Landlords Buying Up HMOs

Posted by Vesta Property on 3rd November 2020 -

At the start of the year, Paragon - the specialist buy-to-let mortgage lender - predicted that of the landlords planning to purchase property in 2020 nearly a third (31%) planned to purchase HMOs. This mirrors what we have experienced at Vesta with demand for HMOs listed on the platform attracting a lot of interest from investors during the year.

A House of Multiple Occupation (HMO) is defined as a property where rooms are rented out individually to un-related people, rather than renting out a dwelling on a single tenancy, such as to a family or a couple.

HMOs appeared in popular culture in the 1970s in the TV programme "Rising Damp" where live-in landlord, Rupert Rigsby, provided rooms of dubious quality for a random group of people. However, tighter regulations and greater expectations from tenants means that HMOs attain a much higher standard and can often feature designer interiors and lifestyle extras to cater to discerning professional tenants or all ages who like to pay an "all-inclusive" rent while enjoying the social aspects of house shares.

Landlords are attracted to HMOs because they typically deliver significantly higher yields than a property rented out to a single tenant. However, as with any investment, with higher rewards comes higher risk, and for this reason HMOs are typically the domain of more experienced landlords who are aware of the much stricter compliance requirements, who are skilled at tenant management and who are likely to be more "hands on”.

Some of the main considerations when purchasing an HMO:

• Financing - specialist finance is typically required when purchasing an HMO. Lenders, including Paragon, like to see some level of previous experience of property and tenant management. Lenders typically look to bricks & mortar to anchor their valuation, however the higher rental income can typically support a higher level of debt depending on the lender and the property in question. That is why it is so important to make sure you have spoken to a specialist mortgage lender early on in your journey to buying an HMO. We work with Coreco who can advise you on HMO lending options as well as more vanilla buy-to-let mortgages.
• Net rental yields - sometimes up to three times greater than a single-occupancy BtL property are countered by much higher costs (usually higher maintenance & repairs and higher tenant turnover and voids) and more time-intensive management. So HMOs are not generally recommended for first-timer or amateur landlords for these reasons.
• Regulation - HMOs come with stricter compliance requirements and often require a licence, this can add significant costs associated with getting the property up to standard and licenced, and there are much stricter regulations, particularly around safety, including fire and escape routes. Many areas are brining in what is known as Article 4 to reduce the number of HMOs in an area, so getting hold of existing licenced properties can be very beneficial.
• Tenant management - Landlords need to be careful about tenant vetting and selection to ensure that harmonious households are created. One "bad apple" can upset an entire HMO and result in other tenants leaving. This is even more critical in the current COVID-19 environment.

From a tenant perspective we see demand for HMO properties increasing especially in the more upmarket professional market as the quality of homes continues to improve.

Browse the HMOs we currently have available on our marketplace to see what is available today - new properties are added daily! And feel free to get in touch if you're looking at either buying or selling.