Photo by Urban Island Property

When investing in any property, you always need to evaluate what a deal means for you. If you skip this, you’ll be building your investments on rocky foundations… With every deal, make sure you’ve considered all of the things that could go wrong, ensure the property market and location fits your overall strategy and check the numbers are attractive enough!

To find and secure the right deals for you and your HMO business, you need to understand how to evaluate and appraise HMO deals and what makes a good deal. This is very different to how you’d evaluate single buy-to-lets as there’s so much more you need to consider when it comes to HMOs. 

Ongoing cost increases are also making this even more challenging to do accurately, and this can really determine whether a deal will be successful or not… Because of this, finding, appraising and securing deals is requiring much more persistence and diligence nowadays. 

So, here’s a guide to help you understand the ins and outs of evaluating and appraising HMO deals to allow you to make more informed decisions and understand the exact details of what you should be looking for in your next investment!

Stress Test 10 Key Areas

When it comes to HMO investment, it’s not uncommon to face issues that will cost you more than you originally thought or negatively impact your investment – even at the best of times! But this is particularly challenging for HMO investors amidst the higher cost of living that’s been prevalent the past few years, so it’s important to not be too optimistic (or too pessimistic!).

As anything can happen, it’s essential that we’re prepared if costs go up even further. Because of this, we all need to stress test every single one of our HMO deals. We need to do this accurately and thoroughly before considering purchasing anything or deciding what offers to put in.

Stress testing your deals has become even more important now than it was 10 years ago. It’s incredibly easy to get caught out if you don’t do this effectively, and there are numerous areas you need to stress, which can help you see what a deal could look like under ANY circumstances, allowing you to make more informed decisions.

While you of course can’t predict everything that could happen in the future, there are ways to help you prepare for whatever ends up coming your way! To help you do this, here are the 10 points to stress test in every HMO deal appraisal!

1. Purchase Price

Factor in different potential purchase prices and see what the entire deal looks like. This is particularly important as house prices have been at high levels in recent years. Never be embarrassed about putting in a lower offer than the asking price.

2. Interest Rate

A small change in interest rates can make a substantial difference to the economics of any HMO deal. Make sure you’d be able to handle rate rises and understand how that would impact your cash flow at the back end of the deal.

3. Mortgage Loan to Value

Some lenders can insist on higher deposits to reduce their risk, so this is always something you should consider and be prepared for just in case. Keep in mind that this could also happen at the revaluation stage as well.

4. Refurbishment Costs

When doing any refurbishment, issues can arise that are beyond your control, and your contingency plan may not have allowed for them… You need to make sure the deal would still work if the price of materials and labour increased.

5. Down Valuations

At the end of the day, down valuations happen, and this also really impacts the back end of a deal. So, you need to have a contingency in place if this were to happen. This may mean you need to re-think the offer you could put in.

6. Timeframes

Naturally the longer you don’t have tenants in your property, the more money you will lose out on… This includes the time it takes to refurbish and let the rooms out. And if you’ll be borrowing funds to buy the property, the clock will be ticking!

7. Rent Prices

Rents can fluctuate and especially so as your property won’t stay looking brand new. Factor in short and long-term adjustments to your rents and assess what that means for you as HMO deals are especially sensitive to this over the long term.

8. Occupancy Rates

While it may be possible to maintain occupancy rates of 98-100% in certain circumstances, it’s too risky to rely on this. I recommend HMO investors to stress down their occupancy to around 80%, and figure out at what point the deal would stop making you money.

9. Utility Bills

If you’re offering all-inclusive rent, stress test your energy and water bills like your tenants are racking up the costs. This can be a particularly tough one to stress test as we’ve seen these costs continue to increase in recent years.

10. Maintenance Costs

Maintenance is an essential part of running a HMO business, but it’s too easy for these costs to spiral. So, make sure you’re being realistic about what your costs could be and how they could increase in the coming years.

