In an era marked by high rental property demand, Houses in Multiple Occupations (HMOs) have gained unprecedented popularity.
In England and Wales, an HMO property is defined as a residence where three or more individuals from two or more different households cohabit. These residents share common facilities such as bathrooms, living rooms, and kitchens, often called ‘house shares’ or ‘flat shares.’
While HMOs are commonly associated with students or young adults, their appeal extends beyond this demographic. The surge in demand for rental properties has been notable since mid-2019, especially as the average age of first-time buyers reached 33, leaving a substantial portion of the population seeking rental accommodations.
Factors such as mainstream lenders increasing deposits to 15% and the impending conclusion of government help-to-buy schemes in 2023, heightened by the impacts of the 2020 pandemic, suggest that the age at which individuals can afford to buy a home will likely rise to 40 before 2025.
Funding Houses in Multiple Occupation purchase or conversion
While conventional lenders may be your initial choice, finding one that aligns with your specific criteria can be challenging. Securing a lender can prove exceptionally tough for novice landlords. Many lenders stipulate a requirement of approximately two years of experience, especially for Houses in Multiple Occupation mortgages.
This is where bridging loans can be crucial in supporting such investments, allowing a transition to a mainstream lender once the experience criteria are met. Completing all necessary work in one go, often during a vacancy between tenants, is advantageous when renovating houses in multiple occupations.
A bridging loan offers an effective solution by ensuring comprehensive coverage. With funds available within days, work can commence promptly, minimising the duration of property vacancy.
If you’re converting your property into an HMO, a bridging loan can furnish the funds for this permitted or light development, facilitating swift execution without the delays and potential mortgage denials of waiting for a mainstream lender.
What types of properties count as HMOs?
One of the many great aspects of having Houses in Multiple Occupation is that it can be used for various reasons. However, the number of people you want under one roof will affect whether you need a license or not.
Examples of commonly used Houses in Multiple Occupations are:
- Bedsits
- Hostel
- 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 want to convert is counted as an HMO, you can always check government legislation.
Landlord revolution
HMOs offer a profitable option for landlords aiming to maximise rental income in the growing UK property market. The housing crisis persists, and property values are close to pre-pandemic levels, creating favourable investor conditions. According to The Guardian, rental demand among individuals in their mid-30s and 40s has tripled over the last 20 years. This surge in demand is especially evident in commuter cities. However, smaller expanding towns are emerging as untapped opportunities. These smaller towns, undergoing rapid development, are attracting interest from buy-to-let and HMO landlords.
Such growth often focuses on converting older properties in town centres into modern living spaces. Refurbishment bridging loans facilitate these conversions, creating homes near transport links.
This approach especially appeals to commuters seeking convenient access to nearby cities via local train stations. Investing in these developing areas is a cost-effective alternative to buying older properties in larger cities. While initial rental yields may be lower, long-term property value increases can justify the investment. Landlords entering this market can benefit from lower upfront costs while positioning themselves for future financial growth.
The UK rental market remains vibrant, offering landlords ample opportunities to diversify their portfolios with HMOs.
Know your audience
Recognising your target demographic is pivotal when assessing the appeal of your property. The 20-30 age range, in particular, encounters challenges in acquiring their first homes, primarily due to uncertainties on a national scale. Traditional lenders often mandate a substantial 15% deposit, compounding difficulties, as even managing the initial 10% can pose a hurdle. This situation is anticipated to elevate the demand for rental properties.
As per insights from Landlord Vision, the age group most inclined towards renting currently falls within the 25-35 bracket, comprising 33% of tenants in the UK.
Notably, regions with universities such as Guildford, Manchester, and Canterbury are witnessing a growing preference for renting entire properties to specific groups. This trend remains popular and is equally lucrative, catering to a slightly later demographic.
Advantages of Houses in Multiple Occupation Properties
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