Commercial HMO Loans

HMO's are a highly profitable sector of the rental real estate market, but it’s essential to source the correct finances to make these properties a success.


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Buying property to let is still one of the best ways to invest your money, even in the modern real estate market; there are many properties still available, and though the UK Government has recently made it more difficult for landlords to turn a profit, owning a rental property is still often a better choice than other comparable investments. The most profitable buy-to-let properties by far are Houses in Multiple Occupation, abbreviated as HMOs - these large houses are “multi-let” to different groups of tenants simultaneously, bringing benefits to both the landlord and their tenants.

HMOs are much more work than standard buy to let properties, since they have so many more tenants. There’s much more work to be done with an HMO, more paperwork to keep track of, and more rent payments to keep an eye on. However, with a well-chosen commercial HMO loan it’s possible for landlords to generate substantially greater income than from a standard single-occupant property. Choosing the correct type of finance is crucial for a successful HMO project, and there are many types of commercial HMO loan on offer throughout the market - it’s vital that anyone considering a loan of this type consults their financial advisor before proceeding, in order to ensure it’s appropriate for their requirements.

Why invest in an HMO?

HMOs are a step above buy-to-let properties in both profitability and the amount of work it takes to look after them. In essence, an HMO is a large property that’s shared by several sets of tenants - this means that there will be several groups paying rent to the landlord, enabling them to generate even greater profits. However, this does mean that there are additional resources that need looking after, since there are more tenants involved, and it also means the landlord must work hard to avoid void periods - the separate groups of tenants are unlikely to move in and out at the same time, so the landlord will have to ensure they’re not allowing the property to fall vacant.

Living in an HMO is also beneficial for tenants, as well, because they are able to obtain cheaper rental rates and can share utilities and council tax bills. Generally speaking, an HMO will contain several private areas for each group of tenants, but will share some common areas between all tenants. HMOs also benefit both parties by enabling greater flexibility; tenants don’ collectively share the responsibility for rent payments, as they do in a standard rental property, so they can live in a large property without worrying when other tenants move out.

What is a commercial HMO?

An HMO can be of any shape and size, and while there are many variations as to what precisely constitutes an HMO there are certain regulations that set out when a property becomes an HMO, and when it is simply a standard property. There are many subtle distinctions which determine whether a property is an HMO or not, but as a rule of thumb any property in which there are 3 or more distinct groups of tenants that share toilet or cooking facilities is considered an HMO. The sharing of facilities is what separates an HMO from a block of flats, or a large home that’s been divided into several separate properties. Likewise, the requirement for several different groups of tenants to exist separates HMOs from large rental properties, where there may be a large number of tenants that all belong to the same group.

HMOs can sometimes require a license, though this is generally only for larger HMOs. Again, there are numerous rules and exceptions surrounding the need for an HMO to be licensed, but the basic requirements are that if a property is over 3 storeys high, requires tenants to share facilities and is home to at least 3 separate groups of tenants, it will need to be licensed. Licenses last for 5 years and must be obtained for each separate HMO that a landlord owns. Not all HMOs need to be licensed, and properties without a license are often referred to as “multi-lets” rather than “unlicensed HMOs”, because of the negative implications of “unlicensed” properties.

Financing a Commercial HMO

There are many costs associated with setting up an HMO, beyond the initial purchase. It’s important to keep in mind that inexperienced lenders will not be able to assess a property’s value as an HMO, and may only be able to value it as a normal property; this can limit the amount a landlord can borrow, because HMOs have a higher value than non-HMOs. Therefore, anyone pursuing an HMO investment should be sure to talk to a dedicated HMO loan provider, rather than simply contacting their local bank.

The costs of converting a property into an HMO don’t necessarily have to be high, but if extensive modifications are needed it can be costly. For example, it might be necessary to put in dividing walls if a property is to be converted from a single-occupancy property to an HMO, and this process is expensive. In addition, larger HMOs may well need extra utilities to be fitted in order to meet the needs of a larger number of tenants. This pushes up the costs for a landlord, and means they will need to source funds for the conversion of the property as well as for its purchase.

A specialist HMO finance provider will be able to generate a loan package that covers the costs of purchasing an HMO, as well as the expenses associated with its conversion. It’s also vital that borrowers consult a financial advisor if they’re intending to convert an existing property into an HMO, because they will need to use the correct type of finance in order to do so. It’s not possible to take out a commercial HMO mortgage for the purposes of converting a property into an HMO - these loans can only be taken out on a property that is already an HMO. Instead, developers must use alternative forms of borrowing to finance conversion, which can often be available from the same HMO loan provider.

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