HMOs remain a growing component within the buy-to-let sector

The eyes of many homebuyers quite rightly lit up at the prospect of the potential savings on offer from the stamp duty tax break. Inevitably, this enthusiasm also filtered through to investors, developers and landlords. However, as attractive as any tax saving might be, it’s become increasingly clear that the thought process behind any buy-to-let investment extends way beyond any SDLT consideration.

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George Gee | Foundation Home Loans
2nd March 2021
George Gee Foundation
"HMOs will continue to rise in prominence and the intermediary market remains in a prime position to help satisfy this growing demand."

In recent years, we’ve seen a far more methodical approach from landlords when adding to and restructuring their portfolios. This increased focus has stemmed from the raft of tax, policy and regulatory changes which affected the BTL sector in recent years. These served to focus the minds of landlords – especially at the more professional end of the spectrum – in terms of exploring more tax efficient methods and focusing their attention on limited company buy-to-let offerings. This is especially apparent in areas where landlords are looking to ensure greater yields - for example HMOs or multi-unit blocks - and growing flexibility has emerged in the way lenders are looking at borrowing requirements in these areas.

These yields were highlighted in the recent Q4 2020 Landlord Panel research from BVA BDRC which outlined that HMO lettings continue to generate significantly higher average rental yields when compared to other property types (7.0%).

In terms of costs, landlords running and maintaining HMOs were reported to typically spend around 25% of their gross rental income, compared to an average of 21% which is spent running non-HMO properties. Both estimated spend percentages have edged down slightly year-on-year from 28% and 24% respectively.

When looking at the ownership of property types, the research showed that terraced houses continue to be the most commonly owned rental property type. Almost six in 10 landlords have at least one terraced house within their portfolio, with the incidence peaking for those in the 11-19 property segment. A typical landlord indicated ownership of an average of two different property types within their portfolio, with this rising to 3.3 for those with 20+ properties and ownership of HMOs did soften slightly to 16% in Q4 (-2%pts).

This data offers a great insight into yield, costs and diversity within portfolios, elements which lenders are closely monitoring. HMOs remain an interesting, and growing, component within the buy-to-let sector and market forces dictate that there will be further competition within this product field with an increasing number of options emerging. This is good news for intermediaries as we believe these types of cases require additional support and specialist advice due to an increased level of complexity and legislation. A factor which also highlights the benefits of establishing relationships with lenders who have the underwriting capabilities to assess such cases on an individual basis and the product range to meet a variety of landlord needs.

With landlords already looking to diversify their portfolios to minimise risk and bolster yields beyond the stamp duty deadline, HMOs will continue to rise in prominence and the intermediary market remains in a prime position to help satisfy this growing demand.

 

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