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mark-graves

April 13, 2012

 Richard Cleminson is the professional services director at Kinleigh Folkard & Hayward

Landlords of HMOs (Houses of Multiple Occupancy) are enjoying something of a renaissance in demand, in part as a result of the changes drawn up in the Comprehensive Spending Review. The maximum benefit limits set at £250 per week for a 1 bedroom property moved up to £400 a week for properties with 4 or more bedrooms. The fallout from this, and the continuing moribund mortgage market and sluggish economy, has been a growth in the number of people moving into bed-sit type properties or house-sharing.

The benefits to landlords can be substantial. The rental yields these investments can achieve typically are as much as 9-10%. A London-based single occupancy let might typically achieve something around 4%-6%. It’s understandable why HMO’s are suddenly so attractive.

The obvious HMO is perhaps a ‘student let in a university town or a city based property with shared communal areas for young professionals. Neither of these are plentiful owing to the lack of suitable property stock. Landlords who have them are operating in a niche but lucrative market.

HMOs differ from Buy-to-Lets in many ways, not least in the area of licensing. According to the current red book definition, if the property has five or more occupants, is formed from 2 or more households, or has 3 storeys or more, licenses will be required to operate them. Of course, the majority of London-based HMO’s do not meet the last height requirement, but that doesn’t mean they are exempt and, in London, each borough will have different criteria that needs to be met. But be warned, HMO’s cannot easily obtain planning for return to single use and therefore if the market was to stall, or rates increase, clients could be caught.

Their rarity does mean they command a premium but they are more difficult to finance than single unit buy-to-let properties. That said, rates and fees are in line with the rest of the market so you are not paying commercial borrowing rates, even though it will be treated and probably underwritten as a commercial deal. The main differences are the strenuous criteria and deposit of normally 35%, and lenders will normally want previous buy-to-let experience. The number of lenders doing this kind of business is growing slowly.

With mortgage rates still at lows and returns of as much as 9%-10%, it is certainly an investment with decent returns. Our experience in this field reflects the fact Landlords appreciate this. As for the near term we think this shows no sign of diminishing.


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