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Making money from HMOs


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I thought I'd share my experience on my first HMO as I've made quite a bit of money almost by accident. I am now actively pursuing this strategy as it generates a lot of money and could be a quick way for people to pack the day job in in less time than is usually the case. Property is generally not a get rich quick scheme but I believe I've come across a way of packing the day job in within a year if not less.

 

I bought a 3 bed Victorian terraced house for £66k. I turned it into a 5 bed ensuited HMO. Refurb costs were £40k. So with solicitors bills, stamp duty etc. I invested £110k. I then rented the property out for £23,660 gross annual rent. I was unhappy with the quality of the refurb so decided to sell. Had I been happy I would not have even thought of selling. I was able to sell for £155,000. I arrived at the sales price as I wanted to offer an investment to a client with just over 15% gross yield. To my surprise there were many takers (mostly foreigners).

 

During the time it took to sell I was getting  £1972 per month in rent. So once all incomings and outgoings were factored in I made £55k gross profit.

 

So the moral of the story is if you want a very good income from just one property and enough to pack the day job in then buy a rundown house, convert it into an HMO and then sell it. It's basically a flipping strategy but by converting to an HMO rather than a BTL the rewards are far greater.

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Hi,

 

Godd to hear of your success story. Where was the HMO located and was is rented out to students or professionals?

What were the issues you noticed with the refurb that made you to sell ? would it have cost so much to rectify the issues observed  instead of selling the property? I take it that you had a short term objective of achieving a good return on capital than rental income over a long term?

 

 

 

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2 hours ago, kingsley said:

Hi,

 

Godd to hear of your success story. Where was the HMO located and was is rented out to students or professionals?

What were the issues you noticed with the refurb that made you to sell ? would it have cost so much to rectify the issues observed  instead of selling the property? I take it that you had a short term objective of achieving a good return on capital than rental income over a long term?

 

 

 

Location is Doncaster rented to professionals. We don't have a university (yet). The standard of work was poor throughout the whole refurbishment.  For example 3 extractor fans vented directly into the roof space. A chimney stack wasn't properly supported. Rising damp issues were caused by the builder. Radiators were located in inappropriate places. TV points didn't work and were badly located. The project took much longer than it should have. I could go on. The experience left me traumatised. It was like a bad dream and I just wanted to put the whole experience behind me so selling was the easiest way to do this. I put right as much as I could and the buyer is now getting a good HMO. However it could have been much better.

 

The silver lining is that I've made  good money selling it and the experience has led me to get into project managing HMO refurbs as I knew I could do a much better job than the so called HMO specialists out there. Within the last 8 months I've done 2 for myself and 2 for clients. I've got 3 underway at the moment with several in the pipe line.

 

I own several single lets and got into HMOs simply because the yield is so much better. I'm lucky that I live in a town where property prices are low so yield is great and capital growth has yet to take off. So I feel I'm covered on both fronts so haven't favoured yield over capital growth. I expect to get both.

 

Going forwards I'm more likely to invest in single lets for capital growth now than in HMOs as according to the property cycle we should get around 165% capital growth over the second half of the cycle. I've got more than enough rental income now so taking a punt on the property cycle playing out is well worth it in my opinion. Even if we only get half the growth that's predicted I'll be very happy with that.

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  • 10 months later...
  • 3 weeks later...

Woooah, slow down boys and girls. That sounds like a very lucky first forray into the otherwise very risky field of HMOs.  I invest in several kinds of property and of those, the HMOs are not the best overall performers (and give me by far the biggest headaches). There are many things you have to factor in: firstly, the time it takes to convert a 3-bed house into a 5-bed monster with ensuites, secondly, the fact that you're destroying what could have been a beautiful and well laid-out Victorian house that first-time-buyer families would have otherwise paid a premium for if tastefully renovated; the cost of converting an HMO with those ridiculous ensuites back into a family home if it doesn't work out will be huge. Then there is the ongoing cost of maintenance: my contractors are constantly regailing me with horror stories about the HMOs they have to service: the main problem is blocked drains from all those silly macerator toilets that are needed for the ensuites and that are nowhere near the original waste pipes. Most importantly, however, is filling the rooms: unless you can get 5 students in to share at the start of the academic year, you'll be struggling with voids constantly. It's a nightmare - and virtually impossible to have every room filled at all times. That's why I find it quite difficult to believe that "mainly foreign" investors were queuing up to buy that place. Most investors will negotiate you down to the bone on HMOs, as they're perfectly aware of the difficulty of managing them and keeping the rooms filled. Finally you've got the nightmare of the tenants: they need to get on with each other, and if they don't know each other, there are usually conflicts, leading some to leave. As one agent advised me when we were sitting in one of my HMOs: If I'd only met you a year ago before you bought this place I'd have been on my knees begging you not to and imploring you to stick to nice 3-bed houses that you can rent to families, remortgage, buy another, and then move on. He said if you do that, you'll be far, far ahead of any HMO junky in 10 years' time. Think hard about it before you leap.   

