As experienced mortgage brokers, we’ve had our fair share of dealings with buy to let mortgages. In recent years, there’s been an increase in HMO property investment. I mean, who wouldn’t want to invest in an HMO as they generate a lot more money than regular buy to let. Or do they?
We’ve found that HMO investment may look good on paper, but in reality, it may not be that different from a regular property investment. Furthermore, surveyors have changed their stance on how they value HMOs, but we’ll talk about that a little later on in this article.
What is an HMO?
You’ll probably already know what an HMO is, but if you don’t, we’ll explain it to you.
An HMO is simply an abbreviation for Houses in Multiple Occupation. In other words, an HMO is a property that can be accommodated by multiple tenants and not just a single family.
HMO investment can seem very attractive on the surface. Rent is charged for each room and to each tenant, so the numbers soon add up. For instance, if you have a three bedroom house with 2 reception rooms, you may be able to fetch £800 pcm (depending on the location).
With an HMO, you may be able to convert the 2 reception rooms into rooms and then rent out 5 rooms to 5 single tenants at £350-£450 pcm per room (depending on the location). This totals to a staggering £1750 a month (if each room is £350 pcm). That’s £950 more each month!
It’s clear to see why HMO investment can seem so attractive. Nonetheless, that’s what an HMO looks like on paper. We’ll now get into the nitty gritty of HMO mortgages and whether or not HMOs really are the holy grail of buy to let.
The cost of setting up an HMO
The cost of setting up an HMO is often a lot higher than a traditional buy to let. One of the main reasons is the initial conversion cost, if any. HMOs are all different, but many landlords choose to offer en-suite rooms. This to stand out from the competition and so they’re able to charge higher rent. Furthermore, many tenants want their own bathroom at least. This involves costs to convert the property and maybe chop and dissect the current internal structure.
Another cost will be the refurbishment of the HMO. Due to HMO properties being a very competitive market (which we’ll talk more about later), costs can go through the roof. Landlords are keen to stand out from the competition so are now carrying out high end refurbishments to attract tenants.
HMOs are usually let fully furnished, whereas regular rental properties are usually let unfurnished. This is yet another cost to bear in mind. Furthermore, you’ll have to furnish each bedroom, ensuite and kitchen. In addition, you’ll also have to maintain all furniture and appliances. Also, when we say fully-furnished, we mean more than just a bed. Landlords are now providing kettles, toasters, microwaves, bed side cabinets, wardrobes and even televisions with sky and high-speed internet.
The positives are that landlords are able to remortgage to release capital once the refurbishment is complete. Many landlords utilise this strategy, but it can also be used for regular properties and not just on an HMO.
Other things to think about when investing in an HMO
We’ve already mentioned the costs of setting up an HMO, but there’s a lot more to think about.
You’ll also have to consider:
- Location – HMOs tend to work in certain locations. For example, HMOs tend to be in or around the city centre or around student areas. Regular buy to let isn’t restricted to a certain location, as they’ll pretty much work anywhere. The problem here is that HMOs will be right next to other HMOs so competition will be fierce.
- Void Periods – HMOs will have more void periods that standard buy to let. Families may rent a regular buy to let for years without a single void. If there is a void, it’s often no longer than a couple of weeks depending on the location and condition of the property. HMOs tend to have more voids because rooms are usually used as stop-gaps and rarely as a form of long-term accommodation.
- Utility bills – We’ve already mentioned set-up costs, but there’s also running costs to an HMO. This is because many landlords offer rooms as ‘bills included’. This means you’ll have to pay water, electric, gas and council tax, not to mention broadband and tv costs if you’re offering them. Coupled with void periods, this can soon burn holes in pockets.
- Maintenance – HMOs often require more maintenance than conventional buy to let, especially if your HMO is a student property. Families tend to take more care of the home they live in. Often enough, if anything is damaged, only the family can be held responsible. In an HMO, as there are multiple tenants, it’s hard to pinpoint whose damaged what, unless it’s in their actual room.
- Legalities – Renting an HMO requires a lot more legislation to be met. You’ll have to think about licencing, risk-assessments, fire safety and carry out inspections at a much more regular frequency. Sure, conventional buy to let also has legislation to be met such as fire safety, but the differences in legislation is quite staggering. Regular buy to let also doesn’t licencing.
- Saturation – Sure, HMO investment can work and it often does, but because of this, the multi-let market is very saturated compared to previous years. What this means is, supply has started to overtake demand. A simple search on any property portal which show you just how many rooms are available and how long they’ve been vacant for.
Will I need an HMO mortgage?
An HMO mortgage is solely designed to purchase an HMO. The key here is to select the right lender so they’re able to calculate the rental income when they carry out their mortgage survey. This is because many lenders now simply calculate the bricks and mortar value. Lenders do this in the event that a landlord converts the HMO back to a regular residential property.
We’ve helped many landlords get the right HMO mortgage, when they’ve been declined elsewhere. The reason they’ve been declined is simply because they’ve approached an unsuitable lender.
Author: Martin Alexander
Date: 6th of February 2020