"Every property investor will know that two things are ‘king’ in the property game: one is cash and the other is location."
Most landlords know that rental yields of HMOs can't be achieved with standard buy-to-lets and that HMOs in the right area can make fantastic investments.
Finance brokers and advisers know that apart from helping their customers get the funding they need for their property projects, their property market knowledge and expertise is often welcomed by their customers. From our own conversations with those brokers and advisers, we know that HMOs are often a hot topic of conversation – “you either love or hate HMOs”, we often hear. Amid the worsening UK housing crisis and the lack of affordable housing, HMOs have become an even hotter topic of conversation in recent years. But while HMOs have several advantages, chief among them are the higher rental incomes compared to regular buy-to-lets, the higher yields achieved and the relatively lower risk since the landlord is able to diversify the sources of income among the various rooms, HMOs also have risks. So, what are the three things your clients need to know when investing in HMOs?
Have the right lender who ‘understands’ HMOs
First, for property investors looking to dip their toes with HMO or grow their existing portfolio, unlocking funding always seems tricky. Valuation and lack of standardization are always mentioned as sticking points for HMO landlords who complain that commercial valuations are elusive and that lenders instead tend to base their valuations on the brick and mortar. The truth is that HMO investing involves having a lender who truly understands HMOs and can get their heads around it. HMO deals are rarely standardized one-size-fits-all deals. Most often, they will be non-standardized deals that offer very small capital appreciation to the borrower with rental income being the main reason for the investment. Traditional lenders are usually happy to lend on off-the-shelf deals that are easy to value based on market comparables. Yet when it comes to nonstandard deals in nonstandard locations, alternative finance platforms and peer-to-peer (P2P) lenders are more likely to get comfortable with it provided that the deal makes sense. For example, at Blend Network some of our underwriters are HMO investors themselves, thus being able to speak the HMO investor’s language. It is no surprise then that specialist finance providers and P2P lenders have become the key go-to lenders for finance brokers and financial advisers trying to secure the best HMO deal.
Location, location, location
Second, every property investor will know that two things are ‘king’ in the property game: one is cash and the other is location. The exact same deal in two very different locations can generate hugely different results. While this is true for every property deal, location is even more important in the case of HMOs and a in-depths market analysis is required on a case-by-case basis to be able to assess a HMO deal.
Size matters
Third, HMO deals are often small in size and not many lenders are interested in lending for small deals, certainly sub £200,000 loan size. This is a frequent cause for complain among landlords who are still in the early stages of building their portfolio. Once again, due to their nimbler size and the lack of heavy legacy processes, specialist finance providers are not only able lend on those smaller deals but to offer a smoother, faster and more tailored customer service. For example, at Blend Network we regularly fund HMO deals, having funded deals from as little as £150,000 across the UK regions. So, it is important for finance brokers and advisers to know which lenders to go to for the smaller deals and it is important for clients to know which finance broker and adviser has a great little black book of lenders who would lend on the smaller deals. So, as a broker and adviser, “if you got it, flaunt it”.
In summary, HMOs have been and remain a highly attractive strategy for landlords looking for higher yield and a good source of rental income. But now more than ever before HMO investing requires having a lender who truly understands HMOs and focusing on location.
