It is estimated that there are now somewhere in the region of 2.7M landlords in the UK, and the expectation is that this number will continue to grow.
The fastest area of growth in the Buy-to-Let market is in the HMO sector.
The UK Government defines an HMO as one whereby:
- At least three (3) tenants live in the property, forming more than 1 household
- Tenants share toilet, bathroom and/or kitchen facilities with the other tenants
- Each tenant has their own secure bedroom
HMO properties are extremely popular with both landlords and tenants.
The landlord can increase the income generated from the property by renting it by room rather than as a whole. The tenant is able to live in a property or area that they could not normally afford, by sharing the amenities and running costs with the other tenants.
Buy to Let (BTL) properties deliver a monthly return on investment whilst your property continues to appreciate in value year on year (Capital Appreciation).
As such the correct choice of property, once on the market, will provide you with an immediate, and monthly, source of income that recoups your initial outlay, offsets any monthly expenses and returns a healthy excess return on your investment.
Typically, the purchase of any property by an overseas investor is required in cash. However, Ellis Church recommends – and will provide advice – on refinancing your property by way of a mortgage.
Securing a mortgage will substantially increase your monthly return on investment and enable you to release your capital to, for example, re-invest in another property.
You may, of course, sell your property at any time; either as an ongoing HMO enterprise or conversion to a private house.
Ellis Church will keep you regularly appraised on your property’s rental performance and sales potential; offering advice on the local and national market and, if required, managing the leasing and/or sale of your development.
UK government agencies (UKGAs) act on behalf of the Government’s Home Office in securing accommodation for ‘persons at risk’. There are 3 such UKGA’s that represent the entire country in sourcing and managing rental properties, with lease terms of, typically, 5 years.
Though the rental yields are lower than that of Retail HMOs, a UKGA HMO is especially appealing to investors who are risk averse – as the rent is secured and not dependant on physical occupancy.
Rent is paid on a monthly basis based on the number of bedrooms in the property, regardless of occupancy. Furthermore, all internal repairs and upkeep of the property is undertaken by the UKGA, resulting in a completely ‘hands off’ investment.
UKGA HMOs are a council’s cost-effective solution to help meet local housing requirements and are now renting HMOs directly from private landlords.
This latest development offers a number of benefits to an investor:
- Fixed Rental Income for the duration of the lease
- 5-year fully repairing internal lease. UKGA responsible for all internal repairs
- No void periods. Rental is paid regardless of whether the room is occupied or not
Properties that are not pre-existing HMOs will require a HMO License. These can be applied for once any required renovation work is completed and a site inspection by the local authority is undertaken. The process for securing a HMO license typically takes 4 weeks.
Considerations
- A property is required to fulfil regulatory health and safety standards, namely: Bedroom size minimum of 6 s/m, an additional toilet for HMO’s of 5 bedrooms or more, a window for each bedroom, a communal area for dining/relaxation, fire and safety features
- Not all areas/councils within the UK require UKGA HMOs at any given time
- Choose localities that are already considered popular UKGA and/or Retail HMO communities
A Retail HMO caters to the private market – primarily the professional and student sectors.
Typically such HMOs require a Leasing Agent to source and manage tenants and oversee the upkeep of the property.
The rental yields are significantly higher than that of a UKGA HMO, though the cost of appointing a Leasing Agent must be considered when evaluating a property’s return on investment (ROI). Leasing Agent fees tend to be between 10-15% of rental yield.
The Retail HMO owner is also responsible for the upkeep of the property, its contents and in ensuring it meets with the required fire and safety standards. Utility bills and other incidental costs may be borne by either the property owner or the tenants depending on the leasing terms stipulated in your tenancy agreements.
Properties that are not pre-existing HMOs will require conversion and a HMO License. Licenses can be applied for once any required renovation work is completed and a site inspection by the local authority is undertaken. The process for securing a HMO license typically takes 4 weeks.
Considerations
- Select properties that are within close proximity and/or easy access to town and city centres
- Ensure the immediate area is supported by local amenities, retail facilities, transport channels, education and healthcare services
- Choose localities that are already considered popular rental hubs