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Houses in Multiple Occupation | Our Effortless Guide to HMO | 2020

Houses in Multiple Occupation

Houses in Multiple Occupation

 

In an era marked by high demand for rental properties, Houses in Multiple Occupation (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 during the renovation of houses in multiple occupations.

A bridging loan offers an effective solution by ensuring comprehensive coverage for all aspects. 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 present a lucrative avenue for landlords seeking robust property investments, offering a means to augment rental income in today’s thriving real estate market.

In the midst of an enduring housing crisis and with property values nearly restored to pre-pandemic levels in the UK, the current climate appears opportune for investment.

Recent figures from The Guardian indicate a threefold increase in individuals in their mid-30s and 40s opting for rental housing compared to two decades ago.

The demand for rental properties is particularly pronounced in commuter cities, but emerging smaller towns undergoing expansion present a potential treasure trove for Houses in Multiple Occupation landlords.

The burgeoning growth of these smaller towns is poised to capture the attention of buy-to-let investors and Houses in Multiple Occupation landlords, unveiling fresh opportunities in the rental market.

As small towns expand, there’s a shift in focus towards refurbishing older properties in the town centre, facilitated by refurbishment bridging loans. This strategic conversion provides 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 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

There can be many advantages to owning Houses in Multiple Occupation investment properties:

High Tenant Demand: Properties with direct transport links to London typically command higher rental rates than the national average. Consequently, there is substantial demand from the commuter community, which cannot afford these prime properties and is 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, making them an attractive investment choice for seasoned landlords.

Value Appreciation: Despite the inevitable wear and tear associated with HMOs, property renovations and regular upkeep can significantly enhance the overall value of your investment. Whether it’s repainting the walls or upgrading a bathroom, such improvements contribute 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

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