Five Reasons New Investors Struggle to Launch Their HMOThe HMO Roadmap

Are you having trouble getting your HMO business started? Why is it when some people get started, they’re able to achieve so much success while others fail to get their business off the ground? What’s behind that?

Read below or listen to the full episode on The HMO Podcast for the five main reasons people struggle to launch their property ventures!

We’ll also look at why this is and what you can do differently. If new HMO investors understood how to overcome these challenges, they’d get their business off the ground and achieve so much more quickly!

1. A Lack of Proper Financial Planning

One of the key things I often see missing in people who struggle to get their HMO business off the ground is financial planning. There’s a lot involved with financial planning for your HMO investments, including:

Understanding the economics of deals and analysing projects
Planning out the financial future of your business
Figuring out how you’ll fund deals and manage your cash resources
Predicting the performance of deals and what the cash flow will look like
Setting targets for your portfolio size and deal performance
Thinking about how you’ll achieve your goals

Key Metrics

To get started with financial planning, you need to think about certain metrics, such as purchase prices versus rental income, yields, return on capital employed and net and gross monthly income per room. All of these key metrics allow you to interpret what a HMO deal and its ongoing performance could look like.

Being too optimistic or even too pessimistic can skew the rental performance and potential for the end valuation. You need to understand how commercial valuations are derived and why it’s so variable. You should always be realistic with your numbers, but you need to take into account what the deal could look like if X, Y and Z were to happen.

Could you exit that deal? Is there too much risk? These are the sorts of things that you have to understand and be able to factor in. And if you don’t understand it, the risk is you’ll get it wrong either by over or undershooting a deal. If you undershoot the deal, you might not end up buying it. You may not have been competitive enough when putting your offer in, so you miss out!

I’ve also seen people overshoot and pay too much for a deal and overestimate what they can get out of the back end of the deal. You then may not be able to get the valuation or rental performance you planned for, and that can impact your ability to buy the next deal or pay an investor back!

Planning Ahead

Financial planning can be completely different to anything you might be used to doing, so start thinking about what considerations you need to take into account as a business owner. If you want to build a portfolio, then you need to be thinking about capital for your next properties too.

Sometimes you’ll have to refinance, extract cash from your properties, raise private finance, better manage your cash, use joint ventures and even consider more creative options. You might need a financial safety net, so consider what that should look like.

There’s a lot that needs to be thought through, and only focusing on the first deal is one of the reasons that keep new investors from getting their business off the ground. Even if you have the cash or capital to do the first, second or third deal, what about the fourth, fifth or sixth? If you’re not thinking about that from the outset, you’re unlikely to ever achieve it!

2. Having Inadequate Knowledge of Legal & Regulatory Requirements

There’s lots of legal and regulatory requirements you need to get your head around from use classes, Article 4 directions, HMO licenses, mortgage rules and management regulations. Some of this is standard across the country, but others can be different depending on where your property is located.

When new HMO investors start to realise how much there is to understand, it can scare them off! But don’t let this overwhelm you. All the information you need is out there, and honestly, it’s not actually as difficult as it seems. You’ve just got to get your head into it and understand it all.

Article 4 Directions

For starters, Article 4 directions can look quite different all over the country. There are blanket directions in some places, it’s pocketed in other areas and some locations don’t have it at all.

Understanding in detail how an Article 4 direction is enforced in your investment location is crucial! The way that councils make decisions on whether or not they would or wouldn’t approve a new application for a change of use within an Article 4 direction depends on a variety of factors.

It’s often based on density, but it’s important to look at the details of this because there are different ways that this can be implemented by councils that can mean they wouldn’t accept a change of use in specific locations.

I’ve seen many people with great plans invest in an area and they found out they’ll need planning permission after they’re already in the process of buying the property. And they haven’t really thought or even looked into the details of what that means, how they would deal with that and what the chances of success at planning are.

This also would impact how you’d structure the finance on that deal because you won’t necessarily be able to buy it on the right sort of mortgage without the planning in place.

