Photo by WJF Developments
Many property investors want to figure out what the best kind of investment is for them, especially moving forward, and this can often be challenging to weigh up and decide. Here we’ll discuss the rise in HMO investment, pros, cons and opportunities of HMOs and buy-to-let (BTL), tips to help you decide which property strategy is better for you and how to get started investing!
Rise in HMO Investment
A rising number of investors are opting for alternative property investments like HMOs, especially over BTLs. There has been a significant surge in growth across recent years. With more and more investors leaving the BTL sector, this is often to maximise rental yields and generate better cash flow elsewhere.
It can also be an opportunity to diversify income streams. This trend is expected to continue as BTL investors have had their returns hit hard in recent years. Higher costs, including mortgage rates, are still impacting this.
Recent data has even shown that there has been a 40% increase in licence applications since 2018, according to research undertaken by Just Landlords. There are naturally regional variations with this. While London is still home to a strong HMO market, there has been a lot of growth across the North of England and the Midlands.
Investing in HMOs can be one of the most profitable forms of residential property investment, but a number of factors will impact the success of the investment. Additionally, there are a number of things you need to be aware of before deciding if it’s the right strategy for you.
How Do Standard Buy-to-Lets Work?
Let’s start by talking about standard buy-to-lets and the pros and cons of this kind of investment. BTLs are rented to a single household, such as an individual, family or couple. With this type of rental property, one tenancy agreement will be signed, and a single rental payment is paid to the landlord each month.
BTLs can suit an array of tenant types in a range of areas in the UK. This type of investment also has cheaper starting and operating costs and also consumes less time, especially when it comes to tenant and property management.
With BTLs, there is typically less wear and tear on the property and lower risk is involved with it. However, at the same time, rental income and yields are generally lower than the income that can be achieved by HMOs.
What Are the Pros and Cons of HMOs?
Houses in multiple occupation (HMOs) are inhabited by three or more unrelated tenants who have their own bedrooms but share communal facilities. Across recent years, demand has been high for HMO rooms, especially among student, professional and social renters.
There are a wide range of investment locations across the country that are performing especially well for HMO investors, but getting the location right is probably even more important when it comes to this type of investment.
As there has been a rise in investors leaving the BTL industry and opting for alternative investments like HMOs, there are a number of advantages to making the switch. For example, if a tenant falls behind in rent or vacates the property, HMO landlords can still receive rent from the other tenants, helping minimise the financial impact of both void periods and rent arrears.
There are some disadvantages or challenges to overcome when investing in HMOs. There are higher starting and operating costs to factor in and additional rules HMO landlords must be aware of. With more tenants in a HMO property compared to a standard BTL, property and tenant management naturally takes up more time and effort as well, which can be difficult to manage.
How to Decide Which Investment Is Right for You
Investing in HMOs really isn’t for everyone… It can be challenging to know if it is right for you and looking from the outside, it can look easy. However, that’s really not the case… Read below for some advice to help you figure out what property investment type might be right for you!
Think about what your goals are.
Start by thinking about your short, medium and long-term goals when it comes to property investment and what you want and need to achieve. Be sure to be realistic with this based on your resources and experience.
So, what do you want to achieve when investing in property and why? How hard do you want and need your money to work for you? Do you want to prioritise creating bigger chunks of equity or generating steady cashflow? This is crucial to start thinking about as these will all impact what you should invest in!
Understand the different types of property investment.
It’s important to get at least a basic understanding of the different types of investment you might be interested in before purchasing a property and getting started investing. Learn some of the ins and outs to help you better decide what fits best with your personal and financial circumstances, professional and personal goals and overarching priorities.
Assess the risk and what you’re comfortable with.
It’s important to consider whether you have an appetite for more risk or are more risk averse. If you have an appetite for more risk, especially more risk than standard BTLs, then HMOs might be right for you. But if you aren’t, it might not be right for you.
It’s not only because we’re typically talking about bigger projects and more money when it comes to HMOs, but as there are more tenants too, the risk of things going wrong is naturally higher! So, take the time to think about how much risk you are comfortable with and look into ways you can help mitigate certain risks involved with any type of property investment.
5 Tips for Getting Started in HMO Investment
If you decide that HMO investment is right for you, there’s some things to make sure you do when first getting started with this type of property investment. Here are some of my top tips!
