Adrian Moloney, Group Intermediary Director at Kent Reliance for Intermediaries explores the current HMO landscape along with some recent case examples.
With HMO properties generating above average rental yields of 7.2%1, you can see why landlords could be looking to diversify into HMOs. The effects of the pandemic are still being felt in terms of supply and demand with the number of available homes to rent 20% lower than 2019 (pre-pandemic), plus there are also now 22% more tenants are looking to move too2.
HMOs can come with their own set of challenges and complexities, which are an important consideration, especially for new landlords looking at this type of investment. For example, its pivotal to understand what the local council restrictions are. In some areas, councils/local authorities have Article 4 implemented which can restrict the types of works that can be completed on properties, including conversion from C3 (dwelling house) to C4 (HMO) use. Landlords need to ensure they have obtained all the relevant permissions before any works can take place.
If a client is considering purchasing an existing HMO property to avoid conversion costs and/or planning implications, they are likely to be looking at paying an additional premium which could impact their yield margins.
Specialist lenders, such as Kent Reliance for Intermediaries (KRFI), are experts in this type of finance and have different products available dependent upon criteria points such as number of beds as well as first time landlord vs. experienced portfolio owners. KRFI accept up to 20 lettable rooms, some lenders will only consider a maximum of 10.
An example of the type of cases we have been seeing recently, was a remortgage of a semi-detached house purchased in January 2024 which was then renovated into a 5 bed HMO property, all with ensuite bathrooms. This was an experienced landlord with a portfolio valued at £18m who had already placed considerable business through OSB Group. The portfolio is a combination of flats, houses and semi-commercial assets as well as HMO properties with their first HMO being purchased in 2020. This property type now makes up 14% of their total portfolio with the majority of these purchased in the last 6 years and we’re seeing a similar trend with other customers.
The vast majority of HMO properties include bills in the monthly rental amount, therefore, landlords need to ensure their properties are as energy efficient as possible as they might not have control over energy usage, for example bills could rise very quickly if the heating is left on 24 hours a day. This teamed with the volatility of the energy market means that if the property isn’t as energy efficient as it could be, it could eat into a landlord’s profits. Plus, HMO properties tend to be most popular with students or young professionals who are likely to be influenced by environmental aspects when looking at their rental options so these considerations can make a property more appealing.
Another case that recently completed with us was a first-time landlord who wanted to create a HMO in a high demand area due to its proximity to a university and hospital. This was a full back to brick refurbishment that created a 6-bedroom property, all with ensuite bathrooms. The refurbishment enabled the landlord to be in full control of making the property energy efficient with insulation, double glazed windows and fit out including energy efficient white goods. The HMO property was completed to a high standard and therefore when it hit the rent market, it was in such demand that all rooms were snapped up quickly.
If you do have a first time HMO landlord case, remember that KRFI can accept applications if they can present a good business case drawing on a professional network such as experienced builders, use of letting agents, and of course, that they have completed all their due diligence.
1 Pegasus Insight Landlord Trends, Subscriber Report – Q2 2024
2 https://hub.rightmove.co.uk/content/uploads/2024/07/Rental-Trends-Tracker-Q2-2024-FINAL.pdf