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I’m going to answer one of the questions I get asked the most… Is it the right time to invest in HMOs or is it too late? The growing worry about this is a by-product of what’s been going on in the wider economy. I totally appreciate why you may have worries if you’re wanting to invest in HMOs for the first time.

Read below or listen to the full episode on The HMO Podcast about eight of the most common concerns about investing in HMOs right now! I’ll share my honest opinion about these and where I believe the HMO market is heading.

My objective here is to give you insights to help you make an informed decision independently. What I don’t want to do is just tell you that you should invest in HMOs… I want you to understand what’s going on in the HMO market and the current opportunities and prospects.

8 Common Concerns about HMO Investment

1. Property Values

While property values aren’t at the absolute peak, they are much higher now than five, 10 and 15 years ago. The higher barrier to entry is naturally a challenge for beginner HMO investors, especially as property values drive so much of the economic picture when buying any property.

A decade or so ago, it was relatively cheap to get into the HMO market. But property values have increased since then, and that has made it increasingly difficult for anyone who wants to enter the market. Despite that, the best time to start investing is still today.

I don’t think capital appreciation will be the same over the next 10 to 15 years. However, property values will likely still rise, especially if you take a long-term view. But you still need to be super careful that whatever you buy represents good value for money in the local market!

2. Interest Rates

At the same time, interest rates are much higher now, especially compared to when I started investing in 2009 when they were at rock bottom and pretty much stayed there for a decade or so. That changed in recent years, and I don’t think we’ll get back to those historic lows anytime soon.

Over the next five to 10 years, I believe we’ll see interest rates average out around 4%. This has definitely changed the economics of HMO deals. If you’re a new investor, you’ll also be paying more for your mortgage than experienced investors as it’s considered a higher risk as far as the bank is concerned.

But these rates are coming down, and you can start building some assumptions for that into your model and look at how that might change over the next few years. You’ll find that the economics of your HMO deals will improve, your loan to value will increase over time and your margins will also rise unless you continue to take money out of the deal.

So, don’t let interest rates and how that’s impacting the performance of deals put you off investing in HMOs entirely! Accept that it might not look as good now as you hoped, but it probably will look better in the future, especially if you follow a clear plan.

3. Competition

If you look across the market, investing in HMOs is probably the single best place to put your cash if you want asset-backed security and long-term sustainable, recurring income. Because of that, the competition and standard of competition is quite high.

If you aren’t a design expert, you might be thinking how will I be able to compete with those sorts of standards?! While there is more competition and investors are doing great stuff in the industry, it’s only a fraction of the market.

There are so many opportunities to do the same or better as a good portion of the HMO market are old school landlords who are quite happy to run their properties as cheaply as possible. Spend some time assessing what’s going on in your local market.

The space left for you to put yourself in the top 5% is still huge! Now there are some cities where the concentration and saturation of HMOs are very high, but that doesn’t necessarily mean the standard of all of that accommodation is equally as high as the standard is often poor.

You need to know how to infiltrate the sector, create a product that serves the market in the way that you want it to and have a competitive price. Every market has its ceiling, but that scope and capacity is absolutely there!

4. Stock Levels

Generally speaking, stock levels in the property market have been pretty low for quite some time. But I feel stock has always felt quite low if you’re in the market for properties that have good floor plans that you can turn into HMO properties.

So, I don’t think this is anything that you need to worry about! I don’t see it changing. It would be great if loads of suitable housing came on the market that we could convert into HMOs, but if that did happen, then there’d probably be even more competition, which could then drive values down.

If you’re looking around the market and you can’t see anything you deem suitable, it might be because your expectations are unrealistic! It may also be because you don’t quite know what you should be looking for…

With the right tools, skills, experience and knowledge, you’ll be able to find the right HMO deals. And I know so many investors who are doing this every single day! So, they are out there – there’s probably just a reason if you feel you’re not finding the right ones.

5. Access to Finance

You probably have a certain amount of capital to get started investing, but to continue growing your HMO portfolio, you will likely need to raise private finance. I hear many people who are new to the industry ask if private investors would really lend to them if they don’t have the experience that other investors have.

Many people think private investors will only want to give their money to people who have lots and lots of experience. However, there is an abundance of investors who have capital and are prepared to lend.

