Understanding how your lender values your House in Multiple Occupation (HMO) is crucial for property investors. Lenders use various methods to determine the value of an HMO, which can affect the amount of money you can borrow, and, ultimately, the profitability of your investment.
In this article, we’ll explore the most common ways lenders value HMOs and what you need to know to ensure you get the best deal.
Market value approach
The market value approach is one of the most common methods used by lenders to value HMOs. It involves comparing your property to similar properties in the local area, considering factors such as the number of bedrooms, the size of the property, and the location.
To determine the market value of your HMO, lenders will usually request a valuation report from a qualified surveyor. The surveyor will inspect the property, compare it to similar properties, and estimate its value.
Investment value approach
The investment value approach is another method lenders use to value HMOs. This approach considers the property’s income potential rather than its current market value.
To determine the investment value of your HMO, lenders will look at the potential rental income from the property, considering the number of bedrooms, the size of the property, and the location. They will also consider any expenses associated with the property, such as maintenance costs and void periods.
Gross development value approach
Lenders often use the gross development value (GDV) approach for properties that require significant refurbishment or development work. This method considers the potential future value of the property once the work has been completed.
To determine the GDV of your HMO, lenders will look at the potential rental income from the property after the work has been completed and the cost of the work itself.
Factors that can affect the value of your HMO
Several factors can affect the value of your HMO, including:
- Location: Properties in desirable areas are generally worth more than those in less desirable areas.
- Size: Larger properties with more bedrooms are usually worth more than smaller properties with fewer bedrooms.
- Condition: Properties in good condition are usually worth more than those in poor need.
- Rental income: Properties with a higher rental income are usually worth more than those with a lower rental income.
How to ensure you’re getting the best deal
To ensure you’re getting the best deal when financing your HMO, it’s essential to do your research and compare offers from different lenders. Here are some tips to help you:
- Shop around: Don’t just accept the first offer you receive. Shop around and compare offers from different lenders.
- Consider all the costs: Look beyond the interest rate and consider all the costs associated with the loan, such as arrangement fees and early repayment charges.
- Understand the terms: Ensure you fully understand the loan terms, including any restrictions or penalties.
- Use a broker: Consider using a broker to help you find the best deal. Brokers have access to a broader range of lenders and can often negotiate better rates on your behalf.
Understanding how your lender values your HMO is essential for property investors. By understanding the different methods lenders use and the factors that can affect the value of your property, you can ensure you’re getting the best deal when financing your investment.
Remember to shop around, consider all the costs, and use a broker if necessary to help you find the best deal. With the right approach, you can make your HMO investment a success.