Photo by Innova Property

Are you at the beginning of your HMO property investment journey but feeling unsure and overwhelmed?

Read below or listen to the full episode on The HMO Podcast for the six most important things you need to nail if you’re just getting started with HMOs. These steps are crucial for building a strong foundation and setting yourself up for success!

This is a high-level overview, so to really master each aspect, you’ll need to dig deeper and explore more resources to fine-tune your HMO property investment strategy. You can find resources and tools on these topics in The HMO Roadmap.

1. Thoroughly Understand the HMO Strategy

There’s a lot of confusion between what a HMO, HMO licensing, and Article 4 directions are. So, it’s really important that you understand the strategy in detail and what you want to get out of the model.

You’ll need to understand the different types of HMOs as they all behave differently, and consider why you might invest in social, professional, or student strategies. So, before you look at buying any properties, understand what you’re looking for and why. 

But of course, what strategy is right for you depends on your experience, the amount of capital you have, your objectives, and your short and longer-term goals. Until you really know and understand what your strategy is, don’t try and buy anything! Create a plan, and then stick to it. You will then be able to do exactly what you need incredibly efficiently. 

2. Find the Right Property

It’s important to know how to find the right property and understand the different strategies to source or acquire HMOs. Before you even think about how to do this, you need to know the details of what you’re looking for really specifically.

Dial down the exact investment location and size of the property that you’re looking for, including the proximity to amenities, transport links, and employers. You also need to know the types of floor plans that’ll be conducive for your strategy. You may be looking for things where you can really add value through loft or garage conversions. 

Once you know what you’re looking for in detail, you can then start looking at properties. The easiest way to do this is through working with local estate agents as they hold the keys for most of the properties out there. 

It’s possible to find properties off-market. You can do that through direct-to-vendor marketing or by working with a sourcer, but you could be waiting months to secure a property or even longer! You could also find properties via auctions, but this can be difficult for those just starting out.

So, start by focusing on building and nurturing relationships with local agents. Arrange viewings, have conversations, provide feedback, put offers in – even if you know it’s not going to get accepted – and be honest about why that’s your offer. They might come back to you or have another property they could show you.

3. Understand Legal Requirements & Planning Permissions for HMOs

The HMO industry is a complicated sector, and a lot of new investors don’t fully grasp the legal requirements and planning permissions related to this. If you don’t understand this part of HMO investment, there’s a real risk that you’ll buy something that isn’t compliant, wasting you tens of thousands of pounds, and possibly more!

Over the last five years, HMO licensing standards have changed, and councils employ different standards. Additionally, something that is licensed today, may not be licensable when it comes up for renewal and you’re assessed against the new criteria. 

When spec-ing out a refurb, you need to know exactly what the licence requirements are. Amenity standards and bedroom sizes will heavily impact what it’ll cost to refurb the property. And even if your HMO isn’t required to have a licence, there are still requirements you need to consider. 

On top of that, Article 4 directions are really important to understand. Where in your investment location are Article 4 directions in place and are there opportunities on the edges of these areas? It’s also important to understand how Article 4 directions impact costs and commercial valuations.

4. Fund Your Properties

Another very crucial area is understanding the importance of financing your HMOs and the different strategies to do this. If you get this right, you can keep buying and refurbishing properties. As long as you do this and know what and where to buy, you can build and scale your portfolio quickly!

There are lots of options when it comes to buying HMOs, such as various financing options from the high street, bridging loans, specialist HMO mortgage products, and private investment. You can even use a mix of investment and backed finance.

However, be aware that lenders have different requirements. Sometimes you’ll be more heavily scrutinised if you’ve borrowed from an investor, while other lenders won’t care. It also depends on what you’re proposing to do, whether you’re doing a refurbishment or structural work, and your level of experience. 

At the back-end, your valuations and refinancing will be a really key part of your strategy, particularly if you want to recycle cash out. You need to know what’s involved with that, how you can access commercial valuations, and ways to max out the value at the back-end so you can get your money back out and go again. 

Different lenders, licensing requirements, property sizes, locations, types of tenants, and Article 4 directions all play a role here. So, make sure you understand the basics of HMO financing. Your goal should be to have a constant supply of funding through private investment, recycled capital, cash in-flow from HMOs, and anything else you can save up.

5. Renovation and Conversion Strategies for HMOs

This is the area that beginner HMO investors usually struggle with the most. It’s really difficult to look at a property and have a good idea of what it’s going to cost to refurb it if you don’t have experience with this!

I personally like to buy the same sorts of properties, so I can get within 5% of my budget every single time. But of course, that takes experience. Without that, how can you possibly expect yourself to be able to do that? The truth is you’re going to need some help with understanding the cost of a range of things, such as: 

• Updating electrics and plumbing
• Adding ensuites
• Updating flooring
• Re-roofing a house
• Adding a new kitchen

Don’t beat yourself up too much on this. Refurbishments will be a bit of a question mark, and you’ve got to build that into your model. Most people underestimate these costs. If you’re doing a full back-to-brick refurb, you could end up spending around £100k. 

You can of course do refurbishments on far less, especially if you’re doing cosmetic refurbs where you’re changing the furniture, lightly upgrading the kitchen, or changing one or two of the bathrooms. But with cosmetic refurbs, you’ll find it much more difficult to add value. 

No matter what, you need to be practical and realistic about the cost of whatever work you’re planning. And it’s helpful to learn how to effectively execute low budget refurbs. Even with £10k to £15k, you could find ways to push up the rent. But it’s more challenging to push up the value of the property if you’re not fundamentally making any changes. 

If you sign up for The HMO Roadmap, you’ll have access to 60 case studies from experienced HMO investors. You’ll be able to read about refurb costs, see before and after photos, and learn about the common challenges when undergoing refurbishments and conversions.

6. Find Tenants and Manage HMOs

Before you buy anything, you also need to know how you’ll find and manage tenants. If you’re investing in a prime city centre area with a university and big employers, you’ll likely find it easy to advertise to tenants and fill your rooms. 

If you’re investing in a smaller town or a more peripheral location that’s up and coming, you need to factor this in. It might not be as easy to keep your rooms filled, so think about what you might need to make adjustments or incentivise tenants to live there. 

But if your property is on the wrong side of the city, even if it’s quite close to the centre or campus, tenants won’t want to live there. So, no matter how good you make the property, you may struggle. You’ll probably have to compromise on the rent you charge. That might then change the parameter of your deal entirely, so you need to get this right. 

Also, think about who will manage the property. If you’re going to self-manage it, you need to be really prepared because how good you’re at managing properties will impact how much money you make. 

If you’re going to rely on somebody else to manage it, you need to give this a lot of thought, particularly if you’re investing in social or professional HMOs. You need to make sure the managing agent is very experienced and reliable!

Those are the six key things that will help you build a strong foundation when investing in your first HMO property. You need to be prepared to put the work in on these areas. If you absolutely nail these, you’ll feel more confident, it’ll be more enjoyable, and you’ll be able to buy HMOs more successfully!

If you want to learn more about these areas of HMO investment, all of this detail is covered in The HMO Roadmap. And if you want to discuss anything about investing in HMOs, come over to 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!