house in multiple occupation
What is 'HMO'?
“House in Multiple Occupation” is more commonly referred to as ‘HMO’.
This is where each room in a property is let on its own Assured Shorthold Tenancy (AST), usually for a minimum of six months.
How do you get an HMO property?
There are a few ways to acquire an HMO;
- Buy an existing licensed HMO
- Rent an existing licensed HMO
- Buy a property suitable to be converted to an HMO
- Rent a property suitable to be converted to an HMO (Rent to Rent – generally referred to as ‘R2R’)
Why are HMO's so great?
HMO’s can be excellent for cashflow and, if you’re buying in an ‘Article 4’* area the value will naturally increase due to limited supply.
Returns On Investment (ROI) for an HMO property typically outpace any return you’re likely to get from a bank account and can be a valuable source of cashflow to your business.
How does an HMO work?
Let’s say you bought, for cash, a property that needs refurbishment with the intention of renting it out room by room.
To make the maths easy we’ll say:
- The purchase price is £200K
- You convert it to a five bed HMO
Ignoring all other costs like:
- refurbisment costs (subject to only 5% VAT)
- stamp duty
- legal fees
- architect fees
You rent out each room for £500 per month.
For five rooms you receive a total gross income of £2,500 per month .
You’ll have expenses to run the place, like:
- council tax
We’ll assume your expenses total £1K per month giving you a net monthly income of £1,500.
How do you recoup HMO refurbishment costs?
Aside from the capital you invested to buy the property, you have invested the cost of refurbishment.
Again, ignoring all other costs, We’ll assume a £30K refurbishment cost.
You are now reciving a net annual rental income of £18K (£1,500 X 12).
This means you recoup your refurbishment costs in under two years. That’s a Return on Investment of over 50%!
What’s the interest rate on your bank account?
And, let’s not forget, for every year after that, it’s pure profit.
So, I have an HMO property. Now what?
Since you bought your first HMO for cash you want to pull out as much money as you can to buy your next HMO.
First, you’ll need to apply for a HMO specific mortgage (councils are likely to inform lenders). There are two ways lenders calculate how much they’ll lend;
1) 75% Loan to Value (LTV) against bricks & mortar.
In our example we’ll say your refurb has increased your existing HMO properties value to £250K. You’ll therefore be lent £187,500 (75% of £250K).
2) Commercial valuation
After one year, because you can provide proof of income, the lender can lend 70% of between seven and ten times annual rental income.
For simplicity, we’ll use ten times annual rental income, i.e:
- Annual rental income: £30K
(12 x £2,500)
- Loan amount: £ 210K
(70% of 10 x £30K)
So at the highest end you could be lent £210K compared to the lower end of £147,000.
In the real world lenders will lend somewhere between the two so, for our example, we’ll say £180K.