Photo by WJF Developments
We’ve all heard it before – location, location, location. It’s of course everything when it comes to property, and this includes HMOs. If anything, location is even more important for these types of investments with certain areas being oversaturated or not enough demand for certain tenant demographics.
But not everyone really understands why location is so crucial, and very few people really think about it in the detail they need to before purchasing a property. So, let’s make sure we understand this fully! If we do, it’ll often give us a huge advantage with our investments.
There are a number of things you need to consider when it comes to choosing the right HMO investment location for you, your goals and overall strategy. In this guide, we’ll cover why location is so key, considerations to make and tips for learning the ins and outs of a HMO investment location to help you build a successful property portfolio!
Why Location Is So Key
The success of any HMO investment will depend on a number of factors with location being particularly key. For example, location determines how desirable your HMO will be, what the best rental strategy is, the profitability, long-term appreciation (or depreciation!) and supply and demand.
Of course strong demand, rent increases and drops in void periods aren’t happening everywhere… So, in order to have a sustainable HMO investment over the short, medium and long-term, you need to get the location piece right.
Not getting this spot on can mean you can’t rent your rooms out or not as frequently as you need to or for the rents you require to ensure your property is profitable, or you may need to change your strategy altogether! So, you really can’t afford to get the location wrong.
Because of this, make sure you spend time on getting the location right from the outset. And if you get it right, the rental demand can be so good that you have even stronger levels of occupancy than you account for when analysing your HMO deals.
When we talk about location, we mean narrowing this down on a very micro-level. You need to ascertain right down to the street level where your investment strategy will be the most successful. Getting the wrong street could mean your investment simply doesn’t work…
This can all be somewhat subjective and is not easy to establish, but you must commit to figuring this out. To some extent, this may mean getting on the ground, which is one of the reasons why investing closer to home is much easier.
What to Consider
There are a range of things to consider when it comes to landing on a location for your HMO investment strategy, whether it’s your first or next purchase!
Tenant Type
To choose the right HMO investment location, you’ll need to first figure out what type of tenant you wish to build your investment strategy around or to prioritise. So, start by deciding whether you’ll invest in student, professional or social HMOs.
There are pros and cons for each and certain locations naturally suit specific demographics, so you’ll need to understand the locations your prospective tenants want to live in, which will allow you to attract the right tenants to your properties.
Your Circumstances & Goals
What location is best for you will also depend on your own personal circumstances and goals. All of our goals and objectives will be quite different and will impact where we each should invest individually. You might want to prioritise earning cash flow or capital gains or a solid mix of the two.
Additionally, we all naturally have different levels of financial resources, time and experience at play. You need to be careful as these will all directly impact the performance of a HMO deal in a specific location.
Investing closer to home is naturally much simpler. If you invest further afield, you need to factor in the cost and time of travelling.Also, consider if you have the finances required to undertake a larger development or are you better suited to a smaller HMO project. And do you have the skills, time and experience to manage your HMOs yourself or will you need to hire an agent?
Population
One of the big things you must understand is the population data in the area you’re interested in investing in. What are the data and stats telling you? What information can you get your hands on that gives you the confidence to invest there? For starters, look into how many people are actually living in that specific location that need accommodation like the one you’re proposing to develop.
You need to be able to confidently construct a narrative that supports your business plan, and the more you know about the local population, the more confident you can be in your investment location and any decisions you make!
Property Prices
Another important consideration is where the market is at in terms of average house prices. Look at recent sales price data going back at least six months. Have there been any substantial changes? HM Land Registry is a great resource for sales price data.
Generally speaking, the further north you go, the cheaper the property values tend to be. So, if you invest in the North of England, you can often stretch your capital further. However, that’s not always the case in prime city centre locations. At the same time, rental values are usually higher in the South. With higher value areas, you can often find more opportunities to create additional value too.
You also need to consider your other costs as there can be regional variations in those. So, property prices and the differences in these regionally need to be considered and assessed to help you pick the right location for your personal and financial circumstances.
Proximity to Amenities
Proximity to amenities that are important to your target demographic is key for the success of your investment, such as being near a university, employers or transport links.
If you’re investing in student or professional HMOs, this often can help dial down the exact investment location as you’ll likely need to be near a university, large employers or at least close to transport links to get your tenants to those locations.
Growth Prospects
New infrastructure and regeneration plans locally will help ensure you buy in an area that’s more likely to see capital appreciation. A locations’ proximity to appealing amenities, especially parks and transport links, and any new developments could mean you’re more likely to reap the rewards of capital appreciation over time.
