Photo by Urban Island Property
As starting and building a HMO portfolio is so capital intensive, you need to understand how you will continue to fund your investments throughout 2025 and the coming years. We’re almost always going to face challenges with not having enough cash… So, how will you keep finding the cash you need to buy your next property or do another refurbishment?
Funding will be an extremely key part of every HMO portfolio in 2025 and beyond. It’s essential as HMO investors that we take the time to understand all of the funding options available to us and how we can master this area – no matter what the economic climate is!
There are lots to think about when it comes to funding your HMO portfolio. So, here we’ll guide you through the different ways to keep getting the cash to buy your next property and refurbish your next project! We’ll also include tips to help you take your funding strategy to the next level.
1. Nail Your Numbers
Knowing your numbers in and out is a really crucial aspect of any funding strategy! Start by perfecting your deal analysis. It’s important to thoroughly understand what your HMO deals and properties should look like, in addition to the maths behind them.
You of course need to be able to effectively construct a deal appraisal, but you also must be able to interpret what the numbers actually mean. You also need to be able to input figures and make assumptions with a certain degree of accuracy on bills, refurbishment costs and the average occupancy level.
Understand the Principles of Investing & Good Benchmarks
If you don’t understand the basic principles of investing in property and good benchmarks for HMO deals, spend time researching this area. You need to know what the different metrics mean, how they relate to one another and what they’re informing you about the performance of a deal.
You have to have the confidence to be able to do this, so make sure you spend time learning about the different factors and costs, and account for potential worst-case scenarios if your costs or interest rates were to increase substantially. Anything can happen so stress test all of your deals thoroughly before purchasing anything!
If you need help constructing an appraisal and interpreting what the numbers mean, you may want to create a spreadsheet, or you can use our ‘deal performance stacker’ inside The HMO Roadmap, which will show you the performance of prospective HMO deals.
2. Understand Your Funding Options
It’s essential to be aware of the different ways you can finance and fund your HMO portfolio, and if you want to scale your business, this will be an extremely key area to develop. Work on creating a plan for getting more finance in place moving forward, and set goals and tasks to help you grow this in the short, medium and long-term.
If you can tap into all of the different ways to fund your properties and refurbishments, financing your deals will no longer 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!
Utilise a Mix of Funding Options
You may plan to access HMO mortgages, raise private finance or recycle capital. And more likely than not, if you’re planning to really scale up your business, you’ll want to use a mix of all of these!
There are certain things to be aware of to best utilise each form of funding, and we’ll talk about these in further detail below. Then, you can put a strategy together to build up each type of funding and set actionable steps to help you scale this up. Write this down on paper so you can refer back to it and hold yourself accountable moving forward.
3. Access HMO Mortgages
Using HMO mortgages allows you to purchase properties worth more than the cash you put in up front. This can help you increase the speed in which you can buy properties, undertake refurbs and grow your business, meaning you can make your money work so much harder. Don’t underestimate the value of mortgages when building a property business!
When it comes to mortgage deals, it’s important to choose the right product and lender for your individual needs and circumstances. And often this doesn’t necessarily mean the deal with simply the lowest rate on offer. There can be extra costs with certain deals that mean the product with the lowest rate isn’t actually the cheapest option for you.
Improving Your Mortgage Application
If using mortgages is part of your funding strategy, work on getting yourself in as lendable of a position as possible and have certain key documentation together. Additionally, make your credit score and deal prospects as strong as possible.
Keep in mind that you ideally want to make the bank feel very confident and comfortable with lending to you. When you’re able to achieve that, they’ll lend to you for cheaper and longer! On top of that, if you get yourself where you don’t need to borrow as much, you’ll likely get a much better deal and be able to proceed with the purchase more quickly.
Work With a Specialist Mortgage Broker
It’s recommended to work with an experienced specialist mortgage broker who knows the ins and outs of HMO mortgages to help you navigate the entire process of finding and applying for a mortgage. They can help you understand what banks like and don’t like from the outset so you can prepare accordingly.