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Interesting read, good to see the positives and negatives, I think it's good that you rented it to professionals to avoid the damages, I know first hand from being in an 8 bed HMO during my time at university. Also the void problem is easier and less risk in the future if the university builds more purpose-built pods.

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Interesting read, I'm considering HMOs in the future but want to start with a few professional lets first. Also, in my city (Portsmouth, UK) you require C4 planning permission which doesn't seem to be particularly easy to get unless the property already has it.

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Hi Folks

HMO's in the right location will always be in demand, here in Ireland I have an HMO located within walking distance to a major city and have a list of people wanting to rent a room, on the flip side I have a family living in an Apartment who decided three months ago to stop paying rent, we have had to take them to court to evict them.

The voids in HMO'S can be manageable unlike in a single let where you could incur a 3/4 month void with no rent.

I simple spread the load, have a mix of single lets for capital growth and HMO's for cashflow and remember LOCATION LOCATION LOCATION / RESEARCH RESEARCH RESEARCH. 

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On 3/30/2019 at 9:41 PM, adiel stephenson said:

Woooah, slow down boys and girls. That sounds like a very lucky first forray into the otherwise very risky field of HMOs.  I invest in several kinds of property and of those, the HMOs are not the best overall performers (and give me by far the biggest headaches). There are many things you have to factor in: firstly, the time it takes to convert a 3-bed house into a 5-bed monster with ensuites, secondly, the fact that you're destroying what could have been a beautiful and well laid-out Victorian house that first-time-buyer families would have otherwise paid a premium for if tastefully renovated; the cost of converting an HMO with those ridiculous ensuites back into a family home if it doesn't work out will be huge. Then there is the ongoing cost of maintenance: my contractors are constantly regailing me with horror stories about the HMOs they have to service: the main problem is blocked drains from all those silly macerator toilets that are needed for the ensuites and that are nowhere near the original waste pipes. Most importantly, however, is filling the rooms: unless you can get 5 students in to share at the start of the academic year, you'll be struggling with voids constantly. It's a nightmare - and virtually impossible to have every room filled at all times. That's why I find it quite difficult to believe that "mainly foreign" investors were queuing up to buy that place. Most investors will negotiate you down to the bone on HMOs, as they're perfectly aware of the difficulty of managing them and keeping the rooms filled. Finally you've got the nightmare of the tenants: they need to get on with each other, and if they don't know each other, there are usually conflicts, leading some to leave. As one agent advised me when we were sitting in one of my HMOs: If I'd only met you a year ago before you bought this place I'd have been on my knees begging you not to and imploring you to stick to nice 3-bed houses that you can rent to families, remortgage, buy another, and then move on. He said if you do that, you'll be far, far ahead of any HMO junky in 10 years' time. Think hard about it before you leap.   

I love this and it does make a lot of sense. What it doesn't say is what you are supposed to do down south east coast, there yields are 5%? That's gross. Nice 3 bedroom houses rent basically the same as in Midlands, yet cost 3 times as much. You can't remortgage and start again in this case, as it generates no profits and eats a lot of capital. 
I can only see block of flats as feasible option. Get a block with 1 beds, make it 2 beds and rent it out. Get premium stock, and rent at a premium. Flips don't work, they simply don't. You have 10% margin and one thing goes wrong, and it always does, and you are in minus. Thoughts?

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Interesting discussion. Im thinking about changing a large conversion of 6 x 2 bed flats to 12 ensuite student rooms. Can anyone out there clarify if the extra yield actually happens after all the extra costs are taken into account?

