HMOs considered the biggest area for landlord education

On 3rd September, Bridging & Commercial and Castle Trust Bank led a discussion on all thing BTL, as part of its ongoing virtual roundtable series.

B&C was joined by Robert Oliver, sales director at Castle Trust Bank; Kim McGinley, managing director at VIBE Specialist Finance; Mike Coates, managing director at Commercial Expert; and Alasdair McPherson, director at Rangewell, in a conversation that covered the current opportunities for property investors against a backdrop of enormous change following the pandemic.

Robert outlined that the BTL sector heading into Q4 is just as strong as it was this time last year and is “growing arms and legs at a good pace”. 

He also noted that holiday let enquiries — an area the market has seen growing attention of late — are up 43% in Q3 compared to Q1 this year. 

“Landlords are looking to diversify,” he continued, explaining that holiday lets, as well as MUFBs and HMOs, were proving popular. 

“House prices have gone up immeasurably in the last 12 months,” he said, which he believes has further priced some people out, meaning that rental remains a good option.

He is also seeing landlords move into different parts of the UK, with university towns and smaller cities generating strong leads.

“Location and potential demand are key,” he advises. “Without that, you have to be very careful going into [a new market].”

Alasdair identified that the days of the accidental landlord have gone, and that professionalism in the BTL space has increased — with many now running their portfolios as “proper businesses”. 

“You have to be a professional now,” Mike agreed. “A lot of things have happened to make it very difficult for people to buy property, [including] the pandemic, taxation, furlough, voids, safety measures, and tenants’ rights. You can’t just wander in, buy a BTL property, and think you’re going to make a fortune. You need to know what you’re doing and, clearly, you’ve got to take some good advice, too.”

“Everyone has a different property strategy,” Kim stated, explaining that for those driven by yield, expansion up North may be appropriate, while others may use bridging finance to add value to their properties, taking out the equity for new projects. 

Mike commented that the standard BTL route is good for those building a portfolio for sale in the future, whereas there are great opportunities on the high street for landlords looking for pure income. 

“All local authorities want to drive residential into the high street because it’s failing,” he said. “HMOs would be absolutely ideal for that.”

He considers the relaxation in the change-of-use rules and the introduction of new permitted development rights to be a “huge opportunity”, with lenders “firing products out” into the marketplace. 

According to Alasdair, the finance providers that are gaining traction are those that are listening to brokers and bringing out new, innovative offerings. He cites development exit loans, for which there has been great demand for, as a case in point.

When asked about how Castle Trust Bank goes about developing products that are fit for investors’ needs, Robert highlighted that it wasn’t all about rate; clients need to see innovation as well.

“Any lender can pull price levers, but it’s about adding value,” he opined. Two such examples that the lender has recently devised is a bridge with a guaranteed exit, and a longer-term fixed-rate proposition with a short-term ERC for those operating with lower yields and higher capital appreciation. 

Discussing the holiday let market and its specific nuances, Kim stressed the importance of approaching the right lenders based on the specific case. 

“For a lot of these holiday let products, lenders will mostly stress it on a single AST rental income,” she said. “It’s key for these clients to be speaking to the right [brokers] to make sure that the calculations going on in the background fit the lender’s criteria and appetite.”

She praised the influx of lenders coming into this market, with some now considering high-, medium- and low-income for holiday lets, and the appearance of higher LTVs. 

Alasdair claimed that Rangewell has tripled the number of lenders it works with in this area, and believes that the mid-season will expand “massively”, boding well for the longevity of holiday let viability.  

Mike shared that HMOs — which can be seen to mitigate risk and voids —is still a huge market as people take this first, more affordable step to moving out of home or house shares.

However, he pointed out that many lenders will value an HMO as a single dwelling, and that costs to bring these properties up to specification may eat into profits — aspects to be mindful of when considering this type of investment.  

Kim considers this to be the biggest area of education for landlords. 

“A lot of [HMOs] are valued on bricks and mortar on the basis of it being a single dwelling, but lenders could potentially look at investment value. However, there is no one size fits all. It comes down to the area, comparables and, ultimately, what valuer you get on the day.”

The full virtual roundtable can be watched below.

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