Investing in an HMO or HMO portfolio is not always a simple process. However, it is an undertaking that is known to produce excellent yields, and often capital gain. That is why the market is buoyant in many areas of the UK. Our investor FAQs section will help to answer any of your burning questions and provide guidance around any HMO investment opportunities.
In its simplest form an HMO is a House of Multiple Occupancy. A property that is rented out by at least three people who are not from one ‘household’ (for example a family), but they share facilities like bathrooms or a kitchen. In certain HMOS all bedrooms are ensuite, and in the super-deluxe part of the HMO market the rooms may even have small kitchenettes.
According to GOV.UK a landlord must licence their ‘large HMO’. Helping to verify the property and all the rules that apply to it, including:
- It is rented out to five or more people who form more than one household.
- Some, or all tenants share the property’s facilities, such as the bathroom and kitchen.
- At least one tenant pays rent, or their employer pays it for them.
It is important to note that there are areas whereby a HMO licence is necessary even if your property is smaller or rented to fewer people. You should always check with the relevant council when looking to invest in an unlicensed HMO of four beds or less. In order for an HMO to be issued with a licence, it will need to be rendered compliant by the local HMO officer. This will involve passing a number of safety and space regulations.
Yes. The attraction to HMOs is largely due to their high cash flow capabilities and overall yield. HMOs are let by the room, rather than as a property as a whole and therefore tend to offer significantly higher yields to an Investor. That being said, it is important that the property is managed properly to ensure that it is consistently tenanted, hence achieving its full potential. Here at The Property Advantage we can offer advice on the best management agents in the UK because we have relationships with them.
Yes, it is. Our property yield map can help you identify the key areas that return the greatest yield.
There are a few key terms that you need to understand when identifying the best investment opportunities:
Gross Income – Gross income can be defined as the overall income produced by the property without deducting expenses, such as gas, electricity, and taxes.
Gross Yield – The gross yield can be defined as the overall percentage return on investment of a property without deducting expenses such as gas, electricity, taxes.
Net Income – The net income can be defined as the income produced by the property after deducting expenses such as gas, electricity, taxes.
Net Yield – The net yield can be defined as the overall percentage return on investment of a property after deducting expenses such as gas, electricity, taxes, etc.
Net yield is calculated as:
(Gross Income – Expenses Per Annum) ÷ Property Purchase Price x 100
Property Purchase Price = £150,000
Gross Income = £18,000
Expenses Per Annum = £3,000
Net Income = £15,000
Net Yield = (£15,000 ÷ £150,000) x 100
Net Yield = 10%
HMOs are valued differently to ‘residential family homes’. For a breakdown of how we approach valuations, check out our HMO valuation page.
When valuing an HMO property we take into consideration a multitude of factors, including the location, proximity to necessities, tenant demographics, viability of rent, and property condition.
The majority of the properties we sell are being sold as investment opportunities or ‘income producing assets’; likely tenanted with ASTs (Assured Shorthold Tenancy Agreements) in place, fully compliant and fully furnished. This means that they are likely listed for sale at an asking price that is higher than other residential ‘family homes’ in the same area.
The reason for this is down to a property’s cash flow capabilities, which other residential properties on the street likely could not produce without further expenditure. You should consider this when seeking finance via a mortgage.
For properties of six bedrooms or less, the Lender/Surveyor may not regard the additional ‘business’ value as it is not asset backed. In these instances, you may wish to ‘top up’ a mortgage valuation with your own cash in addition to your initial deposit.
If this is not an option to you, then please speak to one of our team and they can point you in the direction of alternative opportunities which may suit your investment requirements. These may include standard buy to let properties or blocks of flats, for example.
‘Suis Generis’ is Latin and translates to ‘of its own kind’. It is a term used to categorise buildings that do not fall within any particular use class for the purposes of planning permission. An HMO of seven beds or more would fall into this category, and the development of an HMO of this nature would require planning permission. Properties with Suis Generis planning permission are often easier for lenders to value as commercial assets, rather than a bricks and mortar valuation because they are no longer classed as residential family homes.
An Article 4 Direction is implemented by local planning authorities, withdrawing specific permitted development rights across an area. One of these rights is often the right to convert a residential family home into an HMO. It is not impossible to develop an HMO in an Article 4 area, but it would require planning permission (which is not necessary in non-article 4 areas for an HMO up to six beds).
It is widely believed to be tougher to have an HMO planning application approved in an Article 4 area. If a property was operating as an HMO in an Article 4 area before the Article 4 Direction was in place, then this property will benefit from ‘Grandfather Rights’. This means that it can continue to operate as an HMO moving forward.
All areas bring their unique benefits when it comes to owning an HMO investment. Our Yield Map provides a general idea of yield expectations in a number of popular HMO areas across the UK, which may hint at an appropriate area for you based on yield.
Remember to consider that in areas, like London, which offer lower yield potential there is often the prospect of excellent capital appreciation in the longer term. It is important that you weigh up cash-flow returns vs capital appreciation potential, identifying what is most important for your investment requirements.
