But HMOs aren’t the only choice for this type of investment and a multi-unit freehold block is another option that can deliver similar returns.
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A multi-unit block differs from an HMO in that it contains separate, independent residential units, each with their own AST agreement. Each household will have its own entrance and private areas into which no one else has right of access, and there are also likely to be common parts – such as a hallway or garden – that all households have the right to use.
Examples of multi-unit blocks include:
• purpose-built blocks of flats
• houses converted into flats
• a number of houses all held under one freehold title
Multiple-unit flats are lucrative for investors because they provide economies of scale and so – by their nature – they tend to be larger deals. They also provide opportunity for investors to realise greater capital gains as they can increase the value of each unit by separating the title and selling them off individually.
According to Mortgages for Business buy-to-let mortgage index, multi-unit blocks delivered the biggest uplift in yield this quarter compared to any other category of investment.
The average yield achieved by a multi-unit block in Q3 of this year was 8.4%, compared with 7.5% in Q2. The yields achieved by HMOs remained consistent at 8.6% in Q2 and Q3. The yield on a vanilla buy-to-let during this period was just 5.4%.
We recently worked with a broker to help a 61-year-old self-employed director who had successfully developed two adjacent four-bedroom detached houses on a plot of land in Oxfordshire. Both properties were listed on the same title and both were tenanted. The total value of the houses was £1.73m.
The client wanted to raise £1.07m to clear the development loan, pay off existing debts and fund a new project. We structured a solution to meet the client's requirements, with a product that allowed him to roll up some of the interest and service the remainder.
Many lenders are able to lend on multiple units on a single title, but there are often more restrictions imposed when this is the case. For example, some lenders will not lend on new-build properties and some may apply a stricter rental calculation. There are also often limits on the number of units held on the single title. So, look for a lender that takes a flexible and commercial approach, reviewing each application on its own merits and delivering bespoke solutions to meet the needs of the individual customer.