After gaining some experience with letting properties, you might be ready for letting out HMOs. Either you convert an existing property to an HMO (or buy a brand new one), but in either case, you will need an HMO mortgage. You will need to contact your lender again if you are already a homeowner with an ordinary mortgage to buy a property.
HMOs need a license from the local council where the property is located. This licence must be valid for five year. It is important to check with the local authority about the area's policy. Although five-person properties are the most common, smaller properties that have fewer tenants may also need a license. It varies depending on where you live so it is important to get all information before applying.
How much does it cost for an HMO licence to be obtained? Costs for obtaining an HMO license vary by area. Some councils will charge for the number of bedrooms, while others will charge a fixed fee. These fees can vary from a couple hundred pounds to over a hundred. Lenders know the time required to issue a licence. Therefore, they may accept proof when underwriting a mortgage. Being prepared ahead of time will help avoid any delays.
HMO properties are sometimes advertised as having irresistible gross yields of 100%+. Who wouldn't love a piece? The HMO sector has a high yield, but you need to be aware of your costs. This includes council tax, insurance costs, utility bills, management fees, rent arrears and any voids. In reality, an HMO can yield an ROI of 8-10% each year, compared to 4-5% for a single-tenancy purchase-to�let.
Because nobody wants to clean up the mess of another, shared areas often 'get left'. The property may need to be maintained by the landlord, who might have to clean it or hire cleaners.
These higher potential returns come with greater risks. There is a greater chance of having a higher turnover rate than with traditional buy-to-let. Every additional tenant is an unknown factor (e.g. Will they pay rent? They will cause damage. They could cause disputes. A specialist mortgage is also required.
A large deposit is required for an HMO mortgage. LTV ratios between 60% and 75% are required by most lenders (i.e. Minimum 25% deposit While lenders may consider potential rental income in their stress test calculations, they will usually base their sums based on the rental income that you would get from renting the property to one household and not individuals. The mortgage must be affordable to you, and have large margins. A mortgage broker can help you determine how large an HMO mortgage mortgage you can afford according to your lender.