HMO management is another consideration for you when choosing your investment area. If it is your plan to manage the property yourself, then it is important that you reside close by. Managing tenants in an HMO can be a tricky business, particularly when you operate within a demographic of high tenant turnover. If you are an overseas investor, we would recommend that unless you are very experienced and have an existing portfolio, that you work with a UK-based managing agent. We have great relationships with the best HMO agents in the UK – in fact many are good friends. If you would like to know more about managing agents, please ask one of our skilled colleagues.
Explore our property portfolio and find out more about some of the key areas we operate in.
An HMO Licence is specific to the owner and is therefore not transferable when a property is being sold. When purchasing an existing HMO, you would need to apply for a new licence once you take ownership of the property. The Property Advantage has never sold an HMO in which a licence has NOT been granted to a new owner. However, we always recommend that an investor contact the relevant HMO officer in the area they are wishing to make a purchase in order to carry out full due diligence. We can also assist with this process.
Unfortunately, this is not a question that we can answer as it is very specific to your individual circumstances. You should speak to your accountant to ensure you are purchasing via the most efficient means possible. We can put you in touch with HMO investors who hold all or some of their HMOs within a limited company. They can offer compelling advice. Equally, we have relationships with many investors who choose not to hold their HMOs within a limited company. We can also put you in touch with them, to talk through different investment strategies.
You must pay SDLT when purchasing a property over a certain price (£250,000 for residential property) in England and Northern Ireland. You usually pay 3% on top of this rate if you own another residential property in the UK. There is a separate Land & Building Transaction Tax when purchasing in Wales or Scotland.
You must send an SDLT return to HMRC and pay the tax within 14 days of completion of the property. Your solicitor will usually file your return and pay the tax on your behalf on the day of completion and add the amount to their fees. They’ll also claim any relief for which you’re eligible, such as if you’re a first-time buyer.
The Property Advantage charges a reservation fee to protect both buyer and vendor. As soon as that reservation fee is placed we will remove the property from the market and we operate a no ‘gazumping policy’.
You should not pay the reservation fee until you are fully committed, have carried out full due diligence on the property and have your funding in principle in place (if necessary). The reservation fee will be refunded if a property is down valued or there is a significant defect that is unresolvable, found within the surveying or conveyancing process.
The reservation fee will not be refunded should you change your mind in regard to the purchase. When you are ready to progress with a property we will send you a contract to sign, fully outlining your rights prior to committing. If you would like to see this contract in advance, then please speak to one of our brokers.
The majority of our investment opportunities are tenanted residential properties, in the form of HMOs, blocks of flats, or buy to let portfolios. When valuing or selling a property, the ideal circumstance would be for the property, block, or portfolio to be fully tenanted, and this is what we advise vendors to aim for.
Of course, this is not always the case as there are occasions when a property or rooms/units within a property are vacant or transitioning between one tenant and the next. We provide all investors with a full rental schedule and this will include current and historic occupancy. It also includes historic income, so you can be satisfied that you are purchasing a performing asset.
Unfortunately not. However, if you ask the advice of our brokers, we will be able to make recommendations in certain areas. Full due diligence should be carried out on all recommendations made as these companies are unrelated to The Property Advantage.
Yes. We are a fully compliant company, regulated by the Property Ombudsman. This means we have a requirement to check the source and availability of funds. If you are using a mortgage then POF (proof of funds) can consist of a Mortgage Agreement in Principle (which can be provided by the Lender or Mortgage Broker) plus a bank statement showing proof of deposit. Cash Buyers will be required to provide a bank statement showing the full cash funds are available.
This depends on a number of factors, including the financing structure of a deal (cash, mortgage or other lending option), surveys, local authority performance in providing relevant searches, the speed in which your solicitor can act, and more. As a general rule of thumb, we would expect a cash purchase to complete in around 8-10 weeks and a mortgage purchase to take around 12 weeks.
This is your own personal decision and depends on many variables. If you are purchasing with a mortgage, then your lender will require (as a minimum) a mortgage valuation survey.
There are a number of surveys that can be considered when purchasing any property (investment or otherwise):
Valuation Survey – This determines the value of the property. This is generally for the purpose of the mortgage lender and for HMOs of six bed or less. It will usually only take into account the bricks and mortar value of a property.
Condition Report – As the name indicates, this is a report that outlines the condition of the property.
Homebuyer Report – This will include a market valuation, advice on defects and recommended repairs and also any likely ongoing maintenance requirements.
Building or Structural Survey – This survey is not dissimilar to the Homebuyer Report. However, this one looks into areas that are more difficult to reach. This survey type is the most comprehensive survey and is generally used for older or unusually constructed properties.
If you are purchasing with a mortgage then, yes, this is a requirement. If you are purchasing with your own cash funds, then this is your personal decision. Your solicitor can advise and make recommendations for the best course of action.
If you would like to know more about our investment opportunities, or would like any further investor guidance, then please contact us. Our team of experts would be delighted to help.