Posts with tag: HMO investment

HMOs in the North West outperforming standard buy-to-lets

Published On: April 11, 2017 at 10:09 am

Author:

Categories: Landlord News

Tags: ,,,,

The most recent report from The Mistoria Group has revealed that HMOs are substantially outperforming more standard buy-to-let investments for both yields and returns in the North West.

Analysis shows that the average gross cash return before any charges or voids on HMOs with student or young professional tenants have risen to 12-15% over the last five years. This is in comparison to an average gross return of between 6-8% on a standard buy-to-let in the North West.

Greater Returns

HMO investors have seen a substantially higher return than standard buy-to-let investors during the last five years, with 13% in comparison to 7%. This comes despite the fact that the initial capital investment in a HMO is greater than for standard buy-to-let.

Mish Liyanage, Managing Director of The Mistoria Group, observed: ‘If investors buy HMOs in the right location, right market and from the right agent in the North West, they will achieve much higher yields than a standard buy-to-let in the Midlands or South East. Hence, HMOs provide a secure and an excellent performing passive investment to supplement your monthly income.’[1]

‘HMOs in Liverpool and Salford have become very popular with investors, as both cities have a high population of students and young professionals.  Also in both Salford and Liverpool, Article 4 is not in operation, so investors can convert a family home, or a home used by a single person (C3 -dwelling house/flat) to a small-shared house of up to six unrelated individuals (C4 –HMO), without any planning permission,’ he continued.[1]

HMOs in the North West outperforming standard buy-to-lets

HMOs in the North West outperforming standard buy-to-lets

Caution

Liyanage went on to note that each investor must show caution when choosing their purchase location:

‘Every investor needs to be cautious and ensure they buy in the right street, as yields can vary dramatically by postcode.  HMOs within walking distance of a University, or just a short bus or train journey away, will usually command the highest rents.’

‘Whilst the market conditions in many areas are becoming more developed and competitive, a HMO property with a superior spec can deliver landlords and investors an average gross rental yield of 13%, leveraged return on investment of 35% plus, before any charges and voids.’

‘For example, investors can acquire a high quality, three bed HMO which houses three students, from £120,000 upwards in Liverpool.  The return on investment is very attractive too, with 13% (8% cash rental and 5% capital growth). The gross rent on the property will exceed £1,235 pcm, as each room is rented out. Larger rooms, open plan living and kitchen areas, ensuites, TVs, unlimited broadband, premium kitchen appliances and furnishings are the type of features that help to generate a high yielding HMO.’[1]

[1] http://www.propertyreporter.co.uk/landlords/north-west-sees-hmos-continue-to-outperform-standard-btl.html

 

HMOs are a Better Buy-to-Let Investment, Says Property Firm

Published On: September 1, 2015 at 4:19 pm

Author:

Categories: Landlord News

Tags: ,,,

Houses in Multiple Occupation (HMOs) are the most stable and profitable buy-to-let investments in the UK, according to a new report from a property investment firm.

Platinum Property Partners (PPP) said that HMOs protect landlords from higher costs, potentially forthcoming interest rate rises.

HMOs are often rented to young professionals and are targeted towards maximising rental income by letting each room individually, states the report.

Research from the firm reveals that compared to capital gains, rental income for all types of buy-to-let properties is the most dependable and stable source of return on investment (ROI). PPP says that HMO landlords are therefore better prepared for higher mortgage costs caused by an interest rate increase, which the Bank of England (BoE) has claimed will occur in early 2016.

The study found that the profits of a standard buy-to-let investment could be eliminated by a 3% interest rate rise, assuming that mortgage rates increase by the same amount, as gross rental income is not sufficient

HMOs are a Better Buy-to-Let Investment, Says Property Firm

HMOs are a Better Buy-to-Let Investment, Says Property Firm

to cover higher mortgage interest repayments.

Despite HMO landlords paying all household bills, the fact that these investments generate a much higher gross rental income means that these costs are easily covered. The research indicates that the maximisation of income from creating extra rooms and renting them to multiple tenants means that HMOs can generate up to four times higher rental income than that on standard buy-to-lets.