If there are several exciting developments happening in the local area, then property values could increase. When investing in HMOs, investors need to have a mid-to-long-term view, especially as the benefits of the HMO strategy go well beyond the short-term cash flow that you can achieve.
You’ll ideally want to invest in properties that have both good cash flow and the potential to increase in value in the future. This will help you multiply your equity and really scale up your portfolio!
Demand v Supply
Supply and demand can always fluctuate, so it’s another important area that you’ll need to keep up to date with. Check if demand is remaining strong among your target tenants within the area you’re interested in investing in. Also, what is supply like? Is it keeping up with demand?
Some areas in the UK have become oversaturated with HMOs! This can lead to increased landlord competition and lower rental yields, so you need to make sure wherever you invest in has sustainable demand.
Local Regulations
There are other things on the ground level of a location that’ll impact a HMO investment, such as local regulations, so this is important to understand for any location you’re interested in investing in.
For instance, there could be an Article 4 direction in place, and there may be different licensing requirements as this varies regionally. This can impact whether a HMO property could be profitable in this location and how complex (and expensive) it is to create and run a HMO there!
So, make sure you research whether any legislative changes have or could come into effect in the area in the near future. This includes Article 4 directions and selective or additional licensing schemes. If there could be any changes afoot, this needs to be factored into your investment plans and decision making on what location will work for you to invest in.
Tips for Learning the Ins and Outs of a Location
1. Become an Expert on the Local Area
Because of how important location is, it’s essential to become an expert on the locations you invest in and understand all of the ins and outs of the local HMO market in particular. What is the competition doing? What is the rental strategy profitability and long-term prospects?
SpareRoom is a great place to start as it has a vast amount of figures that can help you understand the competition and supply and demand in a specific location. The platform can help you understand your local HMO market and how to attract the right tenants to your properties. So, nerd out over the data and stay on top of this even after getting your HMO up and running!
2. Think About Your Tenants
Spend time understanding the wants and needs of your target tenant demographic and then move on to finding suitable locations. Really do your research and find a location that works for them, not for you!
A good business owner should always understand what their customers want and need. From a tenants’ point of view, location, budget and value for money are nearly always the top priorities, so always keep that in mind.
I know investors who have developed some of the most incredible HMO properties, but the location put people off! On the other hand, I know people who have bought in the very best locations but spent too much in the process and haven’t been able to achieve the rents they needed because there is better value accommodation available elsewhere. So, make sure you always think about your tenants first.
3. Make a Plan
Whether a HMO deal is in the best location or the right investment or not will differ for every investor. To be able to answer it accurately, you should understand a few things, including:
- What’s happening on a granular level in different locations
- What your current limitations, strengths and weakness are
- The risks and sacrifices you’re prepared to take
- What you’re prepared to compromise on and what you’re not
If you find this overwhelming or confusing, this might be because you don’t know what you want to achieve. With HMO investment, you need to have very clear and specific objectives you can work towards.
Once you have that, start to work backwards and reverse engineer how you’ll get there. With that, you can then build a business plan and investment strategy that’ll help you get to where you want to go and will give you clarity on what you’re wanting and needing to achieve. Once you’ve done that, only then can you determine the best location for you to invest in!
4. Continue to Reassess Investment Location
Even after you invest in a property, you need to keep an eye on not just what’s happening in that location now but also what could change in the future.
So, as you grow your HMO portfolio, reassess the location, including local sales and rental prices, property types, supply and demand, legislation and profitability and compare that to what you’re trying to get out of your HMO deals.
Is the location still allowing you to do that? It’s great if so! But if not, you might need to change your strategy or look at a different location or type of property.
Picking Your HMO Investment Location
Investing in property is an art form not a science! Try not to get blinkered by pound signs, remember you are looking for a HMO location that’ll be sustainable over the long-term. You might not be able to tick every box on day one with your HMO investment, but if you can grow into your market instead of out of it, you’ll have a much more profitable business moving forward.
Keep in mind that there’s no silver bullet location that’s right for every HMO investor, so don’t worry about what other people are thinking and doing – just do what’s right for you and your circumstances.
To access training and resources to help you choose your ideal HMO investment location, sign up for The HMO Roadmap today! You can also gain access to case studies across the UK and worksheets to help you dial in on a location. If you have any questions or would like to discuss anything about HMO investment with experienced investors, join us over in 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!