HMO investing has been a widely popular strategy in the UK property market over the past decade and most landlords know that HMOs can make fantastic investments.
Rental yields of HMOs can’t be achieved with standard buy-to-lets in the right areas and the demand for affordable, flexible housing has never been higher despite Covid-19. But investing in HMOs requires having a lender who truly understands HMOs and can get their heads around it.
Roxana Mohammadian-Molina, Chief Strategy Officer at development finance and bridging lender Blend Network explains why specialist finance providers and peer-to-peer lenders have become the key go-to HMO lenders in the UK.
Amid the worsening UK housing crisis and the lack of affordable housing, it is no secret that HMO investing has been one of the preferred strategies among landlords over the past decade. HMO investing has several advantages, chief among them are the higher rental incomes compared to regular buy-to-lets, the higher yields achieved and the relatively lower risk since the landlord is able to diversify the sources of income among the various rooms.
But for investors looking to get started as HMO landlords or grow their existing portfolio, getting funding always seems to be an issue. Valuation and lack of standardization are always mentioned as sticking points for HMO landlords who complain that commercial valuations are elusive and that lenders instead tend to base their valuations on the brick and mortar.
While I believe that commercial valuations are not as elusive as it appears, it is true is that the majority of HMO deals come from specialist finance providers who truly understand this product. Lending on an HMO requires a lender who truly speaks the property investor’s language and fully grasps the way this product works. Specialist finance providers and peer-to-peer lenders have and continue to be active in this area. There are three main reasons.
First, HMO deals are rarely standardized one-size-fits-all deals. Most often, they will be non-standardized deals that offer very small capital appreciation to the borrower with rental income being the main reason for the investment. Traditional lenders are usually happy to lend on off-the-shelf deals that are easy to value based on market comparables.
Yet when it comes to nonstandard deals in nonstandard locations, specialist finance providers are much more likely to get comfortable with it provided that the deal makes sense. Furthermore, alternative finance platforms such as peer-to-peer lenders are able to offer a higher degree of flexibility and one-on-one customer relationships compared to traditional lenders. For example, at Blend Network many of our underwriters are former property developers and current property investors, thus being able to speak the HMO investor’s language.
Second, HMO deals are often small in size and not many lenders are interested in lending for small deals, certainly, sub £200,000 loan size. This is a frequent cause for complaint among landlords who are still in the early stages of building their portfolio.
Once again, due to their nimbler size and the lack of heavy legacy processes, specialist finance providers are not only able to lend on those smaller deals but to offer a smoother, faster and more tailored customer service. For example, at Blend Network we regularly fund HMO deals, having funded deals from as little as £150,000 across the UK regions.
Third, alternative lenders offer a more flexible and less automated approach to traditional due diligence processes. This is because while the industry is highly regulated by the FCA, often small and agile organizations can make or break a deal. These firms are happy to think outside the box as long as the deal makes sense. For example, at Blend Network a number of our lending managers are former or current property developers and investors.
This means that instead of approaching the due diligence process from a ‘spreadsheet’ mindset, they approach the due diligence process from a property developer’s mindset. Not only are they able to understand, assess and price the risk accordingly, they are also often able to offer advice and suggestions to borrowers. In other words, lending managers are able to speak the property developer’s language.
In summary, despite the challenges of Covid-19 HMO investments remain a highly attractive strategy for landlords looking for higher yield and a good source of rental income. But now more than ever before HMO investing requires having a lender who truly understands HMOs and can get their heads around it.