How To Determine The Best Location To Invest In HMOs

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I’m going to address the question I get asked the most frequently: What is the best location to invest in HMOs? 

However, this isn’t simple to answer as the best location is different for every investor! It largely depends on your individual goals, resources, risk profile and experience. 

Read below or listen to the full episode on The HMO Podcast to help you figure out what’s the best location for you to invest in HMOs!

Understand What Impacts the Performance of HMOs

When people are wanting to know the best place to invest in HMO properties, they often really want to know where they can make the most money! Cash flow, yields and return on investment are the key financial metrics that we’re generally talking about here. 

To get started discussing that, there are a few factors that influence the performance of a HMO on a micro level, including:

  • Rental demand
  • Property values
  • Rental supply
  • Average rents

Every location behaves differently, so you need to be an expert in the local market you invest in, ensuring that you understand all of the granular details.

These local market conditions and other economic factors, such as employment rates, whether or not there’s a university or large employers and what sort of infrastructure programs are happening, all impact the viability and potential performance of HMO deals. 

1. Factors On & Off the Spreadsheet

There are two parts to every HMO deal. For starters, there’s the information that lives on the spreadsheet. It’s the numbers that go in, and the numbers that come out. Yes, you’ve got to make some sensible assumptions and stress test that, but this part is largely black and white. 

If you’re sensible about your numbers, you should then have a good indication of what the performance of a HMO will be. But there’s also a big piece of analysis that has to happen off the spreadsheet…

This is subjective data and includes how much you have in terms of time and cash. It’s whether you have the experience to do the sorts of projects that’ll create the value uplift to allow you to recycle enough cash out. It’s also about whether or not you want to travel to your HMO or if you need to invest locally. These all will impact the performance and viability of your HMOs as well!

2. Local Regulations

There are also other things on the ground level of a location that’ll influence HMO deals, such as local regulations. For example, there can be Article 4 directions in place, and there can be different licensing requirements as this varies regionally. 

All of this can impact the profitability and the operational complexity, which usually washes out as higher costs!

3. Current Circumstances & Goals

Whether you’re a new or seasoned HMO investor, our goals and objectives will all be quite different and will impact where we each should invest. Perhaps you’re prioritising earning cash flow or capital gains or a balance between the two.

Additionally, we all have different levels of financial resources, time and experience. You need to be careful as these will all directly impact the performance of a HMO deal in a specific location. 

Do you want or need to invest locally where you live? If you don’t, you need to consider the time and cost of travel. Do you have what’s required to undertake a large development project or are you better suited to a smaller HMO project? And do you have the time, skill and experience to manage your HMOs yourself or will you need to hire an agent? 

4. Risk Profile

On top of that, each of us might have quite different risk profiles. For example, you might have quite a high-risk profile that suits your investment strategy, or you may have other investments that you can offset that risk against. On the other hand, your risk appetite might be quite low, and you might be anxious about potentially losing money or not making enough on a deal…

There’s no right or wrong here – it’s just about you as an investor! And it’s about marrying the objectives of what you want to buy with these sorts of features and factors that build your investor profile. 

5. Property Management

Whether or not you plan to self-manage your HMO properties will also impact what the best location is for you. If you’re going to self-manage, you may need to invest closer to home. If you don’t want to or can’t and you’re prepared to pay the management costs, you need to carefully consider who will manage your HMOs.

This will likely be easy if you’re investing in a big city centre, but if you’re in a periphery area or smaller town, there may not necessarily be an agent with the experience, ability and capacity to do that. And that would be a big problem, so you need to think about this from the outset!

6. Regional Characteristics

There are also certain regional characteristics that impact deals differently across the UK. For starters, the further north you go, generally speaking the cheaper the property values tend to be. So, if you invest in the North of England, you can usually stretch your capital further. 

However, on the other hand, rental values are typically higher in the South. And with high value areas, you can often find more opportunities to add additional value. So, certain regional characteristics need to be considered and assessed.

Make a Plan

Whether a HMO deal is good or bad or in the best location, the answer is different for every investor! And to be able to answer it accurately, you need to thoroughly understand a few things, including:

  • What’s happening on a granular level in different locations
  • What your current limitations, strengths and weaknesses are
  • The risks and sacrifices you’re prepared to take
  • What you’re prepared to compromise on and what you’re not

If this is confusing, this is likely because you don’t know what you want to achieve. You need to have very clear and specific objectives to work towards in your HMO business. Write these down on paper.

Then, start to work backwards and reverse engineer how you’ll get there. And with that, build a business plan that will help you get to where you want to be and will give you clarity on what you’re trying to achieve. Once you’ve done that, only then can you determine where the best location for you to invest in HMOs is! 

Keep in mind that there’s no silver bullet location that’s right for everyone, So, don’t worry about what other people are thinking and doing – just do what’s right for you!

If you want to learn more about location, tenants, yields and cashflow, become a member of The HMO Roadmap and gain access to tons of lessons, resources and case studies to help you start and scale your HMO business! And if you have any questions about where you should invest, come 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. 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!