Property Strategies (Part 4)
This week we’re going to be thinking about HMOs or Houses of Multiple Occupation. Back in the day, we would have called an HMO a bedsit – in which a number of people live together under a single roof, each with an individual room that they rent out separately. Today, this concept has become slightly more sophisticated and few decades on, there are now different levels of HMOs and different types of HMO tenants.
So, let’s think about how to structure a portfolio in order to make the maximum return on our money through HMOs.
With HMOs, the first thing to consider is your investment area because not every “area” is the same. Each area will attract a different type of tenant and not every type of tenant is going to want the same type of property.
The type of tenant that you’re going to attract will largely depend on two things: firstly, on the area itself and secondly, where within your locality you’re going to be creating your HMO.
For example, if you’re targeting nurses or doctors then you’ll be looking at setting up an HMO within reach of the local hospital. If instead you want to buy a property near a town or city centre, then then it’s highly likely that you’ll attract young professionals. Essentially, you’ll need to undertake specific local research to help you identify who might be in your HMO as each area is different.
Also, there are various levels of HMO. At the bottom of the panel, you could create an HMO for people who are on benefits. At a middle level, you could create an HMO for blue collar workers, professionals or students, and at the higher end of the panel you could create an HMO that is much like a boutique hotel or serviced accommodation. There are many different permutations so you need to be absolutely clear on what it is that you’re trying to achieve when you start out.
One of the big drawbacks of an HMO is that they’re heavily regulated and these regulations change constantly. As things stand at the moment, you need a licence for an HMO if you have 5 or more individuals sharing a property of 3 floors or more.
From October 2018, the rules are set to change again. After this date, the number of floors will become irrelevant and a property will be classed as an HMO if there are five people sharing or, if there are two or more separate households under one roof. This would then require a licence that is granted by the Local Authority.
The upside of creating an HMO is that the income can be fantastic – well, when all rooms are rented out. The downside of an HMO is that depending on your target market and where your HMO is actually located, you might find that tenants can be rather transitory. This will mean empty rooms and agents fees, and this will limit cash flow.
Another downside is that HMOs are management intensive, so my advice would be to only consider areas where you know you can find a decent agent. Whilst this does go against all received wisdom, in my opinion rather than just think about the best investment areas, property types and tenants, with this strategy you need to think about competent agents. Because, even if you uncover the best investment location in the world, if your HMO isn’t managed effectively then it’s not going to work.
Finally, let’s think about finance. One of the great benefits of an HMO is that you probably won’t be funding your property using a traditional buy to let mortgage. The whole point of an HMO is that it’s run like a little business – a little lettings business in its own entity. As such, you’ll need to approach a specialist HMO/commercial lender.
Using the right lender (combined with a valuer who understands how to value cash flow on HMO properties), you will end up with a commercial valuation that values the property not on a bricks and mortar basis, but on a cash basis resulting from the rent that’s produced.
All in all, when you know what you’re doing and have the right finance in place, HMOs can be very profitable indeed. To find out more, take a look at the video above – I go into more detail on all of this as well as the process behind applying for an HMO licence.
Here’s to successful property investing.
Peter Jones
Peter Jones B.Sc FRICS
Chartered Surveyor, author and property investor
www.ThePropertyTeacher.co.uk
By the way, I’ve rewritten and updated my best-selling e-book, The Successful Property Investor’s Strategy Workshop, which is an account of how I put together my multi-property portfolio, starting from scratch and with no money of my own, and how you can do the same. For more details please go to:
www.ThePropertyTeacher.co.uk/the-successful-property-investors-strategy-workshop
