Photo by Urban Island Property

There’s been a rise in first-time investors entering the HMO sector as more people are seeing and understanding the benefits of HMO property investment, particularly over single buy-to-lets. 

While there are a lot of advantages to investing in HMOs, there’s still a lot to think about when getting started in this type of investment. So, here’s a step-by-step guide detailing what you need to do to effectively start a HMO on solid foundations!

1. Understand What’s Involved with HMO Investment

For starters, as HMOs operate differently than other property investments, it’s important to ensure you understand the key differences before you purchase your first property. There are additional things you need to be aware of, and how you approach your investments should be different as well. 

Start by investing in HMO property education to help you understand all of the HMO basics from finding, funding, refurbing, filling and managing HMOs. You’ll also need to understand the HMO market in detail and the location you’re looking to invest in. 

2. Create a Compliant Business Structure

Before you can get started, your HMO business will need to be set up in the right way with registration from the appropriate bodies. You have to set up your company structure in the right way and make sure that you’re compliant from the outset.

Complying with regulations is an extremely big part of any type of property investment, and the HMO market comes with additional legislation. HMO investors need to know the relevant regulations locally and nationally, keep up to speed on all of those and make sure you follow them in the right way.

Getting planning regulations, building control, HMO licences, Article 4 directions and lots of other things wrong can be absolutely catastrophic to the success of your HMOs. And keep in mind that national and local guidelines can often be very different and come with lots of grey areas.

Ensure you’re also completely aware of how big the implications are of not having a compliant HMO business. It could cost a huge amount of money and reputational damage, and it could mean that your investment won’t work at all!

3. Learn How to Appraise HMO Deals

You need to be able to appraise deals effectively to be successful when starting a HMO. And this is different to how you’d appraise single BTLs or other property investments as there is more you need to consider when it comes to HMOs.

With HMO investment, you can expect to face problems that’ll cost you more than you originally expected – even at the best of times. And this is an especially difficult challenge for new HMO investors. Anything can happen, so it’s crucial that we’re prepared in case costs increase.

Because of this, you should stress test all of your HMO deals thoroughly before considering purchasing anything or deciding what offer to put in. This is even more important now than it was a decade ago. And it’s super easy to get caught out if you don’t effectively analyse and stress test your deals.

There are numerous areas you need to stress to help you see what a deal could look like under ANY circumstances, including:

• Purchase price
• Interest rate
• Refurb costs
• Down valuations
• Mortgage LTV
• Occupancy rates
• Rental achievement
• Utility bills
• Maintenance costs

You can throw all of this information into a spreadsheet. Or you can use the deal stacker inside The HMO Roadmap and easily play around with them. Once you understand how to stress these 10 points, you’ll start to feel way more confident about what you need to look for in your first HMO!

4. Access Working Capital

To get your business up and off the ground, you’ll need to access working capital. The amount needed to purchase your first HMO will depend on your investment strategy, what kind of property you’re looking to purchase and the HMO you’re wanting to create.

If you’re looking to start and scale a HMO portfolio, the more capital you can get your hands on, the quicker you’ll be able to grow. You’ll be able to purchase more HMO deals, undertake more refurbishments and invest in more infrastructure in your business.

It’s also important to be aware of the other ways you can finance and fund your HMOs, such as utilising mortgages, raising private finance and recycling capital. If you can tap into all of the different ways to fund your properties and refurbishments, financing your deals will not be an issue! 

This will give you the foundation to be able to act on the right opportunities when they crop up, which will allow you to grow your HMO portfolio much more quickly, and it helps ensure you won’t miss out on good HMO deals that come your way.

5. Get the Paperwork Right

Before you get started, you’ll also need to invest in the right kind of paperwork and agreements. You’ll naturally need tenancy agreements to start up a HMO, and the legalities around them are very complicated. There are different places you can get these, but so many aren’t specific for HMO properties. So, you need to be careful with what tenancy agreements you use.

If you plan to invest in more than one type of HMO, like student and professional lets, you’ll need two different types of tenancy agreements as they’re quite different with a range of varying considerations.

If you’d like to see a copy of my tenancy agreements and use them as a template for your own properties, head over to TheHMORoadmap.co.uk and sign up for the premium subscription.

 

6. Become an Expert on Legislation

There’s a ton of legislation and regulations governing what you can or cannot do and what you must or must not do when it comes to letting and managing properties, and there are additional laws with HMOs.

