Photo by Colony Living
After investing in HMOs for nearly 20 years, there are things that have almost made me quit on several occasions along the way. If you’ve been investing in property for long enough, I’m sure you’ve experienced this as well. Investing in HMOs can of course be incredibly rewarding. If you get it right, there’s huge upsides to it, but it can be really difficult at times.
Read below or listen to the full episode on The HMO Podcast for a discussion on the five biggest challenges when it comes to investing in HMOs and property as a whole! Being aware of these before you face them can help you think about what contingencies you need to put in place and how you can mitigate certain risks.
Sometimes there’s nothing you can do to remove these challenges fully, and dealing with them will require constant energy and focus. But understanding them and what you can do about them is really crucial in order to create a successful and sustainable HMO business!
1. Planning System
There are huge problems with the planning system. It really needs a complete overhaul, and as HMO investors, it can be even more difficult. There are a number of challenges when it comes to going through the planning process, but here are some of the biggest ones you’ll face when investing in HMOs!
Planning Delays
One of the main challenges with the planning system are the delays as they often take as long as the local authority likes. There are statutory timeframes they’re supposed to meet for decisions, but they often don’t and request an extension of time. And if we don’t approve of them, they’ll sometimes just flat out reject the application.
For HMO investors looking to convert houses for the use of multiple occupation, there are often many rejections from planning officers, consultants, neighbours and committee members, and it can be a really slow grind working through all of these.
Trying to push a planning application through to a successful decision can absorb so much of your time, energy and headspace. And just because you’ve seen another planning application approved somewhere else doesn’t mean much at all! So, you have to be extremely well prepared.
Anti-HMO Sentiment
People generally don’t like the idea of HMOs. Often, it’s misconstrued or an anti-student mentality, and it’s not just neighbours – it’s also political sentiment. I’ve seen in many places, especially in some cities, there’s a stereotype that HMO tenants cause more noise and are messy.
We won’t be able to change the opinions of most of the people who think like that, but we need to be aware that this anti-HMO sentiment exists. Because of this, many decisions boil down to local politics and not actual planning law….
There is meant to be a framework that if you follow, you’ll ultimately get a decision based on that. But it can be very grey and not based on logic. Some local authorities put their own spin on certain policies and how they interpret the framework to fit their own agenda.
So, be aware of this anti-HMO sentiment, especially in areas with Article 4 directions and if you’re changing use from C3 to C4. Working with a good planning consultant who has experience of similar planning applications is highly recommended to navigate the challenges of the planning system.
Application Costs & Risks
The associated costs of planning applications due to the direct impact on timelines is significant. This is really difficult to manage because planning is so often out of your control. Understand the risks that come with this and that you can follow the rules and still get nowhere.
So, having contingencies in place is an absolute must. Think about what will happen if you don’t get planning permission or don’t get the exact permissions that you want. Work through this with your architect and planning consultant.
Ideally you wouldn’t buy something unless it already has the planning permission you want. That can obviously be difficult because you’d need to negotiate with a seller that you’ll have to wait and go through the planning process before completing the purchase.
You might be able to find someone that’ll do that, which is brilliant because that significantly dampens the risk involved and keeps your costs down. But you need to be really careful with this.
2. Financial Risks
As an investor, you have to be comfortable with taking financial risks. It’s part and parcel of property investment, and investing in HMOs is particularly capital intensive. To get your business off the ground, you’ll often have to do the next deal before getting out of the last one, and your income will likely keep getting sucked back into your business
There’s a lot of financial pressure, and it’s money that you don’t have in your bank account on a day-to-day basis. So, you’ve got to find solutions to keep adding value and recycling capital.
Budgets and timelines can also over-run, refurbs can take longer and material and labour costs can increase. These challenges can really mount up, and a contingency that you might have on a project can vanish very quickly!
Additionally, surveyors can down value what you’ve created. Lenders can change their mind and pull back at the last minute if they’re not happy with something about the property, you or the market in general. Interest rates can also change, squeezing your cashflow, making the exit and term finance more difficult.
All of this can then significantly impact what you’re able to do with a project. These are the things we often don’t put in the spreadsheet, but they can be really expensive and increase risks and pressure.
Because of all of this, stress testing is so important to understand. That is exactly why we have contingencies. If you push yourself too far, that can be catastrophic. And I know lots of people that that has happened to… So, be really cautious and stay on top of this.
3. People
When investing in HMOs, there are lots of people we have to deal with. This is the area I’ve probably struggled with the most… So, what sort of people do we need to deal with and manage and what challenges come with that?
