When it comes to the subject of HMOs (multiple occupancy house), there is no one better to learn from than Nicholas Wallwork. Nicholas has been involved in the real estate industry for over two decades now, specializing in the development of HMOs. With a portfolio valued at over £45m and over 220 tenants across his HMO properties, Nicholas is the go-to source for any guidance needed. So, how would he advise us on the financing of this next HMO project?
First, new owners should keep in mind the number of challenges associated with financing their first HMO. Lenders can only trust experienced homeowners with a proven track record. Plus, as we’re all coming out of the pandemic, that could be doubly the problem. Lenders may be skeptical about paying things back, which could further lead to a limited amount being offered. In the worst case, they may even offer nothing at all.
It’s not always easy to convince lenders to part with their money. This is why it is essential to use a specialist broker who can break down the barriers and make the process much easier. Nicholas, for example, would be lost if it weren’t for his trusted broker, Lucy Barrett.
Lucy is the Founder and Managing Director of Vantage Finance, an established prime broker in the specialty finance industry. Recently, she joined Nicholas to talk about HMO funding for a number of videos on his YouTube channel. They are essential for all property developers looking to undertake another HMO property development.
In this video, the pair cover the various options available to HMO developers and the complexities surrounding aspects such as light or heavy renovation, as well as development financing. The difference between investment valuations and brick-and-mortar valuations must also be understood if HMO developers want to maximize their value. As Nicholas says in the video, he always strives to push his HMOs to the business side for higher valuation and revenue.
However, there may still be difficulties in doing so. Something else Lucy explores: “Lenders will often say that if there are up to six beds, then it’s technically not used as an HMO.” Understanding the lender’s perspective is always handy, so give them a watch.
Adding more rooms to an HMO will change its class of use, which Nicholas thinks novice developers should be aware of. Otherwise, they might get in trouble.
At one of Nicholas’ properties in Hampshire, for example, he added a seventh bedroom which changed the HMO class from a C4 to a Sui Generis. Different lending options are available for each class of use, so going with an understanding is better than not knowing at all!
Lucy goes on to explain that the funding 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 additional bedroom will need to be considered. She also says that it might be better to stick to the short-term financial plan to complete the renovations. Then a broker like her can lend the value once the extra room has been added.
Even if the developer holds on to an expensive loan longer than expected, they will avoid any prepayment penalties by retaining a buy-to-let mortgage (BTL). Lucy says looking for a BTL mortgage that doesn’t charge these fees is worth considering.
Finally, Nicholas believes that the borrower experience is another key aspect that all developers should keep in mind. In this latest video, Nicholas and Lucy discuss the importance of borrower experience and how a developer’s background can influence the loan application process.
As mentioned earlier, lenders tend to be skeptical of letting inexperienced developers borrow from them. Lucy says there is “fear in the market” about people abusing the system – those who intend to use BTL mortgages to live.
With an HMO, some lenders will insist that the developer have previous HMO or BTL experience while others are more relaxed. This is generally for HMOs up to six bedrooms; however, they will again insist that the developer have more experience for more commercial HMOs.
“Lenders love the experience for that reason,” says Lucy. “They don’t want mistakes to be made because it can impact a borrower’s ability to rent the property, start generating income, or pay it back at all.”
Even though experience counts for the most part, it’s not impossible for inexperienced developers to get started. It’s just more difficult because of the smaller pool of lenders.
For 1-2-1 help financing your next HMO, contact Nicholaswho can connect you with their powerful team AND help you optimize the HMO layout to get the most out of any transaction.