HMO buy to lets are no longer just for the experienced portfolio landlord! As lenders broaden their criteria, HMO’s are becoming a more accessible property investment option, and there are many benefits! Consultant Mortgage Broker, Charlie Potter, explains why every landlord needs an HMO property...
What is an HMO?
A House in Multiple Occupancy (HMO) has three or more unrelated tenants who share amenities such as kitchens and bathrooms. (Commonly known as a ‘house share’). It is a popular option for student housing and young professionals wanting to live near work or commuter connections.
Why should you have an HMO in your portfolio?
HMO buy to lets are often seen as an investment only for very experienced landlords; considered more challenging to manage and a higher financial risk than the more traditional vanilla buy to let property. However, there are many overlooked benefits to having an HMO property in your buy to let portfolio, and we work every day with landlords who have had huge success with this type of property.
The main draw for HMOs is that they produce considerably higher yields compared to other types of buy to let property. Our most recent Buy to Let Index for Q4 2019 (yet to be published) shows that the average yield for HMO property is 9.37%, 2% higher than semi-commercial property and 3.5% higher than vanilla buy to let property.
If you’re looking to increase your buy to let portfolio further, this increase in rental income can be very beneficial, potentially allowing you to purchase further property much sooner than with a vanilla property. Even if you’re not looking to expand, I’m sure the extra income will be most welcome! A higher yield also helps mitigate the inevitable cost of maintenance work, which comes with any buy to let property.
One of the main worries with HMOs that we hear about is that tenant turnover is much higher than with other types of investment property, exposing you to the risk of rental voids. If you’re renting to students then this is expected (and seasonal), however outside of student accommodation, they’re often a short-term arrangement until people can rent a whole property or buy their own, though not always.
Unlike vanilla property, however, the impact of these rental voids in an HMO buy to let is spread over two or more other tenants, making them less financially significant and more manageable. With vanilla property, all rental income stops during void periods (or if the tenant falls into arrears). In contrast, HMOs enable you to continue receiving rent from other tenants, even if one room is unoccupied, which can alleviate a lot of the mental and financial stress for you as a landlord.
Location is vital when it comes to HMO buy to let success. We know that with low affordable housing stock, demand for rented accommodation is still very high, in particular, large towns and cities. As many working professionals can’t afford to rent or buy a whole property on their own, they will opt for shared house arrangements as room rent is usually lower than for an entire property.
Property within walking distance from a university campus is always going to be a good investment (you can read our guide to becoming a student landlord here). Student demand in these areas are usually high and, while most student households change over every summer, you’re likely to have the next tenants lined up by the previous January if not earlier... such is the competition for desirable student accommodation!
HMO licencing can appear complicated as the rules vary depending on the local authority. For some, properties with four or fewer tenants do not need a licence, but in others, they will. We would recommend always checking with your local authority to see whether the property you wish to purchase will require a licence.
If the property you’re purchasing does require an HMO licence, these can sometimes take a while to come through. When you’re applying for your HMO mortgage, most lenders will only need to see proof that you’ve applied for the licence. However, if you are remortgaging your HMO, the lender will want to see a copy of the licence.
HMO mortgages are becoming increasingly accessible, with more lenders adding products to the market on a regular basis. While HMO rates are generally higher than for vanilla buy to lets, increased market competition has seen rates decrease, making them more affordable for landlords. This competition has also seen a number of the more specialist lenders introduce other incentives, such as no product fees, cashback and free valuations.
At the moment, we’re seeing 75% LTV HMO mortgages from 1.65% 2-years fixed, and from 1.99% for 5-years fixed. Some lenders are even offering 80% LTV HMO mortgages, with rates from 3.34% 2-years fixed and 3.80% 5-years fixed*.
HMO Mortgage Criteria
As I said at the start, HMOs have long only been an option for the more experienced buy to let landlord, but things are changing. While the majority of lenders do still require anything from one to three years buy to let landlord experience, some have opened up their HMO mortgage criteria to first-time landlords.
In November 2019, we saw two of the largest HMO lenders open up their criteria to Scotland, where previously lender options were minimal, meaning that rates were much higher than those available for properties in England.
Just as with regular buy to let properties, most of the lenders are more concerned with what the security is for the property and whether the rental income will be enough to meet the mortgage repayments plus more to cope with void periods and essential maintenance.
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*Rates as at 27/01/2020
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