Contractors & Tradespeople
Contractors can go quiet on you, cut corners, push costs up, do a bad job or waste your time. On so many occasions, I’ve had the run-around by contractors. So, you have to do a huge amount of work upfront to make sure you get this piece right, but there’s still no absolute guarantee.
Managing contractors and tradespeople is a challenge. Make sure that when you’re working with them, they need to get your time, attention and focus. Don’t leave them to their own devices!
Make sure everything’s wrapped up in a watertight contract. There are a lot of risks and liabilities with building control, people getting injured, issues, liabilities and warranties, so you must stay on top of it all.
Business Partners
There can be challenges with people you might want to work with, and these partnerships can last for years and years. There might be people who turn out to be different than what you thought and surprise you in ways that you never thought they would.
If you’re to go into business with people, you must get the paperwork right. Spend a lot of time doing your due diligence and make sure your shareholders’ agreements and articles of association are all sorted.
A lot of people rush into partnerships because they want to achieve something quickly, but they don’t necessarily end up going into business with the right person. It’s really important that you don’t naively wander into business partnerships with people that you don’t know particularly well. It’s a financial marriage, and it’s very hard to get out of them!
Tenants
There can be all sorts of management issues that affect your income and reputation as a business owner and landlord. This includes tenants who don’t pay rent or are antisocial, and this can take up so much of your time, even if you have a managing agent!
Agents, neighbours and councils can block your progress, mislead you and drain your time, energy and bank balance. And there’s a very real emotional toll of managing expectations, resolving conflicts and having to constantly stay on top of people.
People are unpredictable, and they will test you. So, make sure you’re prepared and don’t underestimate just how much of a challenge it can be if the people that you’re surrounded by and working with make your life difficult.
4. Finding HMO Deals
This can be such a challenging part of investing in HMOs, especially in an expensive market with limited stock like we’ve had for the last few years. There seems to be an endless stream of poor stock, overvalued opportunities and completely irrelevant listings online.
There are many agents out there who simply won’t understand your investment criteria, will deliberately overhype deals or don’t even understand the difference between a license and planning permission.
How easy is it to look at things and feel like nothing’s stacked right? How many deals have you looked at that just don’t work on paper? And how easy is it to be tempted to lower your standards to get a deal done?
Learn how to consistently filter deals quickly, be sharp on your numbers and make sure that you’re prepared when the right thing comes along, especially when it comes to having your finance ready.
Finding the right HMO deals really is a volume game. Nobody wants to put all of that effort in to get so little out. But you win by having a really high standard when assessing prospective deals. Never let emotion drive your decision making, and make sure that the numbers absolutely work.
5. Ability to Stick With It
The challenges that come with investing in HMOs can be so difficult at times they can seem unsurmountable. But you’ve got to deal with whatever comes your way and find solutions to keep going.
You need to be able to think on your toes but also understand the challenges you could face before going into deals and put contingencies in place from the outset. There are a ton of really difficult scenarios you’ll have to manage, but if you plan and manage your business well, you can mitigate the chances and risks of some of this happening.
So, start thinking about what you would do in certain scenarios. Sticking with it when it’s challenging, that’s the really difficult thing. The cumulative effect on stress, waiting, delays and the feeling that you’re always fixing something is so difficult. Progress can feel very slow. It can also feel quite isolating being the one carrying so much risk and responsibility.
Being disciplined and consistent every single day while you’re juggling everything is so key. Have the right contingencies in place and fall back on them when you need to. Have the difficult conversations if that’s what you need to do. Tackle everything head on, but don’t bury your head in the sand.
You don’t have to be the most talented or have done the best deals… You just have to be the one who doesn’t stop! It’s easy to get complacent when things are going well, but good business is about what you do when things aren’t going well.
I hope this hasn’t put you off. I want to give you the confidence that despite these challenges, you can absolutely get through them and know what to do. You will experience some of these challenges, if not all of them at some point. They won’t go away, but you will get stronger and smarter.
To effectively start, scale and systemise your HMO business, sign up for The HMO Roadmap! This can help you put contingencies in place, do better deals and manage your property and business more effectively. And if you’re looking for support, guidance and advice when investing in HMOs, join our free Facebook group The HMO Community.
About the Author:
Andy Graham is the founder and the lead trainer at The HMO Roadmap! He is also the co-founder of The HMO Mastermind, writes as a regular columnist in different magazines about a variety of HMO topics and is the host of The HMO Podcast! Follow Andy on Instagram!