The case FOR HMOs
Wednesday 27 September 2017
I think that investing in HMOs – Houses in Multiple Occupation - can be a great investment strategy, but there’s no doubt you have to know what you’re doing.
My list of pros may not look long, but they’re the bottom line for any landlord:
In the simplest terms, with an HMO you’re paying for one house, but with more paying tenants in one space, that single property will make you at least double the profit. That means you can buy less houses and make more money from the ones you have.
There’s a demand for this sort of property – particularly amongst students and young professionals. If you pick the right city, with the right university or big industries/companies, then you’re onto a winner.
Many new, accidental or part time landlords shy away from renovation projects, but this is where there’s profit if you’ve got the vision, skills, team and time to take it on. There are properties out there ripe for extension and conversion – and it doesn’t need to cost the earth. You’re looking for a practical finish on a practical space, and as fast a turnaround as possible.
So far, so simple. But HMOs aren’t your run-of-the-mill buy-to-let. There are plenty of cons, and you have to go into any HMO investment with your eyes wide open.
Do your research up front. If student housing in your chosen University town is dominated by big investors with huge, purpose build halls of residence, there won’t be much of a market for you. Get it wrong, and it could be costly.
You’ve also got to remember that HMOs come with more rules and regulations than a simple, single tenancy property. Those rules and regulations will vary depending on your Local Authority area, and are always changing. Don’t be caught out, because you’ll face a hefty fine. Again, research is key.
Turn around – particularly for professional tenants – can be high, and sap your time and profit. Vetting is crucial, and ensuring your tenants are a good fit means you’ll get a happier, and ultimately more profitable property. If you can’t be hands on and proactive in managing occupancy and issues - or can’t get an agency to be hands on for you - HMOs are not for you.
Your utility bills will also be higher – and you need to factor this in carefully to your figures. You’re also more likely to spend more on maintenance, and cleaning/sprucing between tenants. Wear and tear on your appliances and communal areas will be greater. Insurance will be more expensive, especially if you’ve got extra sinks or kettles in each room. And insurance extras will be more important – for instance accidental and malicious damage cover.
An HMO is not going to work in a rural village. Look for towns and streets with other HMOs, and look at the going rates and demand for similar properties. Transport links and local ameniaties are also key, and you can get town planning information from local councils to help you identify up and coming areas. If you’re targeting students, talk to the University about popular areas for their students, and get on their housing lists.
When you’re looking at properties think about where there’s room to add rooms – for instance by converting a downstairs reception room into a bedroom, or adding another WC. Check local regulations to make sure each room is the required size, including the kitchen, which needs to be a certain number of square metres per resident. Get a team you trust around you, and take your builder with you on your second viewing.
I’ve seen things go wrong when people invest in the wrong area – a student property on the wrong side of town for instance. I’ve also seen people invest in the wrong property – something that doesn’t meet local standards or dimensions. But even if you’ve got this right, HMOs come with other risks.
More tenants and more rules mean you need to be more organised. Spend time setting up your systems - so you’ve got records of all your applications, references, safety certificates, insurance policies, white goods details, utility deadlines, etc etc. If you don’t set up properly you could miss something - and it could prove expensive.
One bad tenant can bring down your whole HMO. Try and house compatible people – mixing professionals with students probably isn’t going to work, for instance. You need to run in-depth references, and in the case of students consider using parents as guarantors. I also get my managing agents to do random checks to make sure the tenants are being safe eg. not smoking in the properties, turning off appliances, not obstructing doorways etc.
One of the biggest pitfalls I’ve seen people fall into is not keeping an eye on the bills – especially gas and electric in the winter. Invest in timers, and put a clause in your tenancy agreement which states if the bills go over a certain amount the tenant is liable to pay.
HMO properties can take a bit of a beating, and regular inspections are vital. Consider introducing a cleaning rota, or investing in a cleaner for communal areas so things like mould in the bathroom don’t become an expensive leak down the line. Minor damage or neglect can become a major and expensive problem if you’re not on top it and it could potentially void your insurance policy.
Summary: Top tips
- Do your research.
- Talk to the local council.
- Follow the rules to the letter – and beyond.
- Don’t be afraid of renovation work.
- Run detailed references.
- Inspect 4-6 times a year.
- Monitor bills.
- Get a great team around you – from agents to builders, plumbers to cleaners.
- Keep up to date records.
HMOs are a great investment if you’ve got all your ducks in a row. Start off small with a cheaper test property – possibly with just 3-4 bedrooms. Once you’ve got a formula and systems that work, a team around you and some experience under your belt, you can take on your next property. It’s like a cookie cutter – just repeat and repeat what’s worked.
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