When it comes to the topic of HMOs (house in multiple occupation), there is no one else better to learn from than Nicholas Wallwork. Nicholas has been involved within the property industry for over two decades now, specialising in the development of HMOs. With a portfolio valued over £45m and more than 220 tenants across his HMO properties, Nicholas is the go-to source for any guidance needed. So, how would he advise us on financing that next HMO project?
First of all, new landlords must keep in mind the number of challenges associated with financing their first HMO. Lenders may only trust experienced landlords who have a proven track record under their belt. Also, as we are all coming out of the pandemic, this could be doubly the problem. Lenders may be sceptical on the repayment side of things which could further result in a limited amount offered. In the worst-case scenario, they may even offer nothing at all.
It is not always easy to convince lenders to part ways with their cash. That is why it is essential to use a specialist broker who can break down barriers and make the process much easier. Nicholas, for example, would be lost if it were not for his trusted broker, Lucy Barrett.
Lucy is the founder and Managing Director of Vantage Finance, an established master broker within the specialist finance industry. Recently, she joined Nicholas to speak about HMO funding for a number of videos on his YouTube channel. They are essential viewing for all property developers who are looking to take on another HMO property development.
In this video, the pair cover the different options available to HMO developers and the intricacies surrounding aspects such as light or heavy refurbishment, as well as development finance. The difference between investment valuations and bricks & mortar valuations must also be understood if HMO developers want to maximise their value. As Nicholas says in the video, he is always striving to push his HMOs into the commercial side for higher valuation and income.
However, there can always be challenges with doing so. Something else that Lucy explores: “Lenders will often say that if it’s up to six beds, then it’s not technically got planning use as an HMO.” Understanding the lender’s perspective is always handy, so give it a watch.
Adding extra rooms into an HMO will change its use class, something Nicholas believes first-time developers need to know. If not, they could be in for some trouble.
At one of Nicholas’ properties in Hampshire, for example, he added a seventh bedroom that altered the HMO class from a C4 to a Sui Generis. Different loan options are available for each use class, so going in with an understanding is better than not knowing at all!
Lucy goes on to explain that the financing behind adding another room and upgrading the HMO class is purely a matter of timing. Things such as the time scale already in place for the HMO and that of an extra bedroom will need to be considered. She also says it may be best to stick to the short-term financial plan to complete the refurbishment work instead. Then a broker like herself can lend off the value once the additional room has been added.
Even if the developer holds onto an expensive loan for longer than first thought, they will avoid any early repayment penalties by holding off on a buy-to-let (BTL) mortgage. Lucy says that looking around for a BTL mortgage that does not charge these fees is worth considering.
Lastly, Nicholas believes that borrower experience is another key aspect all developers need to keep in mind. In this final video, Nicholas and Lucy discuss the importance of borrower experience and how a developer’s track record can influence the application process for a loan.
As mentioned earlier, lenders tend to be sceptical about letting inexperienced developers borrow from them. Lucy says that there is a “fear in the market” relating to people who abuse the system – those who intend to use the BTL mortgage loans to live in.
With an HMO, some lenders will insist that the developer has previous HMO or BTL experience while others are more relaxed. This is generally for up to six-bedroom HMOs; however, they will again insist on the developer having more experience for more commercial HMOs.
“Lenders like experience for that reason,” Lucy says. “They don’t want mistakes to be made because that can impact a borrower’s ability to either get the property let, start producing income or to pay them back at all.”
Even though the experience matters to most, it is not impossible for inexperienced developers to get started. It is just more challenging as a result of the reduced pool of lenders.
For 1-2-1 help financing your next HMO, get in contact with Nicholas, who can put you in touch with his power team AND help you maximise the HMO layout to get the most out of any deal.