The effects of the last year are being keenly felt by landlords. A study by the Resolution Foundation recently found that almost half a million private renters are behind on their rental payments as a direct result of COVID-19, and that will inevitably be causing pain to the nation’s property investors.
But landlords are a resolute bunch, and we are already seeing signs of how they are adapting to the changing market to ensure their business continues to flourish in the future. But to do so, they will need lenders to adapt too.
The rise of HMOs
HMOs have grown in popularity among landlords in recent years, and understandably so given the yields on offer are often substantially higher than those from a traditional buy-to-let property.
However, landlords with an HMO business have also enjoyed some level of security during the uncertainty of the past year.
During this pandemic, so many tenants have been furloughed or lost their jobs, and the impact of that stretches beyond their own finances.
If the landlord is letting out a traditional property, and the main breadwinner loses their income, then the landlord has to find the money to cover the mortgage repayments themselves.
But with HMOs, even if the landlord loses rental income from one or two tenants, they still have others making their payments, lessening the impact.
The additional security that comes from an HMO or multi-let property is only going to be more attractive to landlords as we head out of the pandemic, given the economic uncertainty still ahead of us.
But they won’t be able to build these sustainable businesses without funding support from lenders, which is why we have revamped the way we lend against HMOs.
We were one of the first to hike our maximum loan-to-value to 80% for small HMOs ‒ which we class as those of six bedrooms or below ‒ while we have also increased the maximum number of bedrooms we will lend against on large HMOs up to 15, alongside an increase in maximum loan sizes.
This is an area of the market that has been underserved for far too long, but enjoys a strong level of demand from landlords and tenants alike.
Raising their game
We have also seen landlords look to ‘level up’ their portfolios, and improve the quality of the HMOs on offer.
Let’s be clear, it’s a renter’s market at the moment, particularly in city centres where quality tenants have no shortage of options.
Competition is rife, so landlords need to go the extra mile in order to make their properties stand out from the crowd and secure those professional tenants who will pay that higher rate of rent.
We have seen a host of landlords put in that extra effort in the way that they furnish and decorate them, ensuring that they are high end and will work for them for the long term.
Again though, that ambition from the landlord needs to be matched by lenders who will talk to them about their vision, get a real idea of what they are building and back them.
How lettable are these rooms?
Not that long ago, a city centre HMO seemed like something of a no-brainer. Young professionals in particular want to live close to their workplace and enjoy the benefits that come from city life.
But is that still going to be the case in the future, as businesses incorporate more flexibility and the option of working from home on a more frequent basis?
Landlords are having to revise the way they view those properties and ask searching questions about just how lettable they are in their current form.
We’ve seen cases of landlords who have got large HMOs in and around cities that used to house people who would use it as a base during the week, but have now looked to remodel those properties into multi-unit freehold blocks, meaning they can turn what had been two or three rooms on a floor of an HMO into a flat that could attract a family or a tenant looking for more space.
Landlords are being forward-thinking, reviewing how their portfolios can work in the future, rising to the challenge of the post-COVID landscape.
But lenders need to do the same, and deliver the funding models that will work for these investors. We can’t just sit back, relying on the same old approaches that worked in the not-so-distant past.
It’s not just landlords who respond to the shifting sands who will succeed in the future, but lenders too.