Interpret the Numbers

After considering the different factors to stress test, it’s then key to consider what makes a good HMO deal. You need to not only be able to effectively construct a deal appraisal but also actually interpret what these numbers mean! If you’re not confident in this area, spend time understanding deal evaluations, the numbers involved and what they’re telling you about a deal. 

If you’re planning to do a refurbishment on the property, you’ll also need to think about what you want to do and what could be achievable. Start to factor all of this in, and use this information to work on fully stacking up the HMO deal.

To look at this in closer detail, you need to throw all of the information you’re looking at and collecting in a spreadsheet. Or you can use the Deal Stacker inside The HMO Roadmap and play around with different numbers and see how it impacts the deal. Our tool also allows you to stack deals side by side and track the key metrics that are most important to you!

To properly assess HMO deals, work through a few scenarios, stress the numbers and see how any changes would impact you. This will help you then pull out the purchase price. But keep in mind that you need to leave scope to negotiate as it’s often rare that a first offer is accepted. 

Once you really work on stress testing and interpreting the numbers, you’ll feel much more confident about your HMO deals – no matter what’s going on in the current market! 

Understand What the Perfect Deal Looks Like

Once you’ve gotten your head around deal evaluations, you should be able to begin to see what your perfect HMO deal looks like – and also what it doesn’t look like! 

It’s also important to consider the relationship between location, spec and rental price when it comes to HMOs and get the balance right. There can be flexibility with this, but no matter what you have to make sure you’re creating a desirable product for your target demographic.

Of course, in an ideal world we’d buy a property in the best location, create the top spec and charge the highest possible rent. But the reality is finding that kind of opportunity is incredibly difficult… So, consider these key ingredients in every HMO deal and what features you need to look out for. This will help give you a lot more scope and see where you can find value.

Start looking for exactly what you need for the perfect HMO deals. This will help you set specific search filters for your requirements, and you can contact agents and tell them what you’re looking for. Overall, this will make it so much easier to find the right HMO deals and not waste your time on deals that simply won’t work for you! 

You can then focus on doing viewings when interesting properties come up, putting in offers when it’s the right deal for you and following up and pipelining deals for the future as well. This will help you really scale up your HMO business.

Continue to Re-Assess Rising Costs & Changes

The cost of living is continuing to put a strain on the country as a whole, and HMO landlords’ costs have been going up just like everyone else’s… 

From higher energy and water bills to increasing labour and material costs, this means your costs are something that needs to be re-assessed frequently, and you need to make sure you’re not underestimating what things could cost you moving forward!

Consider all of your operating costs as well and check if there are any opportunities for you to save money on certain bills. With additional legislation and regulatory obligations on the way, we might see our costs increase even further, so we need to keep an eye out for any upcoming changes and plan for these well in advance.

Keep Learning & Expanding Your Knowledge

Even after you get the basics of evaluating and appraising HMO deals, you need to keep learning and staying informed about what’s going on across the industry and with the things that impact you and your deals.

As an HMO investor, you should be constantly trying to find ways to expand your knowledge. There is so much you need to learn in the HMO industry, and things can move and change quickly as well, making it even more challenging!

So, you might need to invest in property education to ensure you stay on top of everything. There are resources and e-learning platforms out there to help you learn more about evaluating and appraising HMO deals. This is also an area an experienced mentor could really help advise and support you on. 

Improve Your Strategy for Evaluating & Appraising HMO Deals

These are some of the things you need to make sure you’re doing to effectively evaluate and appraise HMO deals! If you’re able to do this well, you’ll be able to look out for the right deals and build and scale a very successful and sustainable HMO business.

To gain access to training and guidance to help you expertly appraise HMO deals, become a member of The HMO Roadmap! You can also gain access to documents, resources, and our deal stacker to help you with this key part of your business.

And to be a part of our community of more than 10,000 HMO investors, join us over in our free Facebook Group The HMO Community! You can start a conversation, ask your burning questions or discuss anything about investing in HMOs with our supportive and inspiring 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. 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!