be a problem dependent on your location but if it is then its something to consider.
Conversely Students may be different. We recently conducted a survey with in one of our student developments and there was a definite preference to 4-5 bed shares.
HMO regulations previously applied to properties of three or more storeys, new rules mean that all bedrooms need to be a minimum of 6.5 square metres and that all tenants have enough space to store rubbish outside.
Your local authority upholds the regulations and the penalty for failing to adhere to these rules can be up to £3,000!
Additionally of the property is shared by seven or more people landlords will need to apply for planning permission.
With the average yield for an HMO at 8.6% versus the average for vanilla buy to lets at 5.5% its perhaps obvious why so many investors are diversifying their portfolio with the addition of an HMO investment.
The average higher rate tax payer holding highly leveraged low yielding buy to lets is going to find slim to no amount of profit after the latest income tax changes.
Perhaps the first phase of new income tax liability and relief calculations for B-T-L landlords have led more investors to look for higher yields to offset any potential tax implications.
This aside, we believe that HMO’s in areas of strong demand with multiple exits that are valued within 15% of bricks and mortar prices represent an increasing solid investment in todays market.
If you are buying a ready made HMO investment or developing one from scratch, your ability to borrow against the asset is a hugely important consideration.
In our experience Shawbrook and Paragon are the two best HMO lenders who have tailored products for smaller 5-7 bed properties.
There are other lenders that purport to offer HMO lending but on closer investigation many will value your HMO on a bricks and mortar basis.
We have had issues where developers have refurbished smaller 3 bed houses into 6 bed HMO’s by increasing the footprint via an extension or/and building into the loft and cellar. Valuers are then asked to value on a bricks and mortar comparable basis and are taking those same 3 beds as their comparables.
One rule we have heard valuers mention is that “if the property you are valuing can be put back on the market and be attractive to a family, we will not value as an investment”.
Back to news