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 massive success with this type of property.
The main draw for HMOs is that they produce considerably higher yields than other types of buy to let property. Our most recent figures (from Q4 2020) show that the average yield for HMO property is 9.13%, 3.5% higher than vanilla buy to let property (5.69%) and 2% higher than semi-commercial property (6.69%).
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 concerns we hear about HMOs is that tenant turnover can be higher than with vanilla investment property, exposing you to the risk of rental voids. For student landlords, this turnover is expected (and seasonal). However, it’s a fair argument that living in an HMO is often a stepping stone for tenants before they can rent a whole property or purchase their own; therefore, tenant turnover can be a little higher than with vanilla property.
Unlike vanilla property, however, the impact of 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 much of the mental and financial stress for you as a landlord.
Location is vital when it comes to HMO buy to let success. With low affordable housing stock, we know that demand for rented accommodation is still very high, particularly in 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 will always be a good investment (you can read our guide to becoming a student landlord here). Student demand in these areas is usually high. 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! If you’re renting to young professionals, then transport links are a must, or town/city centre locations to make commuting and access to local amenities easy.
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 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 regularly. 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 many more specialist lenders introduce other incentives, such as no product fees, cashback and free valuations.
At the moment, interest rates for 75% LTV HMO mortgages start from 1.73% for 2-years fixed and from 1.76% for 5-years fixed for individuals. In the limited company buy to let mortgage space, rates start from 2.89% for 2-years fixed and 3.59% for 5-years fixed at 75% LTV. Some lenders offer 80% LTV HMO mortgages, with rates from 3.69% for 2-years fixed and 4.19% for 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, we have access to some that only require six months or even no previous buy to let experience at all!
In November 2019, we saw two of the largest HMO lenders open up their criteria to Scotland. Previously, lender options here 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.
If you’d like to discuss which HMO buy to let mortgages rates may be available to you, please do not hesitate to contact me, Charlie Potter, on 01732 471648 or email firstname.lastname@example.org
*Rates as at 13/04/2021