Investors are switching to multi occupancy properties to improve yield
Entrepreneurial brokers are behind a trend of landlords switching from residential to commercial or multi occupancy properties – or a combination of them - to achieve a better income, according to a leading specialist finance distributor.
Crystal Specialist Finance, which oversees commercial, bridging, development, specialist mortgages and second charges funding, said it has identified greater numbers of landlords pivoting between assets. Furthermore, it attributes the shift to intermediaries’ knowledge of the market and the need to diversify.
“In the first quarter of 2024, Crystal Specialist Finance saw more landlords pivot from residential asset classes into commercial/semi commercial, house in multiple occupation (HMO), multi-unit freehold blocks (MUFB) and holiday lets,” said Jason Berry (pictured left), its group sales director.
“This diversification is undoubtedly being driven by brokers educating where landlords can find appreciating yields and the benefits of having a mixture of asset classes in a property portfolio. Good brokers educate and motivate their clients into taking positive action - they are natural entrepreneurs.”
Despite wider challenges in the economy the specialist market continues to serve up opportunities, Berry said. He believes it is a time of rich opportunity for advisers, who generate 95% of all the cases it funds on either a packaged or referred basis.
“There is so much confusion around in the mortgage market, but experience tells me this has the potential to be great for brokers,” he said, noting that first and foremost they needed to communicate intelligently and proactively with their clients. “It’s become equally important for them to either upskill to ensure that their specialist knowledge is at an expert level or refer.”
Are HMOs a good property investment?
Chris Norris, policy director for the National Residential Landlords Association advised that where investors are prepared to do the work required, HMO properties can be a good investment, but he sounded a note of caution. “It is vital that they thoroughly research local market conditions and understand the work involved,” Norris said.
People are more likely to consider renting a room in a shared house in the current economic climate, according to Assets For Life, an organisation that offers training in property portfolios. It points to data from the SpareRooms website, which suggests rental prices for rooms in the UK have risen by 16% since Q3 of 2022, and average rents are at an all-time high across the UK. This rise in rental yields and a modest reduction in property prices could mean that investing in an HMO is a smart move for landlords and property investors, it says.
It also cites data from the British Landlord Association suggesting that an HMO property has an average rental yield of 7.5%, which is very profitable compared to single-let properties which have an average yield of 3.63%. Further it says that having an HMO income, with tenants moving in or out at different times, shelters landlords from having what might otherwise be a completely empty property and so-called ‘rental voids’.
Conversely, it can be more difficult to obtain a mortgage to purchase an HMO property, and some lenders may not offer one at all or offer a higher interest rate than for a regular buy-to-let mortgage. Lenders often expect a maximum LTV of 60-75%, meaning that a landlord would have to provide a larger deposit. There are also potentially additional licensing requirements to consider and the fluid nature of the occupancy and heavier use of a property means that it may require more refurbishment.
Apartments in city centres often have supermarket shops or offices underneath them, and many lenders do not lend if the apartment is above or next to commercial premises.
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Do mortgage brokers have to educate clients?
John Phillips (pictured right), CEO of broker firm Just Mortgages and Spicerhaart estate agents, commented that educating clients had become a significant part of a broker’s responsibilities, particularly in the current climate.
“It’s certainly true that this spans beyond residential buyers to include support for landlords to find the best possible opportunities,” Phillips told Mortgage Introducer.
“Against a backdrop of higher mortgage costs and operating costs, in addition to successive anti-landlord governments with restrictive taxation policies, higher yields have become even more of a priority for landlords. This is especially true for new entrants and those remortgaging as they try to overcome tougher affordability and stress testing requirements. This is where the likes of HMOs or MUFBs continue to prove popular with the opportunity for greater potential yields.”
Phillips added that licensing rules for HMOs vary massively from council to council and region to region, making the knowledge of a local broker ‘incredibly valuable’.
