HMOs growing in popularity with landlords but licensing and regulation are key considerations – Rowe

Demand for rental properties is higher in cities such as Bristol, Leeds and Manchester; cities that typically have considerable student populations and tight rental markets.

HMOs are also attractive to young professionals who want to remain in city centres but who cannot afford to rent a flat.

Landlords are including HMOs in their portfolios as a result of above-average yields, which have been around 7.5% in recent years, according to the British Landlords Association (BLA).

Higher yields

A four-bedroom standard property on a current average market interest rate of 4.75% valued at £575,000, for example, could generate £1,850 per month in rent.

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However, the same property operating as an HMO on the same interest rate could generate £625 per room, totalling £2,500 per month – an additional £650. The prospect of higher yields can, in turn, secure a higher-loan-to-value (LTV) mortgage.

This additional amount may help secure a more favourable interest coverage ratio (ICR) – which calculates if a landlord can meet mortgage payments should interest rates rise – enabling them to borrow more.

Securing a five-year fixed rate personal mortgage at 5.75% against our standard four-bedroomed house example might enable a landlord to secure a £275,776 loan (or 48% LTV).

A limited company special purpose vehicle (SPV) mortgage could result in the landlord borrowing £30,000 more (£308,870) – a 54% LTV.

By contrast, a landlord could potentially secure a 5.75% five-year fixed rate mortgage of £347,826 – a 60% LTV against the same house as an HMO property. For a limited company, this could increase to a £386,473 mortgage and a 67% LTV.

Lenders typically consider HMOs a safer investment. They raise more in rent and are typically less likely to be empty, which means landlords are less likely to lose income.

HMOs do still pose risks, and many lenders ask potential landlord customers whether they have rented out such properties before.

HMO licensing and regulation

HMOs can also be more complex to manage than standard BTL properties. For example, they are subject to different regulations – they typically require fire doors – which can be an additional expense.

Many local councils also require HMOs to be licensed, and each region may have different licensing requirements, standards and fees.

Potential investors should also ensure they are aware of recent government changes, including taxes and regulation.