Separate analysis conducted by PPP found that rental income is a much more stable and dependable source of ROI than capital gains, dismissing the belief that buy-to-let success is caused by rising house prices.

From 2010-12, investors in both the standard buy-to-let and HMO markets were sustaining capital losses. In 2013-14, capital gains began to recover, but rental income consistently rose throughout the same period for both asset classes, although at a much higher rate for HMOs.

The report also notes that the best way for landlords to ensure their investment copes with an interest rate rise and any other unexpected costs is to plan ahead and understand the financial performance of their portfolio.

Research carried out by PPP in 2014 reveals that a lack of research and poor planning is preventing many investors from maximising their income. A quarter of buy-to-let investors did not seek advice or conduct research before buying their property. A huge 93% did not have a five-year plan for their investment.

PPP also suggests that landlords often miscalculate their returns. Around 12% of landlords do not take any costs into consideration when calculating the financial performance of their portfolio. Furthermore, one in four landlords pay mortgage interest, but do not take this into account.

Chairman of PPP, Steve Bolton, states: “In recent years, there has been an influx of investors to the buy-to-let market, with bricks and mortar proving to generate returns that outperform all other asset classes.

“However, not all buy-to-let is equal, and our data shows that HMOs generate much higher rental income than standard buy-to-let properties. HMOs will therefore be an attractive option for investors looking for a lower risk strategy that achieves a strong level of income.

“With many changes on the horizon for landlords, including the proposed restrictions to mortgage tax relief and looming interest rate rises, it’s never been more crucial to have a decent cushion of rental income to absorb any rising costs.

“However, many landlords are failing to correctly calculate their returns and our earlier research shows that a worrying number entered the buy-to-let market with very little forward planning. Without a clear picture of what they earn from their investment, a landlord is more vulnerable to market changes. Landlords must have a clear strategy and plan ahead to be able to accurately assess how future-proof their investments are.”1

1 http://www.propertywire.com/news/europe/uk-buy-let-investment-2015083110928.html

 

How Lenders Value HMOs

Published On: July 1, 2015 at 11:00 am

Author:

Categories: Landlord News

Tags: ,,,

The buy-to-let sector has defied the uncertainty that surrounded the general election and has remained positive since the results were announced.

Connell’s Survey and Valuation team reported a 3% increase in valuations from April to May this year and a 33% annual rise.

Landlords are hoping to capitalise on the growing demand for rental property and Houses in Multiple Occupation (HMOs) are becoming even more popular due to the attractive yields they can produce.

How Lenders Value HMOs

How Lenders Value HMOs

However, HMOs are a specialist investment and they can be difficult to value for brokers, who must then advise investors correctly.

Valuing HMOs is significantly different to regular buy-to-lets and their value can be affected by a number of factors.

The four key factors that brokers and clients must remember are as follows:

Required work 

The value of a property can be greatly affected by the amount of work required to convert it into an HMO. If little work is needed, the property should be lent against its value as a private dwelling. This is due to the fact that the home is not particularly specialised compared to other asset classes; an investor could buy a cheaper property and convert this to an HMO for a lower cost.

Location 

It is vital that investors buy in an area with high HMO demand. However, this will give the property a greater value than a private dwelling. Landlords should expect this if they are searching in a popular area. With any property investment, landlords should research the local market to determine demand.

Article 4 Directions 

Article 4 Directions are used to limit the amount of HMOs in certain areas by requiring investors to obtain planning permission before converting a building. However, if an area does have an Article 4 Direction in place, the property will be a viable investment option. Landlords should expect to pay a premium price though, due to limited supply.

Planning permission

Whether an HMO has planning permission or not can greatly affect its value. Sui generis planning relates to buildings that do not fall into any particular use class and this includes HMOs. If this type of planning is in place, valuers often lend against the property’s market value. Usually, these houses require significant structural changes for conversion to an HMO, but provide good yields.

It is likely that demand for HMOs will continue to grow, as private tenants look to a variety of rental options. Lenders and brokers must act responsibly and ensure investors’ ambitions are realistic.