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When does an HMO become a good investment opportunity?
 
Recent figures released by Knight Frank Residential Research show that the average buy to let (BTL) landlord earned total returns of 11.2% in the year to the fourth quarter of 2014. With the property market continuing to reward investors, 2015 is set to be another promising year, and the house of multiple occupancy (HMO) remains a popular choice. There are a number of qualities that make HMOs a worthwhile investment, but I’ve always prioritised a good location, the right property type and the correct market.  
 
Location, location, location
 
The savvy property investor will look for a location that is convenient for their target market, for example somewhere near a train or commuter route or, alternatively, an institution like a university or hospital. If investors have discussed a possible property with their letting agents and have also looked at websites that match tenants with rooms, even better.
 
It is also crucial when looking at a location that the investor assesses the surrounding area. For example, if the area is saturated with existing HMOs, the local authority may have placed the postcode in an Article 4, which means no further HMOs are allowed without full planning permission. This can make a project a complete non-starter, so investors should be sure to do their research first.
 
Identifying the market
 
The property type determines what factors an investor needs to consider, such as whether any planning permission will be needed for a project that adds value to a property. These projects could include adding more rooms to be let in the garage or loft space, or using stud walls to change the layout of existing rooms and potentially create extra rooms. The value of extra rooms and facilities depends on which market is being targeted, and similarly, the choice of tenant market will determine the finish required. Expectations vary significantly between groups such as young professionals and students. In any such case, it is advantageous for an investor to call on the right professionals’ assistance; experienced builders, architects or HMO letting agents for example. 
 
With any property refurbishment, the investor always needs to have done their sums regarding the conversion costs, building in any contingencies for overruns. They also need to be sure of their reasons for doing this. The works taken out to turn a property into a small HMO are not always reflected in the value of the security and this can materially affect the amount they could raise when refinancing. They also need to have considered the expected rental income as a completed HMO, and ensure this is sufficient to cover the costs of managing the property alongside covering the mortgage payments. Doing the sums will ensure the property is financially viable now and in the future.
 
Shawbrook’s role
 
If we can see viable evidence that a client is an experienced investor, Shawbrook is then able to offer HMO conversions through our Short Term Loan (STL) products. The funds can be made available to purchase the property and cover the cost of the works. An exit can be put in place and we will lend up to 70 percent of the current value with no exit or redemption penalties and a maximum term of 18 months. 
 
We are keen to develop long-term relationships with investors, so for existing clients we offer a discount of 0.25 percent off either the annual rate or arrangement fee on their next refurbishment project or, alternatively, on converting the Shawbrook short-term loan to a term loan. In this case we will also consider uplifting the lending against the new investment value of the property. 
 
*Pete Turner is regional development manager for Southern Counties, Commercial Mortgages at Shawbrook Bank
 
 
 

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