Highs & Lows of HMO's
The property investment market is no stranger to acronyms, and one you’ll hear bandied about a lot is ‘HMO’.
SO WHAT’S AN HMO?
An HMO is a House of Multiple Occupancy – the official definition of which is when a house is occupied by three or more people forming two or more separate households, who are sharing a kitchen and a bathroom – whether or not the tenants are on the same tenancy agreement or on separate agreements.
Most of the time, when people are talking about HMOs, they’re talking about large groups sharing – not, for instance, a married couple and one other sharer in a two bed flat. Although both are technically HMOs, management of the latter tends to be similar to just letting to two friends sharing.
SO, WHAT’S THE DIFFERENCE?
Legalities. Big groups tend to attract different regulations: for instance, for a group of five or more sharers living across three or more storeys, you’ll always need an HMO license. In different local areas you may also need a license for a smaller property, or your property might come under Article Four, which requires planning permission to convert a normal family home into an HMO – an essential box to check if you’re planning to invest in HMOs. Not game over if there is a blanket Article 4 across your intended council, but plan for the planning!
WHY ARE THEY SO POPULAR?
A multitude of reasons. Following the 2008 crash, property investors started looking for high cashflow to compensate for their flatlining capital growth, and many looked to HMOs due to the ability to rent out a property room by room – which can give a higher yield than a single let. A change in demographics in the UK has meant that more people are living alone, and fewer people can afford to rent their own flats, so more are sharing, thus increasing demand for HMOs. Changes to LHA have also meant that single people under 35 are only eligible for a room, which is forcing people into HMOs in that market as well.
CAN I GET A REAL LIFE EXAMPLE?
GREAT, I’M OFF TO BUY AN HMO!
Not so fast! If it’s so lucrative, why don’t all property investors only hold HMOs? Well, while the gross yield may be fantastic, the overheads are also higher: council tax, insurance, licensing and converting the house into an HMO are all bigger costs – plus, selling an HMO usually entails converting it back to a family home to realise its full potential.
There are also more regulations to comply with – which could change at any moment – it’s harder to obtain finance, and rates tend to be less competitive. There’s also much more work – more marketing and more tenants to deal with. It’s difficult – potentially impossible – to run a hands-off business with an HMO strategy.
Plus, it’s hard to find an agency that will manage an HMO. If they say they do, you’ll have to research them exceptionally well: the agent will make or break the success of your investment. That’s why it is always advisable to team up with someone with experience!
WHO IS AN HMO STRATEGY RIGHT FOR?
· If you want to leave your job and replace your income as quickly as possible, a portfolio of several HMOs could replace your income rapidly, allowing you to walk out of your day job in record time.
· As a way to generate cash to raise your next deposit as quickly as possible.
· If you have a big house in your portfolio that you want to work harder, turning it into an HMO could potentially make you a lot of money that would protect you from interest rate rises or other unforeseen circumstances.
· If you enjoy being hands-on, HMOs are a great strategy for you!
WHO SHOULDN’T INVEST IN AN HMO…
· People who are time poor.
· Those who want a passive investment.
· Anyone who isn’t too keen on paperwork and admin.
HOW TO DO IT RIGHT
· Know your market and your area – important in any property strategy. You’ll potentially have a higher turnover of tenants and you’ll usually have more rooms to fill, so make sure your target market is in plentiful supply. If you’re seeking young professionals, make sure you’re near employment and public transport. If you’re after the LHA market, proximity to shops and being able to walk to key amenities in town might be preferable.
· Be on top of licensing and planning – make sure there aren’t any roadblocks that you don’t know about. When looking for a specific property – think about thinks like whether it has parking. Ask yourself: is the kitchen big enough? Is it on a street where neighbours could be unhappy with lots of comings and goings?
· Stay in contact with your local council’s HMO department and stay on top of their requirements.
· Choose the right tenants – don’t fill a room without properly referencing just for the sake of the income. Think about the dynamics and personality of the house when choosing a new tenant – the less hassle caused, the better.
· Develop systems for dealing with marketing, rent collection and maintenance – you’ll be able to outsource this work if you develop good standard operating procedures.
There’s nothing hugely different about HMOs from other properties: it’s just more of everything (safety regulations, maintenance, admin, referencing…) you would usually need to do for any other property. It’s not for everyone, but for others it’s a strategy that does really work. However, going straight into an HMO as a new investor can be a baptism of fire!
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