HMO buy to let mortgage

by Readers Question

9:49 AM, 16th August 2014
About 4 years ago

HMO buy to let mortgage

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HMO buy to let mortgage

I am considering remortgaging my house to let it out as a HMO. HMO buy to let mortgage

I am right at the beginning of the process and need to prepare the house and therefore need advice on what needs to be done. Also whether the house has to be totally ready to let before I can apply for the remortgage?

Secondly what sort of company should I go to to arrange the mortgage, should it be a commercial mortgage or a btl mortgage for a HMO property?

I am very green with little knowledge and reading as much as I can to inform myself of the process.

My house is 3 stories with 5 bedrooms 2 bathrooms and 2 receptions a laundry and a kitchen.

Some advice would be great thank you all.

Many thanks

Karen



Comments

Mark Alexander

10:01 AM, 16th August 2014
About 4 years ago

Hi Karen

Your property will definitely require an HMO licence. Check with your local authority to see what needs to be done before you do anything else. If your local authority has imposed article 4 it may not even be possible to get a licence. You need to go into this with your eyes wide open, especially in terms of what the costs will be to stay compliant. Armed with this information you may decide that it's better to sell your home and invest into something else.

If you do decide to go for it then when it comes to financing I recommend that you use a whole of market commercial finance broker who specialises in HMO finance. There aren't many of them but thankfully we do have a few extremely good ones who are members of Property118, all of which I know personally and am happy to endorse - see the following:-

Mark Edwards (London) - http://www.property118.com/author/mark-edwards/

Howard Reuben (Essex) - http://www.property118.com/member/?id=314

Malcolm Jones (Surrey) - http://www.property118.com/author/malcolm-jones/

Cliff Verrill (Cambridge) - http://www.property118.com/author/cliff-verrill/

Adam Hosker (Yorkshire) - http://www.property118.com/member/?id=1024

Good luck and I hope this helps ::
.

matchmade

13:18 PM, 17th August 2014
About 4 years ago

Hello Karen,

How many tenants do you intend to have? From the sound of it you could potentially have six, leaving one reception room.

Mandatory HMO licensing (and probable inspection by Environmental Health) is only required if you have more than two storeys *and* more than five tenants in two or more "households" (or "relationship units"). So unless your council has a different policy, you can avoid mandatory licensing if you don't let out on the top storey. It can be advantageous to be an unlicensed HMO because EHOs can be extremely pernickerty over what they perceive as health and safety issues, and can dramatically exceed the minimum standards most people would expect, i.e. annual landlord gas certificates, a battery-powered smoke alarm or two, furnishings that fit the 1988 fire regulations (almost certain nowadays), and decent locks on the ground floor doors and windows.

The laundry is a great asset to reduce noise and clothes piling up in the kitchen. I would advise going for good-quality white goods that will take a lot of punishment: you don't want to be fixing the washing machine every five minutes. You should have a least one shelf per tenant in the fridge and freezer, and a separate cupboard for their food. A tumble drier is worth it for 5/6 tenants, plus an iron, ironing board and at least two maidens as many tenants will not use tumble driers on the grounds of perceived cost. Try and discourage wet clothes on the radiators, especially in the bedrooms - they will get condensation mildew and blame you, and you will have to pay for decoration.

Good extractors in all bathrooms are essential (to fight humidity and mould).

I feel locks on bedroom doors create a siege mentality, a "hotel" feel and distrust between the tenants, but petty theft is always a possible risk. See threads elsewhere on this website discussing this issue. Consider buying each tenant a small safe to go under their beds or in wardrobes, if you don't like the idea of keys in every door.

I have found it is worth me administering the bills, with the proviso that the tenants must repay me every month when I issue an invoice. If the tenants administer the bills, there are disagreements between them over costs, and if they forget to pay the council tax, it's just more hassle with threats of court action etc.

If I offer "bills inclusive" rents, I always say that this includes a maximum of, say, £100pcm towards bills, and if the household exceeds this by being profligate with the heating or water, I reserve the right to surcharge them. Equally if they are frugal, I reimburse them at the end of each year. When tenants say they want "bills inclusive" what they really seem to want is not a fixed cost per month, irrespective of useage, but a predictable amount leaving their bank account each month, so they can control their expenditure. I've rarely had a complaint about a surcharge.

Two bathrooms between 5/6 is good. If you can add an ensuite to one room you will get virtually guaranteed 100% occupancy, as these rooms are much in demand.

Be careful if you are approached by couples who say they are prepared to cram into one room. They increase the burden on the house's space and services without much increase in rent, and they can unbalance the social mix of the household as they may be inclined to start nesting, introduce personal nick-nacks and fluffy toys in the shared lounge, and so on, irritating the single tenants with their perceived "take over".

Secure bike storage space is useful. Offroad parking too if you are in a location well away from public transport. Make sure there is plenty of recycling bins and dustbins.

A house manual explaining where the stopcock is, the council's recycling policy, etc is always useful.

Find yourself a good plumber for emergencies. Leaking water is your number one enemy.

