This week we are looking at the pros and cons of both strategies; single let’s first or HMOs? It’s a question that comes up lots so here’s what I think!
Single let’s first
The big advantage of this method is experience. Most lenders require you to have some rental experience before you go into HMOs or other more complicated properties such as commercial and blocks of flats. It also allows you to gain some rental experience and possibly some refurbishment experience too. You may want to do this first to feel more comfortable moving to bigger projects; to test the water and see if it’s something you enjoy doing.
The main disadvantage is the money that you will end up leaving in the project in order to gain the experience. I have completed projects with clients that have enabled them to pull all their money out, but this is usually where they’ve added bedrooms within the existing floor plan or clever extensions. Usually you will end up leaving some money in, and that can then restrict how quickly you can move on to your next project. The other issue can be that you end up with a property that isn’t yielding as much as you would like and you didn’t really want a single let anyway!
What about going straight to HMOs?
The big pull towards HMOs are the rental yields. Of course this can apply to blocks of flats or serviced accommodation as well. This dilemma will apply to all of these properties to an extent as you need some experience for all of them.
What you need to decide is whether you want to pay an increase in the interest rate, to compensate for your lack of experience versus putting cash and cost into an asset which isn’t part of your long term plan.
In terms of interest rate for for HMOs, up to 5 bedrooms will be a slightly lesser rate than over 5 bedrooms. Both options will be higher than if you have some experience. In both instances the valuation will be a bricks and mortar figure and you will need to own your residential property. We can look at 2 year products to allow you to refinance to a more competitive product and hybrid valuation if that’s something that can be achieved.
You will need to be looking for a property which doesn’t need extensive works (planning or building regulations) unless you have done something similar previously. You will require a management agent in place to look after the tenants. When you’re looking at refurbishment experience, you need to have done something similar previously, but this can include projects on your own home.
What if you don’t have a residential mortgage?
This is more tricky at the moment but there are still options. Single let’s are easier to place but there are more restrictions on affordability. For HMOs we need to think outside the box to find a solution, but it can be done! Some clients choose to buy something cash and then refinance after they have owned it for a period of time and others use bridging to get around the experience. Looking at occupied properties can be an option too.
When you don’t have the experience required, we need to balance this with something and this is usually a higher cost – whether that is using bridging or an increased interest rate on your mortgage. This is a short term issue though, and once you have one property under your belt you have far more options.
We can usually find a solution somewhere though, so call with your enquiries and we can chat through the options.