Brokers need to know their onions as demand for HMOs rises

Landlord appetite for buy-to-let and property investment has returned with a vengeance since the end of lockdown. A combination of pent up demand and the stamp duty holiday has resulted in buy-to-let mortgage volumes similar to the start of the year.

Related topics:  Special Features
Paul Brett | Landbay
23rd October 2020
Paul Brett
"For brokers advising their clients on HMOs, there are other things to be aware of that are not the case with a normal residential buy-to-let, particularly if it is the first time the investor has had a property of this type."

There is no doubt that tenant demand is also incredibly high and may well increase further, but for landlords looking for higher yields the focus is now Houses in Multiple Occupation (HMOs). The interest is usually from experienced or professional investors who really understand the private rental market and the additional gains that they can get, but also the additional demands on them as a landlord when they take on an HMO.

The HMO sector has been given an additional shot in the arm by the number of students returning to university. Despite all the hype a few months ago that students wouldn’t return this year because of Covid-19, they appear to have returned in record numbers, with the FT and DataHE reporting that university admissions are up by 3.5% over 2019.

Students are one of the biggest drivers of demand of HMOs as it provides more affordable accommodation. Many students are also increasingly motivated by the sociable element, after all, if you are going to be locked down, how much better as a late teen or twenty something to be locked down with six other people of your own age rather than your parents or being in a flat on your own? And it is easy to see why landlords are interested too. HMOs typically have much higher yields than standard residential property which is rented to just one family unit.

There are also typically fewer or smaller void periods with HMOs, as if only one room is vacant in a block of six or more, then the landlord will still receive the income from the other five. Some landlords are now even making the tenants joint and severally liable so that risk disappears altogether.

There is of course more work for the landlord at the start of each tenancy as it does take more time to vet each tenant before they move in. There are also other rules and regulations that the landlord will need to comply with such as fire doors on every bedroom, an alarm system and, if the HMO has six or more bedrooms, then the landlord will need to be licenced by the local authority and abide by rules that dictate the minimum amount of space each bedroom must have.

For brokers advising their clients on HMOs, there are other things to be aware of that are not the case with a normal residential buy-to-let, particularly if it is the first time the investor has had a property of this type.

Firstly, not every lender will accept student lets. Landbay will, in buildings with up to 12 bedrooms or units but, even in a lender does accept HMOs and student lets, the number of rooms a lender will accept in an HMO or a multi-unit freehold block (MUFB) will vary with each lender, dependent on their risk appetite. Most lenders will be looking for some experience that the borrower knows how to handle the additional demands from an HMO and, as with every buy-to-let, maximum loan size and LTVs on HMOs will also vary from lender to lender.

Demand for HMOs is growing from both tenants and landlords so this is definitely a market for brokers to take an interest in. Not only will HMO properties typically require larger mortgages resulting in higher proc fees for those placing the mortgage, most people investing in HMOs will be professional landlords, which means they are likely to be business minded and open to your advice. And for those brokers doing a good job, such borrowers are more likely to provide you with repeat business for many years to come.

More like this
Latest from Property Reporter
Latest from Protection Reporter
CLOSE
Subscribe
to our newsletter

Join a community of over 30,000 intermediaries and keep up-to-date with industry news and upcoming events via our newsletter.