HMO it or Single Let it

Household of Multiple Occupation (HMO) simply means a property that is rented out to more than one tenant. For example: a landlord renting a three bedroom house to five students.  Each student will have their own bedroom but share bathroom and kitchen facilities. The landlord converts the lounge and dining room into bedrooms and charges £400 per month x 5 rooms = £2000.

A single let is where a property is rented to a single person or family. For example, a four bedroom house rented to a young family with two kids.

The rent for a four bedroom house in the same neighbourhood as the HMO property is £1200 as a single let property.

Let us do a cost comparison on a three bed semi detached. Standard rent for a single let tenancy is £625 pm.

Single Let

Purchase price: £165,000

70% LTV Mortgage: £115,500

HMO and BTL lender, 2 year fixed rate of 2.89%

Monthly mortgage cost on interest only: £279

Single let: £625

Net cash per month flow from single let is: £625 – £279 = £346

Rental Yield: (the return on your investment, i.e., annual rental income on purchase price: £625 x 12 = £7500 / £165,000 = 4.55%

HMO

Purchase price: £165,000

70% LTV Mortgage: £115,500

HMO and BTL lender, 2 year fixed rate of 2.89%

Monthly mortgage cost on interest only: £279

HMO (five bedrooms at £350 per month): £1750

Net cash flow per month from HMO: £1750 – £279 = £1471

Rental Yield: (the return on your investment, i.e., annual rental income on purchase price: £1750 x 12 = £21,000 / £165,000 = 12.73%

A semi detached property set up as an HMO can generate a gross yield of 12.73%, whilst if set up on a single tenancy, it generates a gross yield of 4.55%.

In the last 12 months, I have attended a number of property investment seminars and training events and it’s clear that the investment strategy with a number of investors has changed. Before the financial meltdown in 2008, it was new build flats. New build flats were aggressively marketed as solid pension funds.  No one is talking about new build flats anymore. HMO is the new black.

Traditionally, you would buy your first BTL and rent it out on a single let basis. Novice BTL investors are going straight into the HMO market. Now savvy investors are analysing how they can convert part of their existing stock to HMO and invariably increase the yield in the process.

One property investor is getting a yield of 21.43%: Purchase price: £140,000 (not a penny more), rents out five bedrooms at £500 per room.

But is there an HMO market?

The government is finding ways to reduce the national debt and one of the areas they have sought to tackle is welfare benefits. Housing benefits are being capped. Benefits are being assessed and depending on circumstances, you will be asked to move to alternative and more affordable accommodation that is deemed suitable for your needs. There is now more demand for certain types of properties and, as a result, rental prices in certain parts of London have increased by as much as 13% in the last year.

In April 2014, mortgage market review (MMR) kicked in. Basically, lenders tightened their lending criteria, making it harder to get a mortgage. Again, more people will be forced to rent and renting a room will just make a lot of economic sense. Restrictive planning laws, a growing population and a shortage of affordable housing is contributing to soaring house prices, making buying a home beyond the reach of many. Conclusion: There will be a big demand for house shares.

Now that you are up to speed on the single let versus HMO market, what are the issues?

The big challenge is that lenders do not like HMOs and as a result the pool of lenders is restrictive. Yes, some of the rates are not the most competitive compared to standard BTL single let products, but remember the yields are potentially higher on HMOs. If you have a large property portfolio (at least £1m of debt), then there are a few private banks you could approach.

Those that will consider HMOs have strict criteria. Such as:

• No locks on bedroom doors
• Must be an experienced landlord
• Must have an HMO licence from the outset (very tricky one)
• No kitchen units in bedrooms
• Separate kitchen and bathroom facilities
• No more than five bedrooms, and for others its six
• One tenancy agreement for all occupants whilst some insist on separate tenancies
• Restriction on number of BTL properties you own,e.g., a maximum of 3 BTL properties

We need more banks coming on stream but in the meantime, if you want to know more about HMO mortgages and ensure that you can easily tip toe around their criteria then help is at hand.

Talking of new HMO lenders, read: New specialist BTL lender provides more choice 

Mortgageintellectual.com is not recommending that you invest in any specific property. You must conduct your own due diligence before investing in property. Property prices can rise and fall in value and past performance of the UK property market is no guarantee to future performance.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE

The Financial Conduct Authority does not regulate most types of buy to let mortgages, bridging loans and commercial loans.