Advertise at spareroom.co.uk and maybe Accommodation for Students. Gumtree can work but you often get a poorer quality of applicant. University and hospital accommodation offices/boards are useful, and big local private employers often have something similar.

Be very careful with tenants on benefits - they often have hidden social problems and can get into trouble sitting around the house all day when everyone else is at work.

15:17 PM, 17th August 2014
About 4 years ago

Reply to the comment left by "Tony Atkins" at "17/08/2014 - 13:18":

Thank you Tony for your excellent advice, there is a lot of work involved and a lot to think about. I m also considering whether it maybe better to let out the whole house to a family,it considering the site of the property I think the market would be quite limit. Aot to thin bout...thank you again.

matchmade

15:21 PM, 18th August 2014
About 4 years ago

There are also potential pitfalls with letting the whole house out to a family, as I know to my cost:

1. Harder to let and longer voids. Why would a family rent a 5-bedroom house rather than seek to own? Wouldn't they rent somewhere smaller to save money and then buy? If their company is paying the rent, their contract can end suddenly and there is a lot of competition for this sort of tenant. Such tenants can also be extremely demanding: I once had a tenant from India who wanted clocks in every room, a new TV, a cleaner, a gardener - everything they were used to from India where labour is so much cheaper.

2. Possibly financially risky. What happens if the main wage-earner loses her or his job? If a houseshare tenant loses their job, you are still being paid by the remaining tenants, but a family tenant can be vulnerable to financial shocks. You can however insure against loss of rent. Watch out for self-employed tenants - you will find it impossible to claim any money if they fail to pay the rent, whereas you can have their salary tapped at source if they are employed and in arrears.

3. Damage by children or pets. Employed houseshare tenants may not look after your property as well as you would, but they rarely go in for the calculated destruction that pets and children are capable of achieving.

Basically you are at the top end of the market with a 5-bed house, and they can be much harder to let than the 2/3 bedroom houses and flats that most landlords own. The nice thing about running a large house as a houseshare is that the tenants like living in a much grander house than they would normally enjoy, so there are few void periods, and the income stream is pretty reliable.

20:52 PM, 18th August 2014
About 4 years ago

Reply to the comment left by "Tony Atkins" at "18/08/2014 - 15:21":

Thank you

Rob Crawford

10:19 AM, 24th August 2014
About 4 years ago

Hi Karen, we have recently purchased and refurbished similar town house type properties like yours and now let them as HMO's to professional tenants. As suggested already it is important that you develop a relationship with you Local Authority (LA) Private Rented Sector (PRS) Housing Team. They will advise if selected licensing is in force and, assuming you can proceed, they will have guide lines and a licence application template available for you to develop your plans. The property is likely to be classed a "small HMO" and as such the changes you need to make are not too onerous, however, costs can mount up. Any garage internal door, all bedrooms, lounge and kitchen are likely to need 30 minute fire doors fitting. If you think you have fire doors already, check the top edge and ensure the fire door label is still adhered (if not you will need to replace the door). You will need closure devices on the lounge and kitchen doors (the freedoor battery operated sound activated closer are worth the money and prevent wedges being used by tenants). You do not need fire extinguishers but you will need a fire blanket in the kitchen. You probably have a mains powered interconnected smoke detector alarms on each landing. You will also need one in the lounge and a heat detector in the kitchen. They need to be interconnected which is now fairly easy to do with wireless alarms now available. You will need fire exit signs and thumb turn locks fitted to exit doors. Carbon monoxide alarms are now a requirement of the licence for most LA's. If letting to professional tenants then bedroom door locks should be fitted. Even students expect locks nowadays. The licence application will provide guidance ref the size of rooms and number of bathrooms etc. Its worth drawing a basic plan for each floor with the above changes shown to put in front of a PRS representative and maybe even invite one to visit your property to make comment - I found this extremely helpful and informative. If you are making any changes (dividing rooms, additional shower etc) then you are likely to need to comply with Building Regs. These guys will come and inspect your work, they will also take an interest in other areas within the property. So get them involved. As you can see, costs are now accumulating! White good will be required with a couple of fridge freezers - I suggest you stay clear of anything manufactured in Italy (this includes Indesit/Hoover and many others) as they are no longer made to the standards that we used to associate to these firms. A commercial mortgage is normally required for an HMO but if you mention that its a "small HMO" then some mortgage providers are happy to lend on the basis of a family home, although unlikely if separate AST's are to be used. Property insurance can be expensive particularly when the property is empty during the refurbishment. We let with bills included (electricity, gas, water, rates, council tax). We also provide inclusive sky phone unlimited, TV (basic, they pay extra for sport & films) and broadband. Planning and costing is essential and you really have to work as a landlord should. Any neglect on your behalf and issues will soon arise. The reward is higher yields than can be achieved if let to a family. If in the Bristol area give me a shout, otherwise good luck!

matchmade

11:35 AM, 24th August 2014
About 4 years ago

Karen - I think you need to test your market before writing off the houseshare market: you may be surprised at the number of single working people out there looking for shared housing, or even graduate students if you are within driving distance of a university or hospital with trainee doctors. Once young people get past the age of 22/23 and have some money in their market, a houseshare with the feel of a proper home, even if a little remote, starts to become attractive. The main problem in country and suburban areas is actually a lack of supply, not demand. Pretend to be a prospective tenant and search your postcode at http://www.spareroom.co.uk and Gumtree, to see what you come up with: the hits will be your competition but also a measure of likely demand. Ask letting agents, especially at the cheaper end of the market, though they are rarely that helpful as they are usually geared up for couples and families rather than single people. Also ask at large local businesses if they have an accommodation office.

