Houses of Multiple Occupation (HMOs) are continuing to receive attention in the media thanks to the attractive yields potentially available. The HMO is an evolving asset class without a doubt, and it could be argued it now occupies a market of its own, no longer hidden within the wider buy-to-let market. But hand in hand with the HMO’s attractive investment prospects come the complexities that surround this particularly specialist property type.
At Shawbrook we are continuing to see a healthy interest in HMOs from a lending perspective and with property prices continuing to rise, it seems likely that demand for HMO products will increase as tenants look to a variety of rental options. That being said, now more than ever, lenders are under pressure to lend responsibly and ensure that investors’ HMO ambitions are realistic and sustainable.
We require anyone seeking finance on an HMO project to demonstrate adequate experience as a landlord. Our guidelines define an “experienced HMO landlord” as a client who has actively owned and managed at least one similar-sized HMO property for a minimum of 12 months. As with all of our guidelines, these requirements are flexible, and we take a pragmatic approach to lending with every case we encounter. If, for example, your client can demonstrate management and ownership of five or more buy-to-let properties for a minimum of 12 months, we would class this as sufficient experience to enable us to lend on a small HMO comfortably. Essentially, we want to be confident a client is able to successfully manage multiple tenants simultaneously.
If you have a client thinking about investing in an HMO or expanding their portfolio, here are our top tips:
Beware of Article 4 restrictions – More and more councils across the UK are enforcing Article 4 Directions to tighten controls over developments, meaning that all types of developments listed within the Directions will require permission by the local Council. Always ensure your client has checked whether these restrictions apply to their area before securing finance.
Inform your lender of the type of HMO – The type of HMO, including room size will determine value of the asset, so it’s important to disclose to your lender what type of HMO your client is interested in. Is it a shared house, a building split into bedsits or self-contained flats, or one of the many varieties of student accommodation?
Use a commercially-minded solicitor – Specialised asset types require specialised legal work. We recommend choosing a solicitor with relevant experience in the type of asset to ensure all the legal work is in place, and the application can be processed as efficiently as possible.
Research the product market – There are a variety of products available for HMOs depending on your client’s funding needs. At Shawbrook we offer products for HMO conversions, as well as light and heavy refurbishments. Make sure you do your research thoroughly to source the best product for your client.
Karen Bennett is sales and marketing director for commercial mortgages at Shawbrook Bank