In recent years, the number of HMOs (House in Multiple Occupation) has grown rapidly, especially in cities and areas with large student populations. Due to the rising cost of renting, many single people are also opting to move into HMOs, meaning demand is higher than ever.
Smart, opportunistic investors should act quickly to develop an HMO property if they wish to take advantage of the growing demand for HMOs. However, before an investor can move tenants into an HMO, they will likely need to convert an existing residential or commercial property to make it suitable.
At Bridging Finance Solutions, we recognise the growing demand for HMOs and are here to provide developers with the financial support needed to bring conversions to fruition. Keep reading to find out more about using fast bridging loans for HMO conversions.
What is an HMO?
An HMO, or a House in Multiple Occupation, is a property rented by multiple people who are not from the same household, but share facilities, such as a kitchen or sometimes a bathroom. HMOs are commonly used for student accommodations or bedsits and require a specialised landlord license if the house has 5 or more tenants.
HMO owners have strict responsibilities to ensure fire safety and meet space requirements depending on the number of occupants.
Why Use a Bridging Loan for an HMO Conversion?
Torn between using a bank loan or a bridging loan for your conversion? There are plenty of reasons why a bridging loan makes the perfect solution if you’re looking to purchase and convert a property to an HMO.
Unlike other loan solutions, bridging loans can be used for both the acquisition of a property and the development phases of an HMO project, meaning investors do not need to seek multiple sources of finance.
Other reasons why investors should work with bridging lenders on an HMO conversion include:
Speed
Due to the growing popularity of HMOs, if a property is deemed suitable for conversion, be that a property sold at auction or just on the market, you need to act fast to beat the competition.
If you have already purchased a property, you want to act quickly to complete the conversion so you can start earning on your investment as soon as possible.
If you were to follow the typical financing route, it could be weeks or months before you receive the necessary funds, but if you apply for a bridging loan, you could be approved in as little as 48 hours, allowing you to act quickly. Short term finance loans for HMO’s will often take into account the potential for higher rental income, and more favourable terms may be offered compared to a standard buy-to-let loan.
Flexibility
Because bridging loans are secured against the property, lenders can be more flexible about whom they lend to. A previous poor credit history is not an automatic refusal for a loan. Should something go wrong and the borrower is unable to repay the loan amount, the security would be used as collateral to repay the loan.
Because of this flexibility, bridging finance providers can lend to those who may not have been considered by traditional lenders.
Competitive Advantage
Due to the speed at which bridging finance can be obtained, you instantly have a competitive advantage against those who may be aiming to purchase with traditional buy-to-let finance. Not only can you acquire property before your competitors, but you can also complete your conversion faster, knowing you have the financial backing to do so.
No Monthly Payments
Bridging loans can be incredibly flexible, and while monthly repayments are the most common method for loan repayment, you do have the option to ‘roll up’ your payments until your loan comes to term, meaning that you only have to repay your HMO finance once you start making money on the property you have converted.
This means that even if you don’t get the most favourable bridging loan rates, you can still reduce financial pressures by choosing a repayment plan that fits your needs.
How Does an HMO Bridging Loan Actually Work?
Wondering how an HMO loan works with a lender like Bridging Finance Solutions? Once you have acquired an HMO bridging loan, you can expect the following steps.
Property Purchase
If you have spotted a property in the perfect location for an HMO or with the space to meet the required specifications, using a bridging loan allows you to act quickly to complete the purchase, bridge the gap, and get started on your conversion without the long wait. If you are buying at auction, our property auction finance can provide pre-agreed funding before you even step through the door.
Works
If you obtain a bridging loan, any work carried out on the property is funded through staged drawdowns, which is why it is important to have an understanding of the work you need to do on the property before your application, so that you can apply for the correct amount to support your venture.
A bridging loan will often fund 100% of your works on the property, but you need to follow an approved schedule and have a contingency plan in place in case anything goes wrong.
For a broader understanding of what development funding covers, take a look at our property development finance page.
Compliance
If you are planning to develop an HMO, it is essential that you obtain the specific regulatory and licensing requirements. A mandatory HMO License is required if you plan to rent the property to five or more individuals. Before you can move anyone into the property, your property will need to be surveyed to ensure that any planning conditions outlined before the property was refurbished are met.
Exit
Once you have completed your conversion and you’re ready to move people in, it is time to complete your exit strategy at the outlined time. The most common way investors exit their loan is by refinancing onto a standard HMO buy-to-let property as soon as it reaches a lettable condition.
Once you have exited your loan, you are then free from repayments.
What Do Lenders Look For?
Considering a bridging loan for your project? Before applying to a lender, create a checklist of key features they typically evaluate when deciding whether to invest in your project.
Lenders look out for the following when reviewing loan applications:
Exit Strategy
Arguably, one of the most important aspects of your loan application is your exit strategy; without a feasible one, you won’t be approved for an HMO loan. Not only do you need an exit strategy, but you have to outline exactly what is required to help you get there.
Planning and Licensing
It is important that before you start your conversion, you have all of the necessary planning permissions and licenses in place. Due to the growth of HMOs, there are areas across the country where development rights for HMO conversions have been removed, making it impossible to complete the planned work.
If your project is not feasible due to planning or licensing obstacles, lenders will be reluctant to invest.
Your Professional Team
Creating an HMO requires a team of professionals, including architects, contractors, and surveyors, each with their own background and reputation. It’s advantageous to list everyone involved in your conversion. Providing the lender with details of their credentials or a portfolio of previous projects can help build trust in your application.
Documentation Required
As part of your application, you are required to provide certain documentation. The standard documents required include a photo ID, proof of address, bank statements from the last 3 months, evidence of income or existing assets, and a CV or a summary of your property experience.
Make sure to include all these documents with your application, as forgetting to provide them can slow down the review process. If you have questions about what to prepare, our FAQs cover the most common queries we receive from applicants.
Finance Your Project With Bridging Finance Solutions
Through this guide, you should now have a better understanding of what process to expect when applying for a bridging loan for an HMO conversion. With HMOs becoming increasingly popular, more and more investors are going to purchase suitable properties and start the conversion process, so if you’re serious about getting an HMO off the ground, act quickly.
Need finance and want to work with a trusted lender? You’re in the right place. Get in touch to make it happen with BFS today.
