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Newbie! Looking for HMO advice please!


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Hello everyone,

 

I'm at the start of my property journey and I'm looking at generating an income from an HMO.

 

I have around 25-30k to invest and need advice on how to finance the rest.

 

I'm based in Norwich, Norfolk and through research these types of property range from 150-200kish.

 

Any help would be greatly appreciated.

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I'd say you don't have nearly enough money to be thinking about HMOs, which are expensive to acquire, expensive to do up, and expensive to maintain. I just bought one for 275k (all in cash, no financing), but I don't recommend it. Of all the purchases I made last year, that is the one I regret, as it's incredibly difficult to keep the rooms fully tenanted and the competition in that segment of the market is very fierce, meaning that your product needs to stand out - meaning that you have to spend quite a lot of money on furnishings, extra bathrooms, nice kitchens, etc. It's a nightmare. Another problem you're going to have is financing it. You won't find anyone to fund your project at the moment. The high street banks don't touch HMOs, so you need to go to specialist lenders and they're expensive and require you to jump through hoops. They also need you to have a salary of over 70k a year to even consider you for a loan. I think HMOs are passé, to be honest. I met one guy at an auction earlier this year who said he'd just sold 8 HMO properties in his portfolio, as he just could not keep them filled or generate enough to pay the loans on them. He also said, interestingly, that of those 8, he sold 6 at below the original cost of acquiring them (purchase price plus renovation costs). Hugo, take my advice,  and stick with a nice little two-bed terraced house. Do it up for 10k, add value that way, then remortgage once you've got it rented out. Don't be tempted to go down the HMO route like I was, not if you want to sleep at night, and like I say, at the moment you can't afford it anyway. There are a lot of videos on youtube telling you to buy properties and convert them to HMOs - most are made by builders who make a lot of money from investors who've been sold on the HMO dream only to lose yet more money and find themselves with a property that's been gutted to make ensuites and God knows what else and has thus lost what value it had as a nice family home. Stay away.

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Firstly, what are your goals? Do they require/need an HMO?

Your going to struggle a bit with your budget for anything, depending where you're looking. Consider all the purchase costs beyond the purchase itself - solicitor, mortgage fees and stamp duty, for a start. I'd work on having 25k to invest and 5k for the above, plus a bit of contingency.

Based on a 75% mortgage, you're looking at a purchase of up to £100k. 

There are certainly plenty of houses and apartments in the Midlands and North for that sort of price, not sure about further south, but suspect you could outside London.

For an HMO, it'll be more complex. You'll struggle to get a mortgage unless you have some landlord experience, so probably not the best place to start. If you did manage to find a lender, there are then other costs you need to consider. You don't need ensuites etc, but there are things you need to do like fire doors and alarms etc which will cost extra. You'll also need to furnish it, which will be several thousand.

So in reality, you would only be able to spend about £75k on the house, assuming no work other than the regulatory stuff and furniture. That would still find you something in somewhere like the north east, but not in the best of areas, so expect a higher void rate.

Do some more research on HMOs - look at Spareroom to see where the tenant demand is, the quality of the competition and how much you can charge. Research your areas - is there a section 4 in place, for instance. 

And then start with a single let, keep saving, use the rental income to build your savings and, once you know as much as you can, consider whether you want to try an HMO.

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  • 2 months later...

Hi Hugo

 

Don't know if your still looking but personally i would look to try to grow your pot of cash by spreading around a few lower and varied investments such as a new build, a renovation and a HMO through a property crowdfunding site or such - that way you can see which performs better and if the HMO does well then you can re-evaluate the plan and hopefully with more initial cash.

 

 

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Thank you all for your responses. All have been helpful and broadened my view of this idea.

 

I think one of my real struggles at the moment is deciding what path to take.

 

@lee chapman Initially growing my pot was the main goal, I'm just eager to acquire 1 or 2 properties as I believe capital growth will be good around South Norwich / South Norfolk in the next few years. You mention property crowdfunding sites which sound a good idea. Do you recommenced any in particular?

 

I'm looking to network with people around my area also, have you any information on this?

 

Many thanks again

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Have you considered buying a single let house in a slightly cheaper (but higher yielding) area than your own?  Most of the posts I see on facebook property groups are HMO landlords trying to sell their properties, I don't think they are anywhere as attractive as the course providers would have you believe.  With your pot you can comfortably buy a property up to 100k, ideally one which needs minimal work to minimise the cash you put into the deal.

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@londoner thanks for your response. I have thought about buying out of my area for the reason you state. I've been looking at North Midlands ( Manchester , Liverpool , Nottingham , Stoke on Trent etc ). If I were to buy single lets I'd like to buy in an area where there is scope for good capital growth. I'm trying to broaden my knowledge of these areas as best I can. I think I'll go to some meet ups in these areas to gain a greater understanding. Thanks again

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The best thing you can do buying outside your area is to find a good letting agent before even considering looking at properties, they will guide you through the process of identifying the best roads within their area.  Meet them, interview them, go through their systems and knowledge, look for reviews, find their clients through facebook, what does your gut say about them? Look for an independent lettings agent rather than a chain.  They will know the specific roads that tenants stay long term. 

 

And remember we can't predict capital growth as we don't know what the future holds - invest based on the fundamentals, don't speculate.  Employment, transport links, yield, etc.

 

Best of luck

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  • 1 month later...

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