Licence Requirements

You also have to understand your licensing requirements in detail. This depends on whether you’re investing in small or big HMOs and where you are in the country. How are these rules interpreted by your local council? What do they require? What are you actually going to have to do?

Costs & Timelines

Understanding what’s required for your property can impact the refurbishment costs and timelines too. Start with a plan that in an ideal world you’d stick to. Sometimes as you get into the details, you’ll find your plan won’t work now, and you’ll have to make tweaks. There is often a bit of trial and error with this!

3. Failing to Prioritise and Make Sacrifices

One of the reasons so many people fail to ever get their property businesses off the ground and scale it in the way that they want is because they don’t prioritise the right things and aren’t prepared to make sacrifices elsewhere in their lives.

Many think building a HMO business is passive investment where you do practically nothing and reap the rewards with cash in your bank, and that’s just not true! One day in the future when you’ve built a really good business with lots of systems and processes and everything’s substantiated, then yes, it can be relatively passive… But in the early stages, it absolutely isn’t.

If you have a job, young family or other commitments, you’ll be very busy for a few years while you set this up. Maybe at the end of that, the reward will be you can take a step back and have more time back while earning a steady income stream, but until then, it’s going to be hard work.

Understanding the finances, market data and regulatory requirements takes time and commitment, so put time aside and prioritise these actions and activities. When you find your first deal, that’s when you’ll really start to feel the pressure! It’ll be very busy, so you’ll have to make sacrifices and compromises to do this and be really focused.

For three years or so, you might not be able to do the nice holidays or go out much. I put as much as I possibly could from a financial point of view back into my HMO business. However, so many people simply don’t want to do this with their time and money, and it all boils down to choice!

Overall, it’s the individuals who’ve been prepared to make sacrifices, make those choices and do the tough things that have gone on to achieve the most. So, you’ve got to ask yourself how much you really want it, and if you do, you’ve got to do what’s required.

4. Failing to Build a Strong Support Network

Building a strong support network doesn’t necessarily cost you anything, but this can allow you to find the guidance, support, motivation and encouragement you need when building a HMO business.

Online networking is free and easy, and there’s lots of ways to do it. Join our online Facebook Group The HMO Community, which has about 10,000 members. There’s so much support, guidance, ideas, enthusiasm and motivation happening over there.

Invest in building relationships offline too at in-person networking and property events. These experiences can ultimately turn into opportunities down the line. There’ll be deals, finance, investors and all sorts of things that will ultimately help you achieve what you want in your HMO business.

If you’re just starting and don’t have any friends or family members in the industry, then you absolutely need to go and build a network! Find a mentor or group of people that can lift you up, because it’s going to be tough and it’ll only get more challenging. But the more of that support, guidance, motivation and enthusiasm you can find, the easier it’ll be.

5. Fear of Taking the First Step

You’ve got to muster up the confidence to take that leap of faith. I’ve seen so many people who’ve worked weekends, evenings and early mornings to put the work in, but they fail to take that first step.

It’s really difficult, but there’s a point where you can’t do any more work or gain any more confidence. We all want absolutes and predictable outcomes, but when we’re investing in property, there are some things that you simply can’t guarantee. Being paralysed by that fear is why so many people fail.

Once you’ve done all the work, you have to be prepared to take some risks. You can mitigate a lot of it, but property isn’t a zero-risk game… So, make your best assumptions, trust the work that you’ve done, take that leap and move beyond the fear!

If you want to build a HMO business, you have to find the confidence and get over that fear to get the first, second and third deals. And sometimes it’ll start to become bigger and bigger deals with more problems than the last.

Those are the five reasons why so many people fail to get their HMO business off the ground! But these are easy to manage and overcome… So, can you change your behaviour and attitude? I promise you it’s all worth it!

If you want to start and scale your HMO business quickly, sign up for The HMO Roadmap. And to help you build your network and knowledge, 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 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!