- Create a Compliant & Sustainable Business Structure
Before you can even get started, your HMO business will need to be set up in the right way with registration from the appropriate bodies so that you’re compliant from the outset. Complying with regulations is an extremely key part of any type of property investment, and the HMO industry comes with even more legislation.
HMO investors need to know the relevant legislation on a local, regional and national level, so keep up to date on all of these and make sure you follow them in the right way, adhering to best practice.
Getting planning regulations, building control, Article 4 directions, HMO licences and lots of other things wrong can be catastrophic to the success of your HMO investment. And it’s important to keep in mind that national and local guidelines can often vary and come with plenty of grey areas.
Ensure you’re also completely aware of how significant the implications are of not having a compliant HMO business. It could cost a massive amount of money and reputational damage, and it could mean that your investment won’t even work at all!
- Conduct Thorough Market Research
Because of how important location is to HMO properties, conduct thorough research to figure out what location is best for you to invest in. Spend time understanding the wants and needs of your target tenant demographic to help you see what could be the most suitable locations.
Make sure you find a location that works for them most importantly – not necessarily for you! You also need to look at what the competition is doing and what the long-term prospects are in that area. SpareRoom is a helpful place to start as it has a huge amount of data and figures that can help you learn about supply and demand and the competition in a specific area.
- Figure Out Where You’ll Get Capital From
Investing in property, especially HMOs, requires a LOT of capital. So, you need to find out how you’ll fund your first property investment and the ones after that if you’re planning to build a portfolio!
Look at the funding options available to you. You might have some cash saved up to help get you started, and you may also be planning to utilise lending from a bank. HMO mortgages are considered specialist products, so there will be additional things you need to be aware of when it comes to that.
As HMO investors, we’re almost always going to run into challenges with not having enough cash to invest. So, understanding how to raise private finance and recycle capital are major ways for investors to be able to fund their HMO portfolio. And you may want to also consider ways to invest with little to no capital, like utilising a rent-to-rent strategy.
- Learn How to Effectively Appraise HMO Deals
In order to be successful when starting investing in HMOs, you need to be able to effectively appraise prospective deals. This is different to how single BTLs or other property investments are appraised as there are more factors that need to be considered when it comes to HMOs.
With HMO investment in particular, you need to expect to face problems and challenges that’ll cost you more than you originally expected – even at the best of times. This can be particularly challenging for new HMO investors.
Anything can happen, so it’s essential that we’re all prepared in case costs increase, which they so often do! Because of this, you should stress test your HMO deals thoroughly before purchasing a property or putting an offer in. This has become even more important now than it was 10+ years ago.
It’s really easy to get caught out if you don’t analyse and stress test your deals effectively. There are a number of areas you need to stress to help you see what a potential deal could look like under any circumstances. This includes everything from purchase price, interest rate, down valuations and mortgage LTV to refurbishment costs, utility bills, maintenance costs, occupancy rates and rental achievement.
You can then throw all of this information into a spreadsheet or you can use the deal stacker tool inside The HMO Roadmap, which allows you to easily play around with the figures. Once you understand how to analyse and stress test your deals, you’ll begin to feel so much more confident about what you need to look for with your first HMO!
- Don’t Underestimate How Challenging It Will Be
As there are more tenants in HMOs than single BTLs, HMO property management naturally takes up much more effort and time. Managing a property and tenants can be one of the most challenging areas of this type of property investment, especially with larger professional HMOs.
You’ll need to always keep up with changing compliance and figure out how to communicate with tenants and manage maintenance effectively. HMO management isn’t for everyone, so you’ll need to figure out if you’ll self-manage or hire an experienced managing agent instead.
HMO Investment: Risks v Rewards
Increasing costs and regulation is expected to continue to push more investors to look at less traditional forms of property investment, including HMOs. Beginner investors still need to undertake thorough due diligence to ensure they’re making the right choice for themselves and if so, that they get started in the right way!
Whether you are a portfolio investor or exploring HMO investment for the first time, fully understanding the risks and rewards is essential to help you make informed decisions and maximise your returns in this industry.
HMO investment also requires meticulous planning, legislative compliance and proactive management to be successful. But the overall picture of the HMO market in the UK remains strong among a professionalising sector.
If you have decided to get started investing in HMOs and want to learn all of the technical bits, become a member of The HMO Roadmap today! And for additional support from experienced investors, come join us 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!