Houses in multiple occupation (HMOs) are in demand. This is happening despite COVID-19 and the challenges it poses. With demand for rental property on the rise, HMOs are becoming an attractive opportunity for those looking for upcoming residential investments. Why is this the case? We believe there are three reasons for this.
1. The stamp duty holiday
This relief is in place until the end of March 2021. It means landlords do not pay tax on the first £500,000 of a residential purchase.
2. Changes to planning laws
The government has announced new planning laws for commercial property. This means these properties can be converted into housing without full planning permission. As a result, HMOs are more accessible to commercial property owners.
3. HMOs can deliver substantial returns
Rental yields are higher when compared to traditional buy-to-let investments. They are in high demand among renters, including students, young professionals and families.
In this blog, we are going to focus in one of the most popular forms of HMOs: student lettings.
When discussing student accommodation, people often think about halls of residence. These are large blocks of flats that house hundreds of students. But ‘halls’ tends to only accommodate first year students. In fact, most students seek HMOs properties off campus, particularly those in their second, third and master’s years.
In 2016, there were approximately 400,000 students renting out HMO properties. The number of students has risen over recent years, meaning there are plenty more looking for off-campus housing. In our experience, landlords and property investors benefit from consistent demand. After all, student numbers are rising, and they need a place to live.
The other advantage is security. Students tend to sign 12-month leases. They also often have parents who act as their guarantors. This means landlords can confidently manage their property based on the academic year. HMO landlords involved in the student market can achieve total yields of up to 10%. Single buy-to-let properties generally yield around 5%. This is impressive, particularly in this low interest rate environment.
Top HMO cities for students
MFS regularly works with landlords to purchase HMOs or finance such renovation projects. They can deliver significant capital returns and impressive rental yields. The challenge is finding the right property in the right area. There are plenty of opportunities for landlords interested in renting properties to student.
The most logical place to start are the English cities that host the most students, which are:
It is common for landlords to buy cheap properties in these cities and undertake renovation works so they appeal to younger renters. In these situations, refurbishment loans can be of great assistance, with fast funding allowing works to start almost instantly. These properties are then listed on the student rental market, or popular property websites such as Zoopla and Rightmove.
As with the general market, student accommodation must satisfy HMO regulations. These include minimum room sizes and adequate living facilities.
Looking ahead, we could see new regulations being introduced to prevent COVID-19 outbreaks. Coronavirus cases are rising among students. The government might review current HMO rules to prevent overcrowding and the potential for virus outbreaks. For now, we must wait and see.
The other long-term impact of the pandemic could be the amount of time people spend in their homes. As lockdown measures persist, it is likely that socialising will remain infrequent. For students, this means more time spent in their house or flat. In turn, they might seek properties with more space or a higher quality of finish. Landlords ought to consider this trend.
Loans & Licenses
Bridging loans are an ideal way of supporting HMO projects. We list some of the reason for this here.
In certain areas, license and restrictions may change. This can be from room sizes, number of bathrooms or bedrooms; which may require a change of use (for example, from residential to commercial) As this will depend on location, you need to check with your local authority for their regulations on these matters. You can do that by entering your postcode here.
Are you considering an HMO project in 2020? If so, get in touch with a member of the MFS team today. Our team of expert underwriters are available to provide an overview of residential bridging loan products and services. Be sure to email firstname.lastname@example.org to arrange an initial consultation.