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What is a House of Multiple Occupancy (HMO)?
An HMO is a property rented out by at least three people who are not from the same household but share facilities such as kitchens and bathrooms. The tenant profile can vary from professionals to students to tenants in receipt of local housing association payments.
There are many lenders in the market providing mortgages for HMO properties, whether that be a ‘small HMO’ which is up to 6 bedrooms or a ‘large HMO’ which is from 7 bedrooms. The large HMOs require a change of use planning permission called “sui generis”.
Can you get a Commercial Valuation on a ‘Small HMO’?
This question is often asked, ‘Can I get a commercial/investment valuation carried out on a small HMO?’ There are many different answers to this question—it is not as straightforward as a yes or no.
Large HMOs will always receive a commercial valuation for mortgage purposes, and the main reason is planning permission is required for these.
It is a bit different for small HMOs as you can convert standard residential homes without planning permission – subject to the property not being located in an article 4 area. Because it is, therefore, quite straightforward to complete this reconfiguration, the majority of mortgage lenders will only instruct a bricks-and-mortar / vacant possession valuation on a small HMO, with the view being it wouldn’t be that difficult to convert back to a standard residential home.
However, that is no longer the view all lenders are taking, partly due to the rise in HMOs being refurbished to very high standards, with most bedrooms having en-suite facilities. These are being referred to as adapted / super HMOs.
What is a Commercial Valuation?
The ultimate goal and reason for proceeding with a commercial valuation on a HMO is because it can provide a higher value on the property than a standard bricks & mortar report. This is because the property will be valued on a yield basis, which takes into consideration what rental income the property is producing.
To give yourself an idea of what figure is achievable, you need to divide the rental income by the yield (%) in the area your property is located – yields are different all over the UK so this is not a set in stone calculation for this, but we typically see higher yields the further north you go.
You also need to deduct circa 15-20% off the gross rental for running costs prior to calculating this estimate.
Example calculation:
• £41,200 gross rental for a 6 bed, 6 en-suite HMO in an area with an 11% yield
• 20% reduction = £32,960
• £32,960 divided by 11% = £299,636 est. commercial valuation
Please note there are many more factors that a valuer has to consider when it comes to the valuation – the standard of the refurb, the location, the demand, comparables etc. – so you can’t just solely base your estimation on this one simple calculation but it is a good way to quickly work out what valuation could be achieved.
So, which ‘Small HMOs’ will get a Commercial Valuation?
It is important to first state that a commercial valuation is never guaranteed as it ultimately depends on the valuer’s opinion on the day. However, we are successfully getting commercial valuations on the below:
• 6 bed HMO – all 6 rooms have en-suite facilities, and the refurb has been completed to a high standard
• 6 bed HMO – 4/6 rooms have en-suite facilities, and the refurb has been completed to a high standard
• 5 bed HMO – all 5 rooms have en-suite facilities and the refurb has been completed to a high standard
• 5 bed HMO – 4/5 rooms have en-suite facilities, with 1 room benefiting from an off-suite, and the refurb has been completed to a high standard
• Any size HMO that is located in an Article 4 area
One other important point: We highly advise you to have the property fully tenanted at the time of the valuation. This limits the chance of the valuer down-valuing the rental income.
How can Advocate Finance help?
We have a great level of experience advising on this area of the market and many of our clients have received true commercial valuations on their small HMO properties.
If you are someone that invests heavily into HMO properties and you are hoping to achieve a commercial / investment valuation on your HMO, then please do get in touch.
If you are looking for the initial bridging finance that enables you to purchase a property that is not yet a HMO, but you intend on converting it into one, then this is also something we can assist with.
We provide a FREE assessment on all our services.
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