If you still associate HMO properties with cheap student digs, it’s time to play catch-up, says Jon Cooper, director of mortgages at Aldermore.
There’s been a transformation in the House in Multiple Occupation (HMO) sector in the last 10 years, as it’s moved beyond student lets to include a burgeoning professional market.
HMO landlords increasingly target young professionals in their search for more attractive returns in this potentially profitable sector.
Once seen as the preserve of student landlords, HMOs have a much wider appeal than the cheap digs near universities they used to be associated with.
As the HMO sector has evolved, we’ve transformed our proposition at Aldermore to keep pace with the wider changes. We’ve made it easier for landlords to get the numbers to stack up and get specialist support when they need it.
Better borrowing power
In recent weeks, we’ve made a range of improvements to our HMO products, criteria and processes.
This latest update is designed to boost landlords’ borrowing power and provide brokers with improved systems and processes. It includes:
- New expert case management service, providing guidance on HMO cases, from start to finish
- Greater flexibility with a choice of a managed or open panel for conveyancing
- Expanded lending terms up to £2m at 65% loan-to-value (LTV) and £1.5m at 75% LTV for HMOs
- Lower ICR on HMO borrowing to as low as 130% for companies or individual basic-rate taxpayers, and 145% for higher-rate taxpayers
- Free valuations on all single HMO applications up to six bedrooms
- Case-by-case underwriting with common-sense decisions
Aldermore stands ready to help landlords find a buy-to-let mortgage in sectors that are underserved by mainstream lenders, including HMOs. We’re happy to consider clients with non-standard needs and listen to their story if things haven’t gone quite to plan.
Our underwriting approach is flexible and pragmatic, and we know that HMOs can have non-standard or complex elements. So we’ll look at your client’s potential and do our best to maximise their borrowing where possible.
Not all lenders will offer a mortgage to landlords buying a HMO and criteria differ widely. It makes sense for brokers to get an understanding of what is available across the market, alongside boosting your knowledge of this important sector.
What you need to know about HMOs
An HMO is a property rented out by two or more households (at least three people) who share a basic amenity, such as a bathroom, toilet or cooking facilities.
They can be cost-effective rental properties, offering landlords potentially higher rental yields as they are rented out on a per-room basis. They’re also in demand from tenants looking for affordable and flexible accommodation.
But HMOs can have a heavy admin burden, require more maintenance and have a higher turnover of tenants. They also come with extra rules, including licensing requirements.
The HMO market has been estimated at £78billion, generating annual rental income of £6.3billion, according to HMO management platform COHO, with an estimated 182,554 HMO properties in England and Wales.
If there’s still a stigma around HMOs being poor quality, it’s out of date. The reality is that the HMO sector has changed significantly in the last 10 years.
There’s still a place for the traditional student let, often a converted terraced house, with a basic kitchen and bathroom.
But there’s a growing swathe of landlords that focus on letting shared homes to working professionals, from graduates to thirty-somethings, and older tenants, who are all looking for affordable housing, but also community.
It’s not just professionals who have higher expectations; many university students do too. It’s not unusual for student HMOs to also be modern, Wi-Fi-enabled and well-located.
How is a professional HMO different?
It isn’t always that different but, overall, professional HMOs have multiple bathrooms, large communal areas, are furnished to a higher standard, with modern appliances, and might include smart home features like keyless entry, alarm systems and good WIFI.
They’re usually managed by portfolio landlords with experience in the HMO sector or by letting agents with expertise in compliance and maintenance, so the tenants feel confident the property will be well looked after.
Professional HMOs tend to be located in commuter areas or city centres, close to transport links and workplaces, so they suit young professionals or key workers.
This type of high-quality HMO attracts stable, longer-term tenants, attracts higher rents and results in fewer void periods.
For brokers, it’s useful to be aware of the shift in this sector to support your landlord clients who want to take advantage of the appealing yields on HMOs.
Why the rise of professional HMOs?
There are a few reasons behind the change, as the sector has moved away from cheap and cheerful student digs to a broader offering.
Renting is expensive: Rents have risen by 7% in the year to May, to £1,394 in England, according to ARLA Propertymark.
Rents are particularly high in large cities, leaving many working tenants unable to afford traditional one-bed flats or studio apartments. They look to professional HMOs for an affordable alternative that doesn’t sacrifice location or quality.
Changing tenant expectations: Today’s renters have higher expectations, especially if they’re spending more time working from home. Fast broadband, ensuite bathrooms and space to work are expected by many who can’t afford to buy or rent their own place.
They also expect landlords to look after the place properly and respond quickly when something needs fixing.
The professionalisation of landlords: Greater professionalisation in the overall buy-to-let sector has been noticeable over the last 10 years. Some smaller landlords have exited the market, due to increasing regulations and squeezed margins, while fewer have chosen to expand their portfolios.
As a result, the proportion of professional, portfolio landlords, often operating as limited companies, has grown.
These professionals treat their rentals like a business and look for higher-yielding properties in niche sub-sectors. They are more likely to invest in HMOs and look for the best return by providing attractive accommodation. As more seasoned landlords have invested in this market, supply has steadily grown alongside demand.
While the appeal of HMOs is obvious – higher yields with longer-term tenancies, they are still a specialist sub-sector of the buy-to-let market and come with their own complexities. You can help your landlord clients by ensuring they have a good understanding of their responsibilities when it comes to letting HMOs, from licensing rules in their area to looming regulatory changes.
As tenant demand remains high and expectations evolve over what a shared home looks like, professional HMOs look set to grow alongside traditional student lets. For landlords who invest in quality accommodation, the rewards can be significant, but getting the right mortgage is key too.
Here to help
Find out how Aldermore can help your HMO clients, including how we’ve recently improved our proposition at www.aldermore.co.uk/intermediaries/mortgages/buy-to-let/hmo/