I'm sure Rob Crawford has a sensible business model and he finds plenty of willing tenants, especially in a city centre location, but this kind of HMO set-up would not be for me or the kind of tenants I seek to attract. With fire doors, compulsory door closers, fire escape signs and lockable bedroom doors, the tenants might as well be living in an impersonal institution, a student hall of residence or a little hotel. This kind of conversion also makes it next to impossible to rent the house out to a family or group of friends: everything about it says "bedsit land" and not a shared home, so much of it would have to be undone if you wanted to rent the property to people who want a more relaxed home-like feel.

What I object to in all this mania amongst council officials to control and monitor so-called HMOs is that they utterly fail to recognise that there is a category of housing that sits in-between a flat shared by a couple and a collection of near-bedsits (the only difference from full bedsits appears to be that the kitchen and maybe a bathroom is shared, and the tenants may get a shared lounge if they are lucky). A houseshare is typically a suburban 3-, 4- or 5-bed house with at least one communal room and a large shared kitchen-diner, in which the tenants may not necessarily know each other when they move in, but come to do so and learn to live with and spend time together. There is joint responsibility for managing the level of utility bills, for cleaning the house, handling refuse and maintaining the garden, and for showing consideration for others in terms of noise, parking and cleanliness. A houseshare technically falls into the category of House in Multiple Occupation, but there is a world of difference between it and the kind of property that Rob manages.

I don't get a higher rent from a houseshare than I would if I let the property to a family, so the tenants benefit from lower rents compared with a bedsit, as well as a substantially lower council tax charge, as the normal tax for house is split into multiple parts. As discussed on previous threads on Property118, the "locakable rooms" setup described by Rob is vulnerable, I believe, to being re-assessed by revenue-hungry councils as a series of separate Band A units for council tax purposes, which would lead to a massive hike in costs faced by the tenant.

I would also be concerned that if I did ever get my property licensed as an HMO by a council, and rebranded as a set of Band A units for council tax, I would not be allowed later to un-do this and let to a family or sell the property as a family home. Certain councils seem to be trying to create a category of housing called HMO, which they can control as they control the number of bedsits and hotel rooms. Once they have their claws in you and have defined your property as an HMO under licensing rules and Article 4 Directions under planning rules, what is there to stop them forcing you to remain in in this category?

Rob Crawford

19:00 PM, 24th August 2014
About 4 years ago

Hi Karen, lots to consider here. One thing not mentioned is your experience as a landlord. Running an HMO or several AST's in a shared non-HMO property is not really for beginners unless you have access to professional knowledge (not Joe Bloggs down the pub!) and are willing to work at learning the legal pros & cons. If you are only letting individual bedrooms and the bathrooms and kitchen etc form part of the communal area, your Council Tax will not change, hence why I stressed "small HMO", a typical set up for your type of property. Tony makes a good point in that you need to look at the market in your location. My properties are actually in Yate, well north of Bristol city center, however, the quality of my HMO's has attracted good professional tenants and I have many enquirers. I don't have any issues with my local authority but having the right mindset is essential! If you decide on the HMO route, work with your LA and not against them and you'll be ok. Joining your local Landlord Association will help you learn what works and what doesn't.

22:50 PM, 24th August 2014
About 4 years ago

Reply to the comment left by "Rob Crawford" at "24/08/2014 - 10:19":

Hi rob
Thank you for this information, it does seem like a lot of work and money, but its food for thought
Thanks again
Karen

Rob Crawford

10:47 AM, 25th August 2014
About 4 years ago

Reply to the comment left by "Karen Holland" at "24/08/2014 - 22:50":

Its a reasonable amount of work but its fairly basic stuff for a decorator, electrician, carpenter and maybe a plumber. Costs depend on the age and condition of the property. No planning permission is likely to be required. I have recently let a similar size property to my HMO in the same road. The family house is rented part furnished for £925 pcm and the HMO accrues a rent of £1600 pcm (income of £2005 less monthly bills of £400), three bedrooms are unfurnished, two are furnished. The family house was actually not as easy to let as the HMO rooms. If you do not go the HMO route, be careful that you don't rent to more than two unrelated people. If you do so in a three story house then it will be considered an HMO. Three story plus let properties are under scrutiny by LA's as they are easily identified. Operating an HMO without a licence could lead to Court action. Most agents do not let HMO's, some (we) do. So lots to consider. Good luck in what ever you do and remember at the end of the day renting a property is better than having an empty property!


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