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Retail HMO or UKGA HMO?

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.


Your investment strategy

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.

What is a UKGA HMO?

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

What is a Retail HMO?

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


Freehold or Leasehold?

UK homeowners have two main options: freehold and leasehold. With freehold, you own the property and land. With leasehold, you own the property for a fixed period of time but not the land it is built on.

Homeownership comes in two main forms in the UK: freehold and leasehold. Understanding the difference between the two is really important before you go ahead with a home purchase, as they come with very different costs and responsibilities.


Can I change a Leasehold to Freehold?

If you are a leaseholder, then there is the option of attempting to purchase the freehold of your property. If your property is flat, you may be able to buy a share of the freehold, which you would own alongside the other flat owners. If the property is a house you may be able to buy the full freehold.

This can be a lengthy and expensive process, and it’s well worth getting expert legal advice.

Source: Nerdwallet

The Pros and Cons

There are a lot of potential problems with leasehold ownership.

The additional costs and charges can be significant, with the terms of some leases seeing ground rent double every couple of years. As a result, what appears at the outset to be an affordable extra charge can end up costing a huge amount.

The service charges can also present a problem. You will be expected to contribute towards work on the upkeep of the building even if you don’t directly benefit from it, and there have long been complaints from leaseholders that the costs of these works are excessive.

Another issue is the length of the lease. As this gets shorter, it can become more difficult to get a mortgage or attract buyers. You can pay to extend the lease but the process can be costly and complicated.

And then there is the restrictive nature of leasehold. The property may not feel like it is truly yours, as you have to get permission to carry out significant work or be prevented from owning pets.

There are no such limitations in place if you buy a property freehold. You can make those changes, and you don’t have to worry about escalating service charges or ground rent. However, you will be the only one responsible for the upkeep ‒ and therefore the cost of repairs ‒ to the structure of the building itself, which can prove expensive.

Another issue to bear in mind is conveyancing costs. Conveyancers are property lawyers, who go through the legal aspects of a purchase and draw up the transaction contracts. Leasehold purchases are inevitably more complicated, and so may result in a larger conveyancing bill than a freehold purchase.

What is a Leasehold?

Leasehold is rather different. You effectively lease ownership of a property for a specific period. This tends to be over a long period but can vary from anywhere between 40 to 999 years.

You will have a contract with the freeholder of your property, which sets out precisely what you are responsible for. There are likely to be certain annual costs you will be required to pay, such as ground rent, while you will also be required to contribute towards maintenance and service charges.

Generally, you will need to get permission from the freeholder if you want to carry out any major works to the property, while there may also be limitations on things like keeping pets.

Should the lease expire then the full ownership of the property will revert back to the freeholder?

Leasehold is usually reserved for flats and apartments, however, this is not always the case and many older properties are on leaseholds, but recent years have seen a number of new-build homes sold in this way. The Government has now banned this practice, ensuring that all new build homes are sold as freehold.

What is Freehold?

Owning a property on a freehold basis means you own not just the building itself, but the land it stands on. You are responsible for looking after everything to do with the property, from your possessions inside, to the walls and roof of the building’s outside structure.

As a result, if you want to make any changes to the structure of the property ‒ such as adding an extension ‒ then you are free to do so, as long as you have any necessary planning permission from the local council.


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