Financing HMO Purchases

Houses of Multiple Occupancy (HMO), defined as;

‘HMO is a house occupied by more than 2 qualifying persons, being persons who are not all members of the same family. A “qualifying person” is a person whose only or principal place of residence is the HMO’

Landlords are increasingly finding value in having HMO properties within their portfolios. With each bedroom rented out separately it represents a greater opportunity to raise income from larger properties.

However, raising mortgage finance to purchase an HMO can be rather more tricky, with many lenders still hesitant about lending to the sector, even those that would finance a standard buy to let.

There are reasons why this happens, let me explain.

HMO Emerging Market

Buy to let properties are well understood by lenders, they have been around for years and it is all clean cut, a single AST covering the loan costs by a factor of 1.2 or 1.25 and away you go.

As an asset class the HMO is still emerging. Many lenders have yet to experience what value an HMO may fetch in a distressed market or how easy they are to dispose of in a forced sale.

The other issue is around the value of the property against the actual worth. If a 5 bed house rents for £2,000 per month then at a 4% yield the property values at £600,000. If you take the same property and convert it to an HMO then income per month could be £650 per room, or £3,250 per month

If you apply the same yield of 4% then the property has a ‘value’ of £780,000. Is it suddenly ‘worth’ £180,000 more? It is after all the same bricks and mortar and nothing has structurally changed.

What this does is give lenders a confusing picture as to what their asset security is really ‘worth’.

The Valuation Concern

The staple of any property lending is the valuation. The challenge for lenders is what the valuation of an HMO actually is. If you are a landlord selling an HMO then you would look to your yield and market at that value.

The valuer will look at the income alongside the bricks and mortar, add in comparable sales then decide on the value. At this stage there is a disconnect between the asking price of an HMO and the formal valuation.

For many lenders this removes them from offering the level of finance required by the landlord and the deal falls over.

The HMO Lending Answer

What we have is a new lending market. As common as HMOs are, there are still many lenders finding their feet.

The real plus for lenders is that rather than having a single AST and the potential for total income voids, an HMO offers a spread of risk with a void likely to impact only part of the income. Lenders that understand this are keen to advance for HMO purchases.

For landlords who have struggled to secure HMO finance then it is the familiar case of looking in the wrong place. Buy to Let and HMO have the paradox of being both the same and very different, don’t expect a lender to necessarily be both in both markets.

If you are looking for HMO lending then we work with a range of quality lenders who can finance purchases at both full market value, under market value and via auction.

Any questions then please get in touch.

By Dave Farmer