There is a growing understanding amongst landlords of what is achievable from diversifying their portfolio with varying property types.
While initial forays into property investment by landlord borrowers tend to be very residential specific, with traditional houses/flats being purchased, as time moves on landlord confidence grows.
We see that very clearly in the business we write at Foundation Home Loans, and the landlord borrowers we service, particularly as they become acutely aware of the need for further diversification in order to improve yield, grow profitability and mitigate any potential risk in their portfolios.
That is a clear strategy for many landlords, and it’s one that specialist lenders like ourselves are increasingly able to support, providing flexibility in terms of the specialist property types we will lend on, and what we are willing to accept from a borrower point of view.
How do landlords diversify their portfolios and how can advisors support them?
Understandably, landlords tend to look at property types outside their most recent norm, particularly HMOs and MUFBs, which clearly come in a variety of guises and a variety of sizes.
They will also look at the different types of rentals possible and the properties required.
Specifically, student lets in your large university/college areas, holiday lets in parts of the country which benefit from seasonal tourism, and indeed short-term lets where no assured shorthold tenancy (AST) is required.
Interestingly, and this is often a point that gets overlooked when eyeing up HMOs and MUFBs, there are a whole host of properties across the country which we would deem ‘hybrid’ meaning a mix of the two.
As a lender we feel it’s important that we also accept these, not least because you might suggest there is double the property-type risk-mitigation here, with the landlord active in two, often distinct, parts of the rental market.
However, in this case they are combined.
Of course, when it comes to diversifying portfolios, landlords don’t just have the option of residential specialist property types as outlined above.
They can also look at those with another type of ‘hybrid element’, namely properties that straddle residential and commercial, in order to mitigate that risk even further.
The semi-commercial/mixed-use property option is an increasingly attractive one, particularly for those landlords who might sense they are currently residential-heavy.
Indeed, this could be seen as a natural step for diversification, combining their existing residential know-how with an interest in commercial, before perhaps opting to look at fully commercial property investments later down the line.
Semi-commercial combines the residential and commercial element, perhaps in terms of a retail operation with residential flats above it.
When we review lending on these, we look at the residential part of the property, which traditionally has been in excess of 60% of the total property in terms of rental income achievable and the overall valuation, however in certain cases we are able to work on cases which flip this to 60% commercial/40% residential.
On top of this we have our new property plus and HMO plus products which allow us to consider both HMOs and a broader range of commercially adjacent premises, so not just flats above shops but also locations near business units, investor-only areas, and those affected by postcode concentration rules.
Again, it will depend on a number of factors, but those options are available, and given there are no limits on the size or value of the existing portfolio held with other lenders, this should be viewed as a viable option for those landlords who are perhaps looking for a ‘best of both worlds’ rental investment opportunity.
Overall, therefore, we undoubtedly are seeing more and more landlord borrowers looking to expand their portfolios.
They are sensing now is the right time for a level of diversification in order to benefit from forays into more specialist property types, particularly to secure higher rental yields, tap into the growing tenant demand, and to look at how they might add a semi-commercial option to their portfolios.
As advisers it’s important to understand where this demand is coming from, and what finance solutions are available for these acquisitive and expansive landlord borrowers.
By doing so, you are likely to keep hold of this client throughout their portfolio-growing journey.
