One of the things that makes it feel so realistic is its use of baffling acronyms. Is there an UCO in the OCG? Do you know the difference between an AFO and a CHIS? Could Ted Hastings be the HMO?
Notice something unusual in that sentence? The eagle-eyed amongst you will no doubt have spotted the incongruent use of HMO. Although it wouldn’t sound out of place in the popular police thriller, it’s obviously taken from the mortgage world, standing for Houses in Multiple Occupation.
With their potential to earn higher rental yields compared to more traditional single let properties, HMOs have become increasingly popular with landlords in recent years. According to the latest research by BVA BDRC1, HMOs continue to generate significantly higher average rental yields compared to other property types – seven per cent compared to the overall average rental yield of 5.8%.
When you factor in the added peace of mind that comes with knowing that if one tenant moves out there’s less exposure to arrears, it’s no surprise why they’re proving so appealing to clients looking to maximise their investments.
And it’s not just experienced landlords with years of rental know-how behind them; HMOs are also attracting the attention of investors looking to take their first steps in the buy to let market.
As with any financial investment, however, there are downsides as well as upsides. Managing an HMO can be challenging, and first-time buyers in particular should only go into an HMO arrangement with their eyes wide open.
Licensing an HMO
Many people believe a property only becomes an HMO when five or more people forming more than one household are living it. Not only is that incorrect, it could potentially have very costly consequences for landlords. A property is actually classified as an HMO when it’s occupied by at least three unrelated tenants forming more than one household who share toilet, bathroom or kitchen facilities.
While HMOs with five or more unrelated people are subject to mandatory licensing with all local authorities, some councils insist on landlords with fewer residents obtaining a licence. Landlords failing to apply for a licence when one is required could face a fine of up to £20,000, plus costs.
Adding up the costs
The costs associated with running an HMO can be higher compared with a traditional single let property too. Start-up costs can mount up if conversion work needs to be carried out or furniture needs to be purchased, while running costs for things such as letting agents, utilities and maintenance can soon eat away into those much vaunted potential higher rental yields.
Finding the right HMO mortgage
Finally, aspiring first-time HMO landlords might find their choice is more limited when it comes to securing the finance they need. Their complex nature can mean there’s often more work in managing an HMO property, resulting in some lenders being more cautious as a result. Many lenders will insist on some form of letting experience before they will lend to someone buying an HMO.
So if you’re approached by a client who still wants to purchase an HMO property but who doesn’t have any previous buy to let experience, would you know where to turn?
Well, it’s good to know that there are lenders out there who can support both you and your client every step of the way.
We’ve seen every scenario, from simple to complex cases, and our common sense approach to lending and flexible underwriting means we can help shape lending decisions. We’ll consider first-time landlords if they’re a residential homeowner and the HMO property is no more than six bedrooms. For more experienced landlords, we’ll consider properties with up to 10 bedrooms.
As some doors shut in certain areas of the buy to let market, different ones are opening up. HMOs offer the potential to earn higher rental yields, as well as some protection from rental arrears, and with the right lender by your side, you can help landlords, both new and experienced, step over the threshold and explore the new opportunities they offer.