Buying Your First HMO

Author: Lee Hemming CeMAP

20+ years experience in HMO Mortgages

Houses in multiple occupation or HMOs are definitely a popular popular investments and area highly profitable approach to letting.

An HMO is a specialist type of buy-to-let property. They are typically a single property, let to three or more individuals on separate tenancy agreements and with bedrooms rented out separately. They also often share some communal areas such as bathrooms, kitchens and reception rooms.

HMO mortgage lenders prefer to see some level of lettings experience from an applicant as a landlord. Although it’s not impossible for a first-time buyer to secure HMO funding.

Existing or experienced landlord

An existing or experienced landlord is generally classed as somebody who owns at least one investment property already and has done so for over a year. If you have lettings experience and are buying a small HMO, you will have a large choice of lenders and products to choose from.

If you are looking to buy something large or an unusual property to let as an HMO, the choice of lender narrows and you may require a commercial mortgage in some cases.

HMO mortgage for a first-time landlord

If you own your home and wish to get on the property investment ladder you are classed as a first-time landlord, in this situation, the choice of lender is limited if looking to buy an HMO. That doesn’t, however, mean to say that the interest rate will be high.

Although an HMO may be a stronger investment than a standard buy-to-let, you should consider that there is more work involved in managing the property.

First-time buyer HMO

If you don’t currently own a property in the UK, you will be classed as a first-time buyer for mortgage purposes. More and more first-time buyers are looking to invest into HMO’s rather than buy a property to live in themselves.

Some people may be in a position to buy a property but don’t feel ready to move away from their parents, for example. Investing in an HMO is a good way to get on the property ladder whilst generating an extra income at the same time.

As a first-time buyer, the choice of lender is low and the criteria for borrowing can be stricter. You could expect to pay an interest rate of over 5%, but even then, a profit can still be made given the strong rental yield. Typically, a 35% deposit is required. Although, if you have a good credit profile and healthy personal income, up to 70% LTV could be available.

Let to buy HMO

A let to buy mortgage product is designed to allow you to remortgage your main residence onto a buy to let mortgage, in turn allowing you to buy another property to live in.

When looking to move house and let out your exiting property, assuming it’s in an area suitable for a HMO let, this could be worth considering. Most lenders insist that you have a new property lined up to move into and would want a simultaneous completion.

Why do lenders prefer lettings experience?

As HMO’s tend to have 3 or more tenants with 3 or more AST’s, this can be harder to manage than 1 tenant with a single AST. Experience is required mainly to demonstrate the handing of a tenant cycle. For instance, tenants leaving, and new ones being found.

If you plan to let via a managing agent, this will make your application stronger. An inexperienced landlord may struggle to manage an HMO and therefore rental voids are more likely. This is obviously a concern for lenders.

Things to consider

When looking to buy your first HMO property, the basic things you should be looking at are:

  • Location: You should look at whether the location of the property is desirable for people wanting to live in an HMO e.g. near a university, hospital or city centre. Different locations will also provide different rental yields. Research of the competition is also key. If there are lots of untenanted HMOs in the area, it will drive demand down.
  • Tenant profile: The property location may have an impact on the type of tenants attracted to the property. If it’s near a university, you may attract students. Near a city centre you may attract working people who wish to live nearer their place of employment. Be aware, not all lenders allow all tenant profiles. You should also look to match tenants to ensure they all get along together.
  • The property: Make sure the property is appropriate and desirable for letting. If the property is modern and clean it is more likely to attract tenants. You should also make sure things like waste disposal and washing facilities are ample. The bedrooms and shared facilities should be large enough to be attractive tenants.
  • Rental voids: If the property was vacant, could you afford to pay the mortgage and any bills? It’s worth keeping a contingency fund of around 3 – 6 months to make sure everything gets paid should the property be vacant. You could also take out an HMO insurance policy to cover voids.
  • Affordability: You should always check the monthly mortgage payment and household bills come to less than the monthly rent. Allow for any future interest rate increases or you may find yourself paying towards this.
  • Repairs: If, for example, a boiler breaks down, you should have funds readily available to repair this. If an urgent repair is needed, you should have the means to sort this quickly. If you don’t live close to the property, it could be worth using a managing agent.
  • Fire safety: You must make sure that the property itself meets the requirements of being an HMO and that essentials like fire doors, smoke alarms and fire escapes are all in place with adequate signs and lighting.
  • Tax: As with other investments, your HMO could be liable for various taxes such as income or capital gains tax. You should always seek expert advice about this.

If you are thinking of buying an HMO property and would like more information, please call us on 01922 620008 or visit our contact page and we will be happy to answer any questions. If you’d like to know what documents are needed when applying for an HMO mortgage, check out our guide now.

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