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HMO Strategy: Is this the right one for you?

Last updated: 21st September 2020

A HMO strategy isn’t for the faint hearted.

HMOs require hard work. So you’ve got to be prepared to put in the effort if you want to succeed.

If you’re looking for something relatively hands-off and are wanting to win big with capital growth, a HMO strategy is unlikely to be for you. But if you’re after a decent rental return and you like to be hands on, it’s worth considering.

Now we’ve got the intro out of the way, let’s dive into the details of a HMO strategy.

What is a HMO?

HMO = a house in multiple occupation. It’s essentially a property that’s rented out to at least three people who aren’t from one household.

For example, you have a standard 3-bedroom house but each bedroom is rented out to a working professional, but they share the living spaces.

However, if the property is occupied by more than five people, you’ll need to obtain a licence.

And if you’re going to have more than seven people in the property, then that’s categorised as a large HMO and you need to apply for planning permission for change of use.

Advantages of a HMO strategy

The biggest advantage of choosing a HMO strategy is that you’re going to generate higher amounts of cash, because you can often command higher rents renting rooms out on an individual basis than you can to one household. This is where a HMO will often trump a traditional buy-to-let as you can create more income with less properties.

Larger HMOs can also be valued on an investment valuation, that’s when they value the property on the rent roll. This means that usually you can refinance and pull more money out of the property.

Another big advantage of HMOs is that you can get six month tenancies. Of course you can get some tenants who stay for longer, but the choice is there with HMOs whereas it might not be for a strategy like services accommodation.

One thing to note is that location is key when going down the HMO route, and you need to make sure you’re ticking all of the essential fundamentals boxes. We talk about them all the time, but make sure you really understand the fundamentals before investing in any type of property – not just HMOs.

Most HMOs tend to be large houses that have been converted, and these are often in and around city centres. A popular target market with investors is the young professional market – this demographic prefers being close to local amenities and transport links for commuting – so make sure you research locations properly to make sure your HMO benefits from everything a tenant needs.

Disadvantages of a HMO strategy

The main thing that puts some people off a HMO strategy is the refurb. Unless you’re purchasing a HMO from an existing investor, a HMO will require a refurb to bring it up to co-living standard. So if you’re not willing to be hands-on at this point then you should choose a different strategy.

You need to bear in mind that sometimes a refurb can be considerable, for example, turning a 3-bed house into a 5-bed. That’s not something that’s going to transform overnight. There’s more to it than just a lick of paint like you might have to do with a standard buy-to-let.

Another thing to consider is making sure that once you’ve carried out the refurbishment, and you’ve obtained your HMO licence, is if the numbers are actually going to stack up. The last thing you want is to put in all that effort to see a minimal return. Give this video a watch to make sure you aren’t spending any unnecessary cash.

There’s also the idea of targeting the student market with a HMO property. Although yes, that is a large market and naturally they all need somewhere to live, it’s not a market we’d advise aiming for. But that’s a cautionary tale for another day.

Is a HMO strategy the right one for me?

There’s a lot you need to think about before 100% committing to a HMO strategy. This isn’t something that you’re going to want to rush into.

One area that you’ll want to be very clued up on is the effect that supply and demand can have on the rentability of your property. If you’re planning to convert a property into a HMO in an area where there are already a lot of HMOs, you may struggle letting all the rooms out if the demand for it isn’t there.

Research is your best friend here. Make sure the property isn’t in the middle of nowhere and make sure that the fundamentals are there to go with it. That’s the recipe for success.

If you’re certain that this is the right investment strategy for you, you’re going to want to go into it fully equipped. You’re going to want to make sure that you’ve got the advantage of getting your property let and we’ve got just the tool you need in the form of this university course. Whether you’re going to be managing the property yourself or using a letting agent, this course will make sure everything is being done to have all your rooms rented out and generating an income.

If you’re still sat on the fence about whether or not you should be investing in a HMO right now, you’ve got two choices.

You can either book a goals call and we’ll talk it through with you in even more detail and make sure that the strategy you’re choosing is going to help you achieve your goals. Or, you could give this podcast episode a listen where Rob & Rob discuss whether now is a good time to invest in HMOs.

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