A HMO, standing for House in Multiple Occupation, is a single dwelling that is let out to 2 more or tenants (that are part of separate ‘households’ of people that are not connected to each other) and who share facilities such as a kitchen or bathroom.
If there are 5 or more unconnected parties, this type of letting requires a mandatory HMO licence which needs to be obtained from the local authority. However, some local authorities require a licence even where there are less than 5 tenants under ‘additional’ or ‘selective’ licencing. You should always look to speak to the local authority to check their requirements when you are thinking of a new BTL purchase.
If the BTL property you wish to acquire needs a licence, you will need to meet the conditions of the licence such as fire regulations, and you will need to find a lender that will lend on a HMO property. Connect Mortgages can help you find a suitable HMO lender, contact the Connect team for help.
This is sometimes referred to by the lenders as an MUB (Multi-Unit Block) or MUFB (Multi-unit Freehold Block). This is where a single freehold property has been divided into self-contained flats. Although they could be small flats such as studios, being self-contained, with their own kitchens and bathrooms, they would not normally require HMO licences.
Where there is just the one legal freehold title at Land Registry, only one mortgage is required, even if there are several self-contained flats. A specialist lender can assist with this type of property.
Some investors look the create ‘individual’ properties but creating long leases on each flat. This has the benefit of individual records at Land Registry, so each individual flat can be mortgaged or sold. Contact one of our specialist mortgage advisers who can help you to compare the options for mortgages on this type of complex property.
In a time when renting is in such high demand, Houses in Multiple Occupation (HMOs) have never been more popular…
For England and Wales, an HMO property means three or more people living together, who are from two or more different households. They must share facilities such as bathrooms, living rooms and kitchens. They can also be referred to as ‘house shares’ or ‘flat shares’. HMOs are typically rented by students or young adults. However, they are by no means limited to this age bracket. By mid-2019, the average age of a first-time buyer had risen to 33, leaving many in demand for lettings.
Since the 2020 pandemic, many mainstream lenders have increased deposits to 15% and the government help to buy schemes set to end in 2023, it suggests the age is likely to hit 40 before 2025.
Funding an HMO purchase or conversion
Whilst mainstream lenders may be your first point of call, it can be difficult to find one with the right criteria to suit your needs.
For first-time landlords however, it can be incredibly difficult to find a lender at all. Many will only provide HMO mortgages to those with roughly 2 years’ experience.
This is where bridging can step in to support this investment, with a mainstream lender taking over when the experience criteria has been met.
When refurbishing HMO properties, it is often much easier for works to be completed in one go, and usually in a gap between tenants.
Using a bridging loan can be a great way to ensure that all elements are covered. As funds can be released in days, works can start almost instantly, decreasing the time that the property stays empty.
If you are converting your property into an HMO, a bridging loan can also provide the funds for this, under permitted or light development.
This means that works can be carried out within a day, without having to wait for a mainstream lender which can cause delays and increase the likelihood of being denied a mortgage.
What types of properties count as HMOs?
One of the many great aspects of having an HMO, is that is can be used for a variety of reasons. Although the amount of people you’re looking to have under one roof will affect whether you need a license or not.
Examples of commonly used HMOs are:
- House / flat share
- Student share accommodation (accommodation owned by the university is not counted as HMOs)
- Licensed HMO (5+ tenants from more than one household living together)
- Unlicensed HMO (3 people from more than one household living together)
It can also depend on how many stories the property has. If you’re unsure whether the property you own or looking to convert is counted as a HMO, then you can always check government legislation.
HMOs can be a great form of property investment for landlords. They are a way to increase rental income, in an industry that is currently booming.
As the housing crisis continues to reign and with property prices almost back to those of a pre-pandemic Britain, now could be the perfect time to invest.
Earlier this year, The Guardian released figures showing that people in their mid-30s and 40s are now three times more likely to be renting compared to 20 years ago.
The demand is stemming from commuter cities, but smaller towns which are currently under expansion and development hold the key to a potential HMO goldmine.
Expansion of small towns is likely to become a new source of interest for buy-to-let investors and HMO landlords, as it opens up new renting opportunities.
New build developments can often attract locals to move from the town centre to the residential community on the edge of the town.
To then help meet the demand of tenants, landlords can convert older properties in the centre of the commuter town, with help of refurbishment bridging loans.
This then provides living quarters which are within walking distance to the local train station, giving commuters a direct transport link to the nearest city.
Investing in properties around upcoming towns can be a cheaper alternative than buying an old property in the city. Whilst rent may be lower, allowing time for the area to fully develop could also mean an increase in property value.
Know your audience
It’s important to understand what market you’re aiming your property towards. The 20-30 age group is still struggling to purchase their first home.
Uncertainty across the country is a key cause, with many mainstream lenders asking for a 15% deposit. With the struggle of being able to fund event the original 10%, demand from tenants are liable to skyrocket.
The bracket most likely to rent, according to landlord vision, is currently 25-35, which accounts for 33% of tenants in the UK.
Yet in university districts such as Guildford, Manchester and Canterbury, renting a property as a whole to one specific group will deem more popular and still holds equal profit but for a slightly later generation.
Advantages of HMO Properties
There can be many advantages to owning a HMO investment property:
In demand from tenants
Housing with direct transport links to London are always more expensive than the UK average. Therefore, a large percentage of renters belonging to the commuter community, who are unable to afford these highly desirable properties are keen to rent them.
Minimising risk to income
With multiple tenants generating income, they form a barrier that provides an extra layer of protection. Not only do you receive a higher yield, but you also spread the risk should a tenant become suddenly unavailable to pay rent.
Higher rental income
The yield from a HMO can be up to three times higher than a single let property. It’s one of the key reasons why they are a favourable property investment for experienced landlords.
Whilst wear and tear is an inevitable part of HMOs, any form of property renovations and general upkeeps is highly likely to increase your properties overall value.
From repainting the walls to installing a new bathroom, renovations are always a great way to entice potential buyers, should you want to sell your property.
Credit: Tiba Raja, Executive Director, Market Financial Solutions