Working with the right mortgage broker also means you can benefit from their knowledge with what’s happening across the sector at any point in time. And when using mortgages, think about changing interest rates and how this might affect you.
We have a trusted mortgage broker Ellie Broadhurst working in partnership with The HMO Roadmap. If you’re ready to discuss your finance needs or have any questions about this part of funding HMOs, get in touch with Ellie here!
4. Raise Private Finance
Raising private finance can allow you to scale your HMO portfolio almost infinitely! There are different ways to utilise private finance, including fixed rate lending or joint ventures. Take the time to understand how you could use these and different types of structure.
Joint Venture
A joint venture is an arrangement where two or more parties agree to pool their resources together to invest in HMOs. In an arrangement like this, each participant will be responsible for a certain amount of the profits, losses, risks, costs and liabilities. So, there can be 50/50, 60/40, 70/30 or 80/20 agreements.
Fixed Rate Lending
When it comes to fixed rate lending, an investor agrees to loan you a certain amount of money over an agreed period of time and interest level. It’s also essential to have a contingency agreed with the investor. Fixed rate lending can be pretty quick to arrange and is a very versatile way to raise private finance and grow your HMO portfolio.
What To Do & Be Aware Of
Before getting started with raising private finance, there is relevant compliance you should be aware of. For example, there are laws set out by the Financial Conduct Authority that regulate what you can and can’t say when it comes to investments and what you can and can’t do.
Start by setting a fundraising objective and work on building your profile and authority. There’s a myth that only extremely experienced investors can take advantage of raising private finance; however, this simply isn’t true.
People invest in people, so if you can demonstrate you’re the right investment partner, that can be more than enough. You can even leverage the skills, experience and credibility you have from other areas of your life.
You’ll need to take time to build relationships and rapport with investors and make them comfortable with lending you money. Leverage your network of family members, friends and associates and take advantage of social media to allow you to demonstrate your credibility and expand your network.
Additionally, spend time putting together an investor deck. This should demonstrate your plan, examples of what you’ve done and why you’re doing this. If you’re able to effectively master raising private finance, you’ll open so many more doors and be able to scale your HMO portfolio much more quickly!
5. Recycle Capital
Being able to recycle capital is crucial when building a business that needs to regenerate cash. This should be considered a top priority because it can help support private finance deal structures as well, allowing you to pay investors back. So, start thinking about how you could recycle capital from your deals and properties…
Considerations to Make
When it comes to recycling capital, there are three essential considerations. Most importantly, look for projects where you can genuinely add value. This is often through adding square footage from extensions and loft and garage conversions. You can also add aesthetic value, and kitchens and bathrooms are where you can usually do this successfully.
Secondly, while you shouldn’t only rely on capital appreciation with your HMOs, property values do tend to go up over time… Because of this, it can provide an opportunity to extract value and recycle capital, which can then help you further scale your HMO portfolio.
Finally, depending on the number of bedrooms in your property and the rent these rooms generate, you might be able to get a commercial valuation. If you refinance off the back of that, you may find you can recycle more capital, which you can then roll into the next deal!
So, at the back-end, your valuations and refinancing will be a really key part of your strategy to recycle cash out. You need to learn what’s involved with that, how to access commercial valuations and ways you can max out the value at the back-end so you can get your money back out and go again.
Take Your HMO Portfolio to the Next Level
Those are five key things that will help you fund your HMO portfolio throughout 2025 and beyond! If you do this the right way, you’ll really be able to grow your business and take it to the next level.
If you’re wanting to scale your property business up, your goal should be to create a constant supply of funding through mortgages, private investment, recycled capital, cash in-flow from your properties and anything else you can save up!
To gain access to training and guidance to help you fund your HMO portfolio with a full course dedicated to HMO mortgages, raising private finance and recycling capital, become a member of The HMO Roadmap! You can then also access our HMO Deal Stacker Tool to help you easily appraise, evaluate and store your HMO deals – all in one place.
To be a part of our community of beginner and veteran HMO investors, join us over in our free Facebook Group The HMO Community, where you can ask any questions or discuss anything about HMO investment.
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!