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On 3/30/2019 at 9:41 PM, adiel stephenson said:

Woooah, slow down boys and girls. That sounds like a very lucky first forray into the otherwise very risky field of HMOs.  I invest in several kinds of property and of those, the HMOs are not the best overall performers (and give me by far the biggest headaches). There are many things you have to factor in: firstly, the time it takes to convert a 3-bed house into a 5-bed monster with ensuites, secondly, the fact that you're destroying what could have been a beautiful and well laid-out Victorian house that first-time-buyer families would have otherwise paid a premium for if tastefully renovated; the cost of converting an HMO with those ridiculous ensuites back into a family home if it doesn't work out will be huge. Then there is the ongoing cost of maintenance: my contractors are constantly regailing me with horror stories about the HMOs they have to service: the main problem is blocked drains from all those silly macerator toilets that are needed for the ensuites and that are nowhere near the original waste pipes. Most importantly, however, is filling the rooms: unless you can get 5 students in to share at the start of the academic year, you'll be struggling with voids constantly. It's a nightmare - and virtually impossible to have every room filled at all times. That's why I find it quite difficult to believe that "mainly foreign" investors were queuing up to buy that place. Most investors will negotiate you down to the bone on HMOs, as they're perfectly aware of the difficulty of managing them and keeping the rooms filled. Finally you've got the nightmare of the tenants: they need to get on with each other, and if they don't know each other, there are usually conflicts, leading some to leave. As one agent advised me when we were sitting in one of my HMOs: If I'd only met you a year ago before you bought this place I'd have been on my knees begging you not to and imploring you to stick to nice 3-bed houses that you can rent to families, remortgage, buy another, and then move on. He said if you do that, you'll be far, far ahead of any HMO junky in 10 years' time. Think hard about it before you leap.   

Adiel,

 

that is is a very eye opening response and has really got me thinking. Where about are your property’s based and is this a strategy you would recommend to a first time investor who is looking to build up to 4 property as fast as possible? 

 

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On 4/21/2018 at 1:38 PM, youngjoe80 said:

I bought a 3 bed Victorian terraced house for £66k. I turned it into a 5 bed ensuited HMO. Refurb costs were £40k. So with solicitors bills, stamp duty etc. I invested £110k. I then rented the property out for £23,660 gross annual rent. I was unhappy with the quality of the refurb so decided to sell. Had I been happy I would not have even thought of selling. I was able to sell for £155,000. I arrived at the sales price as I wanted to offer an investment to a client with just over 15% gross yield. To my surprise there were many takers (mostly foreigners).

 

 

It's really interesting to hear this.  I've been seeing a lot of ordinary 2 or 3 bed Victoria terraces worth around £60K put on the market by investors as HMOs for £150K +.  I think I will start a new post under HMOs about this.

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  • 4 weeks later...

Please show me a concrete example of a 60k Victorian house that sold for 150k as an HMO. How much do you think it costs to do the initial conversion, how much time does that take and how long before you've got a sufficient track record of stellar rental income before some mug pays you 150k for it?

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  • 1 year later...

Thank you for sharing your story with us. It is really nice that you can make money from this. I guess that you are very talented that was able to develop this story in such a way to make money from it. I cannot do such things. I was looking for a new activity that will give me a passive income. I even found this site themoneymix.com with a lot of ideas. Also there I read how to invest money correctly in order to get an income, but I'm scared. I don't like big changes and I think that I will lose my money. How can I pass over this?

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I am with adiel on this - its nowhere near as easy as it sounds and, if anything, boith hmo's and student accomodation are coming under the spotlight by councils and govt regs so I am not sure i would be recommending this a safe strategy versus having a mixed portfolio - especially if starting out. I am in the midlands so not sure about 'up north' like doncaster where  it seems like properties are in the 50k region but there are plenty of 'professional' tenants.

I would agree with another poster who said a smnall block of flats is a better long term option (if available)

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On 4/7/2019 at 1:02 PM, Luisa C said:

I love this and it does make a lot of sense. What it doesn't say is what you are supposed to do down south east coast, there yields are 5%? That's gross. Nice 3 bedroom houses rent basically the same as in Midlands, yet cost 3 times as much. You can't remortgage and start again in this case, as it generates no profits and eats a lot of capital. 
I can only see block of flats as feasible option. Get a block with 1 beds, make it 2 beds and rent it out. Get premium stock, and rent at a premium. Flips don't work, they simply don't. You have 10% margin and one thing goes wrong, and it always does, and you are in minus. Thoughts?

