The New Breed of High Yield Properties
The attitudes of property investors are changing. Mortgage lending rates to individuals and companies has grown and the legal structures within which investments are being made are becoming more sophisticated, opening opportunities for new types of co-investment, better syndicate management, increased professionalism and thus bigger investments.
In the first quarter of 2016, £13.5 billion was pledged to property investors by mortgage lenders accounting for 21.1% of all mortgage lending, an increase of £3.5billion above that of the previous quarter according to the FCA Mortgage Lending Administration Report (1). 421,669 of those mortgages were granted to Special Purpose Vehicles (SPV); a UK limited company that owns a property which is an indication of how investors are adapting to new Stamp Duty Land Tax regulations (2). Attitudes are changing and that is no more evident in the changes of investment class that property magnates are now set upon: Professional HMO (PHMO).
In a recent survey, 28% of property professionals are now considering buying Houses of Multiple Occupancy in contrast to a 4% fall in the number looking to expand their "vanilla" single-family-let (SFL) portfolios (3). Is it a surprise? The promise of high yields, intrinsic hedge for voids and a budding trend towards occupancy contracts for additional security are driving professional property investors increasingly towards the new breed of shared houses.
In the interests of being thorough let's demonstrate some example headline figures and terms as a comparison:
3 Bedroom Single Family let in St Helens, Merseyside:?Purchase Price: £70,000 (4) Gross Rent : £595.00 (5) per month Average Net Yield with 60% LTV repayment mortgage and costs: £384pm or 6.67%pa? Security: 6 Month standard AST
Converted 5 (Double) Bedroom, Blue Collar HMO/ Multi Let in St Helens, Merseyside:
Gross Rent: £2058.33 (7) per month
Average Net Yield with 60% LTV repayment mortgage, utilities and costs: £1550pm or 12.69%pa ?Security: None. Highly transient tenants and no deposit
Terms: 30 days notice, no deposit
Purpose-Built 34 Bedroom, En-suite, Professional HMO in Liverpool:
As you can see, the numbers are significantly in favour of HMO and PHMO however there are two major and highly problematic issues to be aware of; voids and dilapidation. Investors on the Property Tribes forum discuss projected void period calculations for HMO and, after much deliberation landed on a minimum HMO void allowance of 5% or 3 weeks per room per year. The difficulty is enforcement; if a tenant has paid no or very little deposit for a room in which they spend a minimal amount of time then the likelihood of unannounced exits is far higher. Rent is paid weekly and therefore the lead time for finding a new tenant has to be incredibly short meaning often only specialists HMO agents will take on the management job. However, a larger number of tenants per property with a higher percentage yield can mean that cash flow is enough to manage voids and it's unlikely, barring any disaster either locally or within the property, that all rooms will be empty at the same time. Professional HMO tenants are becoming more expectant of longer term contracts than the traditional blue-collar tenant who expects an easy-in easy-out arrangement and therefore a higher end client, paying more money per room for better quality accommodation for a longer term could go some way towards mitigating the risks presented by empty rooms.
Dilapidation is expected. It's part of Buy-to-Let. Tenants will never look after your property to the same standard as you would so it is a logical assumption that a tenant who is more motivated to stay in the property or in the area for a longer period of time are more inclined to adhere to a higher standard of maintenance, whilst expecting the same from their landlord. Professional HMO tenants sometimes expect common arrears to be cleaned and the property kept in a good state of repair. In return they look after the tidiness of common areas and cleanliness of their own rooms. There is a greater cost for furnishing this type of property, for example, en-suite bathroom pods for the comfort of your tenants but the trade-off is a tenant who stays longer, often pays a higher price per room and takes greater pride in your property, reducing your overall lifetime costs.
Professional HMOs are gathering a head of steam with young professionals opting for shared living spaces in prime locations close to city centres and main business districts where traditional property is rare but at a fraction of the cost. Student Lettings Managers the Mistoria Group have observed a 23% increase in the incidence of young professionals opting for shared living with many properties previously ear-marked for student accommodation now being converted for tenancy by the city set (11).