Whether or not someone will decide to lend to you is often 99% about you as an individual. So, if you know what you’re doing and what you’re talking about, you’re reliable and trustworthy and you give the investor confidence, you’ll have no issues raising private finance! It’s about knowing how to do this and having the confidence to do it.

6. Access to Mortgages

On the other hand, if you’re looking to invest in HMOs for the first time, banks of course prefer investors with more experience. But you will likely still be able to get your hands on lending. It might cost you a bit more, and there may be other caveats, such as only being able to do smaller HMO projects.

But the mistake people often make is speaking to the wrong people about this… The appetite for lending on HMOs is stronger than it’s ever been! There’s a lot of competition in this space, especially as interest rates are coming down. Banks like that returns in the HMO sector are better than pretty much anything else you can get in the residential market.

Having the right specialist mortgage broker is key to accessing the right products with the right lenders. If this is an area you need help with, reach out to our partner mortgage broker Ellie Broadhurst.

Ellie can put you in front of the right bank so you can have the right conversations. She has fantastic relationships with all of the specialist lenders that have an appetite for HMOs.

7. Planning Laws

Planning laws around HMOs are very complicated as there are so many nuances to it. You’ve got Article 4 directions, change of use from a C3 residential property to C4 HMO and specific planning permission applications if you want to make certain changes to a property.

There’s a lot of things that can get in the way, and it’s normal to feel overwhelmed by this! But there are a few ways to deal with this. Start by learning the general ins and outs of planning laws. You can learn all about this in The HMO Roadmap, where we walk you through the key things you need to be aware of.

Secondly, one of the best investments you could make is hiring a planning consultant. They know all of the intricacies of local and national planning laws. This knowledge can help support your application, and if you’re asking to do something that simply won’t be achievable, they will tell you.

So, before you buy anything, speak to a planning consultant as they can help you understand what will be achievable, what a likely outcome will be and what that process will look like. Then, you can buy more confidently knowing that you’ve got that individual in your power team who will help you throughout the planning process.

It’s not impossible to overcome planning challenges, and there are lots of places that aren’t under Article 4 restrictions. So, there are still loads of opportunities to freely convert a residential property into a HMO under permitted development.

8. Legislation

On top of that, there’s a ton of compliance to think about when it comes to buying or managing a HMO, including certification and licensing. And the good thing about this is it’s basically a tick box exercise.

It’s really about ensuring you have the right knowledge base about the legal requirements you need to abide by. And if you’re asking yourself if it’s too late to invest in HMOs, the real question you should be asking yourself is have you got the knowledge that you need to invest in HMOs? And if you can’t confidently answer that, then the answer is probably no!

Predictions for the HMO Market

It’s currently a great time to invest in HMOs. For starters, we’re simply not building enough homes across the country. There’s no way that in the near future we’ll get anywhere near fulfilling the void that we currently have.

That means property values and rents are expected to continue to rise. But also, affordability and the ability to buy new homes is unlikely to change. And that pressure on people who want to get into homes for the first time will remain.

It will probably get even worse, and HMOs are a sensible alternative. Renting a room is generally cheaper than renting a flat, especially as tenants have the ability to share the bills. So as an investor, you should see this as a key part of the HMO strategy and an underlying part of the fabric as to why this investment model is continuing to work so well!

HMOs and the idea of co-living has become more appealing among young people not only because it’s an affordable option but also because they like the community aspect and what co-living brings.

Additionally, if you’re able to take a longer-term view on the market, we’ll likely see more stock coming onto the market as some landlords and investors decide that they want to sell up and crystallise whatever gains they may have had over the years in their properties. So, this really provides a huge opportunity for us over the next decade!

Concluding Thoughts

The last thing that I want to ask is if you’re not going to invest in HMOs, what will you invest in? Where are you going to get a minimum of 12 to 15% return on every pound that you invest? (And I’m seeing some HMO investors get much more than that!)

Across my own HMO portfolio, the margins are generally better now than they were when I first started. And that’s because things have drifted positively over time. If you’ve been concerned about whether or not there’s a future in the HMO market, hopefully I’ve been able to answer that for you…

The more knowledge and experience you can gather through digesting information, speaking to experts and having the right people on your team, the easier you’ll find all of this. And you’ll find that these questions and anxieties fade away as a lot of this actually creates opportunities!

If you have any questions about investing in HMOs, join us in our free Facebook Group The HMO Community. And if you want to start and scale your HMO business, sign up for The HMO Roadmap today!

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!