HMO Valuation Based On Rent

An HMO valuation based on rent, known as a Market Value 1 (MV1) valuation, values a House in Multiple Occupation on the rental income it generates rather than on comparable property sales. Because this yield-based approach measures the income-producing ability of the asset, it can produce a higher valuation than a standard comparable or hybrid method on the same property.

The valuation method is the lender's decision, based on whether the property and the case qualify. Lenders assess rental income, tenant structure, property layout, licensing status and the sustainability of the income before agreeing that a yield-based valuation is appropriate.

Mortgage Lane arranges HMO mortgages where the valuation method decides the loan structure, identifying lenders and valuers whose criteria support income-based MV1 valuations.

What does an HMO need to qualify for a valuation based on rent?

En-suites to each room, or most rooms, are the first of four features a lender typically looks for before agreeing an MV1 valuation based on rent. Rooms with en-suite bathrooms command higher rents, and a property configured that way evidences the income the yield-based method relies on.

The property also needs adequate communal living space for the tenants, such as living rooms and kitchens, for the rental income to be treated as sustainable.

It should be extensively adapted for HMO use and not easily converted back to a family home, to the point where reverting it to a standard family home would be difficult. That ties the property's value to its rental income rather than to the surrounding housing market.

The property also needs enough bedrooms. Each lender sets its own minimum for a valuation based on rent, often five or more bedrooms, so whether a five-bed HMO qualifies depends on the lender, and properties with six or more bedrooms can see greater valuation uplifts.

A property that misses these criteria can still be mortgaged. It is likely to be valued on a comparable or hybrid basis instead, which usually produces a lower figure.

Why an HMO valuation based on rent is worth pursuing

Because the MV1 method values the property on the income it generates, a well-adapted HMO can achieve a higher figure than a comparable or hybrid valuation, which do not price the rental yield.

A higher valuation supported by evidenced rental income also makes the asset more attractive to investors seeking strong yields, which matters at exit as well as at purchase.

On the financing side, a higher valuation supports a larger loan and can support more favourable terms, because the loan-to-value sits lower against the yield-based figure than it would against a bricks and mortar figure.

Yield-based methods versus comparable and hybrid valuations

A comparable valuation prices an HMO against similar property sales in the area, while a yield-based valuation prices it as an income-generating asset, and the two can produce very different figures on the same building.

Comparable and hybrid methods suit standard residential property, where market value is set by what similar homes sell for. An extensively adapted HMO is different: its value to the owner is the income stream, which the yield-based method captures, so on a heavily adapted, high-income HMO the method chosen can decide whether the loan amount works.

Does an MV1 valuation need C4 planning?

No. An MV1 valuation is not limited to C4 HMOs: lenders offering it consider small and large HMOs alike, provided the HMO use is lawful. In England, an HMO with three to six occupants falls within use class C4, and one with seven or more occupants is sui generis and normally needs planning permission for that use. Because the properties that gain most from a valuation based on rent are often the larger ones, many MV1 cases are sui generis HMOs.

Lenders need evidence that the HMO use is lawful, and the planning position differs by type: for a C4 HMO, planning permission where an Article 4 direction applies, or a Certificate of Lawful Use where the HMO use predates the direction, and for a sui generis HMO, a planning decision notice for that use or a Certificate of Lawful Use. The planning and licensing detail for each valuation route is on our HMO mortgage valuations page.

HMO Valuation Based On Rent: frequently asked questions