On 1 October 2018, new legislation finally came into effect in England and Wales affecting the criteria and standard of house of multiple occupancy (HMO) properties. This includes a major shift in the way that HMOs are licensed, and any property with five or more occupants now requires a licence from the local authority in their area.
What are the new minimum standards for getting a HMO licence?
Since 1 October 2018, minimum standards now apply to bedroom sizes:
- Double bedrooms must be at least 10.22m2 in area
- Single bedrooms must be at least 6.51m2 in area
- Rooms occupied by children under the age of 10 must be at least 4.64m2 in area
- Rooms smaller than 4.64m2 must not be used as sleeping accommodation
Alongside there are new rules surrounding evictions, decor and a property’s energy efficiency, plus the upcoming ban on lettings fees which is likely to come into effect during the first half of 2019.
One of the major shifts, which began in April 2017, is a decline in the way landlords pay tax on their HMO revenue. Although previously this was paid on profits rather than turnover, the Government has changed the rules and by 2020 this will fall to 0 per cent for higher rate tax payers. However, at this point, a tax credit equivalent to 20 per cent of mortgage interest will come into effect. There are considerations for landlords to transition their properties into a limited company and these should be discussed with their accountant in conjunction with a mortgage broker such as NM Finance.
Why now is the right time to become a HMO landlord
Although these changes require investment landlords to review and potentially make adjustments to their properties to ensure they are compliant with the legislation, HMOs can still represent a lucrative opportunity which benefits both owner and tenant.
Those who operate within the sector are reporting that HMOs are experiencing something of a makeover. In a sector which has traditionally been dogged with a bad press of rogue landlords and tenants left in cramped, overcrowded and often desperate settings, there is a new approach by many investment landlords to make HMOs attractive, stylish and desirable to rent.
With increased pressure on housing, particularly in cities around the UK, and the challenges associated with getting a foot on the property ladder, many young professionals are seeking high quality accommodation in modern, well-presented HMOs. Providing a relatively low-cost option, a good-sized room with en suite facilities and access to a pleasant communal area can offer a tenant a suitably priced place to live for a fraction of the cost of a flat or house.
Better than buy-to-let: The HMO income multiplier effect
Ryan Windsor and Giovanni Patania of WindsorPatania Architects has offices around the UK to help a growing number of investors to maximise the potential earning power of their properties by converting them to HMOs. “We are able to help our clients by designing a property layout which works within the regulations governing HMOs and by creating a contemporary interior design which appeals to professionals that can command a premium in rental income,” says Giovanni.
“These are quality developments,” adds Ryan, “and the cashflow generated by converting a buy-to-let to an HMO can be up to four times more than a traditional buy-to-let, representing a significant ROI.”
WindsorPatania Architects works with NM Finance to help many of its clients to secure property finance for HMO developments. With access to whole of market and an expertise in navigating complex and unusual applications, the mortgage broker has impressed the architectural firm with its outstanding customer service.
“NM Finance are extremely helpful, professional and proactive,” says Ryan. “We feel very confident putting our clients in touch with their team for help and direction on preparing their mortgage applications.
“Often investors have complex circumstances, but NM Finance consistently finds solutions for their property finance requirements. The time, effort and proactivity they invest in working with our clients is invaluable, and even if they are unable to secure a deal for a client they provide constructive feedback which enables an applicant to make changes to their circumstances to enable them to move forwards with their plans at a later date.”
Exclusive lending for HMO refurbishment costs
As part of its strategic partnership with Shawbrook Bank, NM Finance is able to offer clients exclusive access to new ‘bridge to let’ lending which includes funding for light refurbishments to develop an HMO property.
How to secure funding for a HMO property, step by step
Here’s a step-by-step case study of how the lending can provide funding for an HMO.
Step 1: Find a suitable property
An investor purchases a standard 3-bedroom residential house for £425,000 and converts the property to a 6-bedroom HMO by reconfiguring the layout and making refurbishments with a budget of £50,000
Step 2: Secure a short term mortgage to buy and develop the property
With 75 per cent loan to value (LTV) short-term borrowing of £318,750, the investor can additionally borrow £42,500 for refurbishment costs (85 per cent LTV and 68 per cent loan to gross development value (LTGDV).
This provides total day one lending of £361,250 at 0.8 per cent pcm plus a 1.95 per cent fee. The deal requires a surveyor’s report on the property’s current value, after works value and market rent based on the development’s plans.
Step 3: Up-front deposit and fees
The investor’s cash requirement is:
- £106,250 deposit
- £24,000 stamp duty land tax (SDLT)
- £7,500 remainder of refurbishment costs
Total investor cash required: £137,750
Step 4: Convert the short-term lending to a HMO mortgage
The property is now developed into a 6-bedroom HMO valued at £525,000 and generating a rental income of £51,600 (10 per cent yield).
The lending is converted into a standard HMO mortgage at 75 per cent LTV for £393,750, repaying the refurbishment loan and releasing £32,500 to the investor which can be used towards the next project.
Additionally, there is no exit fee from the ‘bridge to let’ lending, no arrangement fee for the new HMO mortgage and the same surveyor can confirm the final after works value and market rent.
How we can help you to invest in HMO development
“This type of flexible lending is ideal for portfolio landlords or those looking to invest in HMO developments,” says NM Finance director Max Mace. “As a strategic partner of Shawbrook Bank, we are able to guide applicants and existing clients may even be eligible for further savings with the bank.
“The shift towards new, high quality HMO developments reflect changes in the lettings market and a willingness for renters to pay more for desirable and well-presented developments. At NM Finance, we have the knowledge and experience to help landlords create successful HMO developments for the future.”
What should you do now?
If you’re considering investing in HMO development, NM Finance can help you to finance your project. Whether it’s your tenth, or your first, our expert team can talk you through the steps for making the most of the current demand for high-quality, low-cost housing. Call us today, to find out more about how we can help you.