Houses in Multiple Occupation
In today’s market, rental properties are in high demand. As a result, Houses in Multiple Occupation (HMOs) have become very popular.
In England and Wales, an HMO is a residence where three or more individuals from different households cohabit. These residents share common facilities such as bathrooms, living rooms, and kitchens. These properties are often called ‘house shares’ or ‘flat shares.’
Although HMOs are often associated with students or young adults, they appeal to a broader demographic. Since mid-2019, the demand for rental properties has surged. This increase is notable as the average age of first-time buyers has reached 33. Consequently, a significant portion of the population seeks rental accommodations.
Several factors contribute to this trend. Mainstream lenders now require 15% deposits. Additionally, the government help-to-buy schemes are ending in 2023. The 2020 pandemic has also impacted the housing market. These factors combined suggest that the age at which individuals can afford a home will likely rise to 40 by 2025.
Funding Houses in Multiple Occupation purchase or conversion
Conventional lenders might be your initial choice, but finding one that meets your criteria can be difficult. Securing a lender is especially tough for novice landlords. Many lenders require about two years of experience, particularly for Houses in HMO mortgages.
The Role of Bridging Loans
This is where bridging loans become crucial. They support such investments, allowing a transition to a mainstream lender once the experience criteria are met. Bridging loans are beneficial for renovating HMOs, especially when the property is vacant between tenants.
Benefits of Bridging Loans
A bridging loan offers an effective solution by ensuring comprehensive coverage. Funds are available within days, allowing work to commence promptly. This minimises the duration of property vacancy.
Converting to an HMO
A bridging loan can provide the necessary funds if you’re converting your property into an HMO. This supports permitted or light development, facilitating swift execution. You avoid delays and potential mortgage denials from mainstream lenders.
What types of properties count as HMOs?
Houses in Multiple Occupation offer various benefits. They can serve different purposes, accommodating diverse tenant groups.
The number of occupants affects licensing requirements. More people often mean a licence is necessary.
Common HMOs include:
- Bedsits
- Hostels
- House or flat shares
- Student accommodation (university-owned properties aren’t HMOs)
- Licensed HMOs (5+ tenants from multiple households)
- Unlicensed HMOs (3 tenants from multiple households)
The property’s number of storeys also matters. If unsure about your property’s HMO status, consult government legislation for clarity.
Landlord revolution
HMOs offer a lucrative avenue for landlords seeking robust property investments. They augment rental income in today’s thriving real estate market.
The UK faces an enduring housing crisis, with property values nearing pre-pandemic levels. Consequently, the current climate appears opportune for investment.
Recent figures from The Guardian show a threefold increase in the number of individuals in their mid-30s and 40s opting for rental housing compared to two decades ago.
Demand for rental properties is particularly pronounced in commuter cities. However, smaller towns undergoing expansion present potential opportunities for Houses in Multiple Occupation (HMO) landlords.
The growth of these smaller towns is attracting buy-to-let investors and HMO landlords. This unveils fresh opportunities in the rental market.
As small towns expand, the focus shifts towards refurbishing older properties in the town centre. Refurbishment bridging loans facilitate this strategic conversion. These loans provide convenient living spaces within walking distance of local train stations, offering commuters a direct link to nearby cities.
Investing in properties around these burgeoning towns offers a cost-effective alternative to purchasing older city properties. While initial rents may be lower, allowing time for the area to develop fully can lead to enhanced property values in the long run.
Know your audience
Recognising your target demographic is crucial when assessing your property’s appeal.
The 20-30 age range faces challenges in acquiring their first homes. This is primarily due to national uncertainties. Traditional lenders often require a substantial 15% deposit. Even managing the initial 10% can be a significant hurdle. Consequently, this situation is expected to increase the demand for rental properties.
Insights from Landlord Vision reveal that the 25-35 age group is most inclined to rent. They comprise 33% of tenants in the UK.
Regions with universities, such as Guildford, Manchester, and Canterbury, are seeing a growing preference for renting entire properties to specific groups. This trend remains popular and equally lucrative, catering to a slightly older demographic.
Advantages of Houses in Multiple Occupation Properties
High Tenant Demand
Properties with direct transport links to London usually command higher rental rates than the national average. Consequently, there is substantial demand from the commuter community. These commuters cannot afford prime properties and are eager to rent HMOs in these areas.
Risk Mitigation for Income
Multiple tenants serve as a protective barrier, minimising the risk to your rental income. This ensures a higher yield and spreads the risk if a tenant faces sudden financial challenges.
Elevated Rental Income
HMOs can yield up to three times more rental income than single-let properties. This makes them an attractive investment choice for seasoned landlords.
Value Appreciation
Despite inevitable wear and tear, property renovations and regular upkeep can enhance the value of your investment. Repainting walls or upgrading a bathroom contributes to a property’s appeal and market value, making it a lucrative option for potential buyers should you decide to sell.
Credit: Tiba Raja, Executive Director, Market Financial Solutions