 

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In reply to Adiel I don't think this was a very lucky first foray into HMO land. I did a lot of research before I got involved. I was also an experienced BTL landlord with an extensive building background. I agree that HMOs do cause a lot of headaches but that is only if you decide to keep them. My strategy was about flipping them. 

It takes 3 months to convert a house into an HMO. You could say you're destroying a Victorian house but on the other hand you could say you're converting a very run down house into good standard housing accommodation for many more people than before thus helping to solve the housing crisis.

I had no intention of ever converting it back into a typical house so those costs are irrelevant.  Maintenance is a factor to consider. I don't use macerators in toilets and never would. I'd refuse to convert a house to an HMO if macerators were the only option.

Students aren't the only customers for HMOs. Where I invest there isn't a student market! Voids are a problem but this is why you need to do a lot of research and only have HMOs where there is strong demand and you must have a good management company onboard.

There was and still is huge demand from foreign investors for HMOs. I'm actively involved with several of them mainly from Hong Kong. Most investors will negotiate with you to try and get a good deal. There is no need to go to the bone if the deal suits both parties.

I agree managing tenants can be a nightmare. It is certainly much more challenging than with your typical BTL. But then the yield is better.

I also agree that you'd be better avoiding HMOs as a long term investment as BTLs will make you a lot more money and give you an easier life. This is only because capital appreciation is much better with BTLs. The value of an HMO is inextricably linked to the amount of rent it commands. This is not the case with BTLs. HMOs have their place if income is your main goal. If you're mainly after capital appreciation I'd avoid HMOs.

I invested in 2 more HMOs of my own after my foray into the market. I bought one for £80,000 (it was a bigger house than the first one in a better area). I spent £50,000 on the refurb and ended up with a very high quality HMO. I kept it for 18 months and made £16,200 net profit on the rent after all expenses. I sold it for £175,000 and made a gross profit on the sale of around £35,000 (excluding rent profit). So in 18 months a very healthy profit.

I bought my third one for £78,000 so when sold it will make a very similar profit as my second one (it's on the same street).

So I stand by my first post. Converting a house to an HMO and selling one every year, if done right can allow you to leave the day job and have more than enough to get by on.    

Edited by youngjoe80
added more information
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On 4/7/2019 at 1:02 PM, Luisa C said:

I love this and it does make a lot of sense. What it doesn't say is what you are supposed to do down south east coast, there yields are 5%? That's gross. Nice 3 bedroom houses rent basically the same as in Midlands, yet cost 3 times as much. You can't remortgage and start again in this case, as it generates no profits and eats a lot of capital. 
I can only see block of flats as feasible option. Get a block with 1 beds, make it 2 beds and rent it out. Get premium stock, and rent at a premium. Flips don't work, they simply don't. You have 10% margin and one thing goes wrong, and it always does, and you are in minus. Thoughts?

HMO flips as I described previously, definitely do work if done right.

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4 hours ago, haf1963 said:

I am with adiel on this - its nowhere near as easy as it sounds and, if anything, boith hmo's and student accomodation are coming under the spotlight by councils and govt regs so I am not sure i would be recommending this a safe strategy versus having a mixed portfolio - especially if starting out. I am in the midlands so not sure about 'up north' like doncaster where  it seems like properties are in the 50k region but there are plenty of 'professional' tenants.

I would agree with another poster who said a smnall block of flats is a better long term option (if available)

I'm not advocating keeping HMOs. I'm advocating flipping them. I wouldn't recommend keeping HMOs medium to long term as they are a lot of hard work and don't have a lot of capital appreciation in them.

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On 5/13/2019 at 12:15 PM, adiel stephenson said:

Please show me a concrete example of a 60k Victorian house that sold for 150k as an HMO. How much do you think it costs to do the initial conversion, how much time does that take and how long before you've got a sufficient track record of stellar rental income before some mug pays you 150k for it?

I bought for £66,000 and sold for £155,000. I kept it for less than a year. It doesn't get much more concrete than that. I have also provided another example in one of my other posts. You can also check Rightmove and see what price HMOs have sold for and check what the house was originally bought for. There are hundreds of examples.

You don't necessarily have to prove a track record of stellar rental income. THere is a strong demand for brand new HMOs with no track record. Comparables of other HMOs would be used in stead to prove rental demand/income.

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