HMO Funding
Your Guide to HMO Funding – Houses in Multiple Occupation
1. The HMO Opportunity
More property professionals are now turning to HMOs as their long-term strategy choice for real estate investment. Higher-than-average yields can be achieved if landlords are prepared to invest in providing high-quality, self-contained accommodation with an element of shared services and which meet the licensing regulations of the local authority.
With the average age for first-time buyers increasing and the levels of guaranteed income and deposit required to buy a property on the rise, the demand for affordable rental accommodation in cities and commutable locations has never been greater.
With this in mind, many investors now view the newly-imposed higher levels of regulation around HMO as a barrier to entry for those landlords unwilling or unable to comply but an opportunity for themselves.
This presents a unique window of opportunity to buy and invest in poorly-maintained property by refurbishing and converting buildings into HMO-compliant assets which, in turn, can provide a strong long-term revenue stream difficult to match through standard Buy-to-Let investment strategies.
2. Key Considerations for HMO investment
- Location, location, location.
- Is there a demand in the area for self-contained “bed sit” type accommodation with a shared kitchen and/or laundry room?
- Is the property close to public transport facilities?
- Is there parking near by if a car is needed?
- Is employment in the general area buoyant?
- What is the price differential in the area for the rental of a ‘standard’ flat versus a room in an HMO property?
- Are you personally experienced in property development, and/or do you have access to experienced building contractors who could be overseen by a qualified project manager?
3. Local Authority – Licensing & Planning
The attitude of local authorities when granting licences for HMOs differs from area to area. Please note, however, that compliance with building regulations, health and safety standards and minimum space and services requirements will need to be satisfied to achieve licensing approval across all regions.
Planning consent will be required (and can be declined) if the property is categorised as an HMO and is in a region where the Council has imposed Article 4.
Where the local authority has imposed Article 4, it will usually be as a result of over-population in the area and the consequent strain imposed on services and infrastructure.
In areas where Article 4 applies, formal planning consent will always be required.
4. Costs and Return on Investment
Local capital values and the costs to convert a property into a fully-compliant HMO need to be meticulously calculated before committing to a buying decision.
The full costs of acquisition - including SDLT, legal fees and the refurbishment costs - together with any ongoing services and borrowing costs, all need to be factored in to calculate an accurate return on investment.
HMOs do generally deliver higher-than-average yields; and, if they are fully compliant, well-maintained and licensed, can enjoy higher valuations as landlords will often pay a premium for a properly-licensed going concern.
Clearly, regional property prices vary greatly, as do rental costs. As a general rule, however, the highest yields are achieved in areas where the cost of buying a family home is below the UK average but where it is well-connected to a densely populated town or city with lower-than-average unemployment and other social deprivations.
5. Building your HMO Portfolio
Tuscan Capital are HMO funding specialists and can provide competitive, flexible leverage to help investors build a significant HMO portfolio.
Subject to the property and the borrower’s circumstances, we can provide funding up to 75% of acquisition costs and up to 100% of refurbishment costs.