Why first-time landlords should be supported in the HMO sector

Houses in Multiple Occupation (HMO) are proving be ever more attractive to first-time landlords because higher rental yields are far easier to achieve in a multi occupancy property. In the face of tougher stress tests and affordability requirements, the focus is very much on higher yields.

The HMO sector is also a good option for first-time landlords because of its reliability. An ongoing housing shortage and growing student numbers mean tenant demand remains consistently high for house-shares.

Various barriers that might previously have been off-putting have recently been lifted. Utility bills have fallen which mean higher net rental which in its turn makes it easier to borrow a greater amount against a property’s value. In addition, council tax banding for individual rooms in shared houses has been reversed, meaning HMOs will be classed as a single dwelling as before.

But, despite the robustness of the HMO sector, first-time landlords have found it difficult to break into the market. This is largely because most lenders require landlord experience before lending on HMOs.

Yet HMO first-time landlords are become increasingly sophisticated. Lenders under-estimate how much these first-time landlords understand the market. In our experience, they know full well that yields on HMOs are much higher than single flats or houses, resulting in greater financial rewards.

Our latest landlord survey backs this up. It found that many HMO landlords, including first-time landlords, treat their portfolios as a profession. The survey demonstrated that landlords have continued confidence in this property type, with some growing their portfolios and treating them as a full-time career.

Just under 30% of landlords who took part in our survey owned an HMO property or portfolio. Seventy two per cent of these landlords owned HMO properties through a limited company. Half said they did not have another job and used their property or portfolio as their sole source of income.

Despite some of the complexities of managing a portfolio, the survey also found that nearly half of the properties were self-managed by landlords – a third of whom owned portfolios with over 20 properties. Only 19% of HMO landlords relied on property management companies, with a quarter using estate agents.

The reason for this more DIY approach could be that the most popular size of HMO portfolio was the smallest, between 4-10 properties, with 34% falling into that category. Thirty one per cent of the HMOS were part of portfolios of 20 or more, while 22% were in portfolios of 11-20 properties.

There are undoubtedly pitfalls for the unwary, and knowing your local market well is essential. There is no doubt that anyone invested in this type of property needs to do their homework first. But with more first-time landlords treating HMOs as a full-time occupation, the knowledge base for this group is better than before.

Our broker feedback demonstrates this, with a steady increase in enquiries from well informed first-time landlords who are attracted by the higher yields HMOs can bring.

Unlike other lenders, at Landbay we have confidence in the burgeoning group of first-time HMO landlords, based our experience. New landlords are the future of the sector and we are proud to provide our introducers with the tools to support them.

There are many positives in the HMO sector which is proving to be ever resilient. It will be interesting to see what the next Government does, if anything, about rental reforms and HMOs. But, as long as they do their research thoroughly, HMOs can give great returns for first-time lenders. Those lenders brave enough to back them will benefit too.

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