Whether you’re investing in your first HMO property or are an experienced investor in large HMOs, a valuation is critical for understanding its true value. More complex than a valuation for a standard residential property, it enables you to make an informed decision about your investment.
The purpose of an HMO valuation
A house in multiple occupation (HMO) differs from a standard residential property in that it’s rented out as shared accommodation to multiple occupants from separate households. As such, it requires an HMO valuation, which is different from a valuation carried out for a standard residential property.
As a more specialised form of valuation, it is used to assess the value of the property, taking into account its condition, location and potential rental income. Investing in an HMO can be very lucrative, especially when it’s located in an area that has a high demand from young professionals, key workers and students. Getting the right valuation is key to understanding the property’s true worth as an investment. This enables you to make the right purchasing decision and secure the finance you need.
The types of HMO valuations
With standard residential properties, a valuation focuses on the bricks-and-mortar value, factoring in the property’s condition and comparable sales prices. An HMO property, however, is specifically used to generate income from multiple tenants. As such, it tends to be viewed as a business, which is especially the case for large HMOs and those classed as sui generis. For HMOs, therefore, there are two main types of valuation method — a residential (bricks-and-mortar) valuation and a commercial valuation.
Residential valuation (bricks-and-mortar valuation)
A residential valuation, also called a bricks-and-mortar valuation, is typically used for standard residential properties. Using this valuation method, a property’s value is assessed on its physical characteristics and by comparing the prices of similar properties sold in the area. A bricks-and-mortar valuation is also usually used for small HMOs. Small HMOs are those that are rented out to three or four occupants who form more than one household.
This valuation method tends to be used for small HMOs because surveyors class them as standard residential properties despite being rented out to multiple tenants. However, it doesn’t accurately assess the income that can be generated from this type of property. This is especially the case for luxury accommodation or larger properties that can command a higher rent.
To ensure that you have a more accurate valuation that fully reflects the property’s investment potential, a commercial valuation is often an investor’s preferred method.
Commercial valuation
An HMO property is essentially a business investment and you need a valuation that assesses it on this basis. A commercial valuation takes account of the rental income that can be generated by the property.
The potential rental income, the location and condition of the property as well as the local demand for HMOs are factors used to calculate the valuation yield. The gross annual rent is divided by the yield to give you a figure for your return on investment. This method usually provides a higher valuation than a bricks-and-mortar alternative and is a more accurate assessment for this type of property.
Large HMOs in particular benefit from commercial valuations. These are HMOs that are rented out to five or more occupants who form more than one household. Having this type of valuation is especially useful if you already own a large HMO and want to release some equity to use for your next investment.
The key points considered in an HMO valuation
When carrying out an HMO valuation, there are several factors that a surveyor will take into account. These include:
- The size of the property, in particular the number of bedrooms.
- The layout of the property. This focuses on safety and the quality of living standards for the tenants.
- The overall condition of the property. One that is well-maintained and has modern amenities is likely to benefit from a higher valuation.
- The property’s location and the demand for HMOs within that area. With the ability to achieve a higher rental income, the property’s commercial valuation will be higher.
- Tenancy agreements. When refinancing an HMO property, the surveyor will check any existing tenancy agreements. This is to ascertain whether you’ve had a consistent rental income and to review variations in the occupancy rates.
- Compliance with HMO regulations. Numerous HMO requirements and regulations must be adhered to, including fire safety and licensing requirements. These differ per property and depending on the local council’s criteria. Failure to meet any of those that apply can result in a lower valuation.
How to maximise valuations for large HMOs
It’s essential to choose the right type of valuation for your HMO property. Using comparable sales prices when assessing a large HMO can result in a significantly lower valuation than when using a commercial valuation method. This can have a considerable effect on the terms and rates you’re offered for an HMO mortgage. As well as choosing the right one, there are ways to maximise the HMO property’s value before a valuation is carried out.
- Improve the layout. Optimise the property’s design to increase the rental income achieved. For example, if there are unused spaces that meet the minimum bedroom requirements, convert them into additional bedrooms. Enhance tenants’ well-being by adding en-suite bathrooms where possible.
- Make property upgrades. Consider any rooms that can benefit from being upgraded, such as the kitchen or bathroom. Does any flooring need to be replaced in the property? Has it been fitted with modern appliances? Do the communal areas need updating? Any improvements to the property can not only reduce any future maintenance issues experienced but can also lead to a higher rental income being obtained.
- Meet the HMO regulations. Various standards relating to health and safety regulations must be met. It’s essential to comply with these and you can face severe penalties for non-compliance. Meeting the regulations ensures that you benefit from a positive valuation. It also shows your commitment as an HMO landlord and concern for the well-being of your tenants.
- Strive for full occupancy. Continued high occupancy results in a consistent rental income. This leads to a higher commercial valuation and shows lenders that the property is a sustainable investment.
- Keep good financial records. Having thorough financial records helps to ensure a more favourable valuation. Be sure to document all rental income, tenancy agreements, HMO licence details and maintenance and repair costs.
We can arrange your HMO finance
Optimising your property and choosing the right HMO valuation are key to having a successful investment, whether buying or refinancing it. Our mortgage brokers have hands-on experience with HMO properties and can use their expertise to help you secure the best financial outcome for your investment. Give us a call on 01322 907 000 and be confident of the potential and long-term success of your large HMO.