This article is an external press release originally published on the Landlord News website, which has now been migrated to the Just Landlords blog.
The buy-to-let sector has defied the uncertainty that surrounded the general election and has remained positive since the results were announced.
Connell’s Survey and Valuation team reported a 3% increase in valuations from April to May this year and a 33% annual rise.
Landlords are hoping to capitalise on the growing demand for rental property and Houses in Multiple Occupation (HMOs) are becoming even more popular due to the attractive yields they can produce.
How Lenders Value HMOs
However, HMOs are a specialist investment and they can be difficult to value for brokers, who must then advise investors correctly.
Valuing HMOs is significantly different to regular buy-to-lets and their value can be affected by a number of factors.
The four key factors that brokers and clients must remember are as follows:
Required work
The value of a property can be greatly affected by the amount of work required to convert it into an HMO. If little work is needed, the property should be lent against its value as a private dwelling. This is due to the fact that the home is not particularly specialised compared to other asset classes; an investor could buy a cheaper property and convert this to an HMO for a lower cost.
Location
It is vital that investors buy in an area with high HMO demand. However, this will give the property a greater value than a private dwelling. Landlords should expect this if they are searching in a popular area. With any property investment, landlords should research the local market to determine demand.
Article 4 Directions
Article 4 Directions are used to limit the amount of HMOs in certain areas by requiring investors to obtain planning permission before converting a building. However, if an area does have an Article 4 Direction in place, the property will be a viable investment option. Landlords should expect to pay a premium price though, due to limited supply.
Planning permission
Whether an HMO has planning permission or not can greatly affect its value. Sui generis planning relates to buildings that do not fall into any particular use class and this includes HMOs. If this type of planning is in place, valuers often lend against the property’s market value. Usually, these houses require significant structural changes for conversion to an HMO, but provide good yields.
It is likely that demand for HMOs will continue to grow, as private tenants look to a variety of rental options. Lenders and brokers must act responsibly and ensure investors’ ambitions are realistic.