This isn’t the most exciting part of property investment, but you must understand your additional legal obligations and legislation as a HMO investor. When it comes to investing in HMOs, there’s so much you need to adhere to. So, spend time learning about this and getting it right.

Because of this, it’s crucial to learn your obligations before getting started, particularly as getting this wrong can have big consequences! This will become even more challenging with more incoming legislation, such as the Renters Rights Bill.

7. Set Up Systems & Processes

Before you start letting out rooms, it can be helpful to have systems and processes written down. This helps provide accountability and ensures standards are being maintained when it comes to managing your HMO or dealing with phone calls and emails.

Implementing systems involves pulling all of the pieces together on how to deliver specific tasks. Writing these down on paper allows you to have a process that can be followed. Systems also help ensure that tasks are done consistently and to the right standard and provide a way to hold yourself accountable.

To get a HMO up and running, it can also be helpful to create a checklist to help ensure you don’t miss meeting any of the standards you need to meet and documentation you need to provide. This can help make sure you pull everything required together. 

8. Look For the Right Properties

To get started with HMO investment, you need to know how to find the right property, what investment strategy is right for you, and the different ways to source HMOs. Firstly, consider what you really want to get out of HMO property investment.

Then, start thinking about what kind of HMO is right for you and how that aligns with your short and long-term objectives. Will you be investing in student, professional or social HMOs? They all have their own unique set of advantages and disadvantages, so take the time to understand these.

Once you decide what type of HMO you want to invest in, you can then start looking at different locations and property sizes. It’s all about picking the right location and the type of property to attract your target tenants. Dial down the exact investment location, including the proximity to amenities, transport links and employers.

You also need to know what size property you’ll need for the size of HMO you want to create. What types of floor plans will be conducive for your strategy? You need to start to really understand the details of what you’re looking for! Once you know in detail what you’re looking for, you can then start looking for properties. 

9. Figure Out Refurbishments

Another key area is understanding what’s involved in planning and undertaking a HMO refurbishment, and this includes transforming a property, setting budgets, putting contingencies in place, estimating timeframes and mitigating risks. Look at what the competition is doing and figure out what’s appealing to your target tenant.

This is all crucial in making sure that the end result of your refurbishment is as close to where you want and need it to be. Always proceed with caution in the planning stages, but don’t forget to build some contingencies to help prepare you for mistakes or anything that might crop up!

10. Fill Your Rooms

Knowing how to fill your rooms with the right tenants is another crucial part of getting started in investing in HMOs. But it can be difficult to keep up with filling your rooms, arranging viewings and converting them into tenancies over time, especially if you invest in professional HMOs.

You could end up spending hours on managing enquiries only to find out that they’re not the right tenants, and this could then in turn cost you money as your rooms sit empty! You also need to get your adverts right with the title, copy and photos all needing to be spot on and effective in capturing your prospective tenants’ attention. 

It’s also essential that you reply to enquiries quickly. We recommend aiming to answer ALL enquiries within 15 minutes and offering viewings within 48 hours of their first contact wherever possible.

So, set up systems to allow yourself to reply as fast as possible. If you don’t, other landlords will likely beat you to it, and you can then lose out on great prospective tenants! Also, master using SpareRoom, and create a great tenant matching strategy.

11. Get Support

There are numerous ways you can get the support you need when it comes to managing your first HMO property. The ongoing challenges and upcoming changes will make it more difficult to deal with everything on your own. A team of experts can be particularly helpful to give you the confidence you need in different parts of HMO investment.

However, there are still plenty of opportunities for HMO landlords as long as you have the right support. There are professionals who provide key services that can help you manage your portfolio, including a managing agent (if you’re not going to self manage).

So, work on building a power team with the right professionals. This will allow you to remain compliant and can even help you provide a top-notch service offering. You’ll also be better placed to deal with the upcoming changes hitting the industry and allow you to create a more sustainable HMO business overall.

Having a strong power team is essential as it’s impossible to do everything on your own! We have highly recommended partner HMO services to help support you at every stage of your journey from award-winning property management software and virtual assistants to architects and designers.

For all of the training, advice, and resources you need to start a HMO, become a member of The HMO Roadmap! And if you want access to useful templates, spreadsheets and documents to help really scale your HMO portfolio, sign up for the premium subscription. To be a part of our growing community of HMO investors, you can also 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 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!