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Similar to but definitely not the same as Self Contained Units, HMOs seem to be where the yields are at these days. This isn’t a strategy for the faint of heart though. For most people HMOs conjure the image of students, but this kind of living arrangement is becoming a lot more popular with different demographics as you’ll soon see. In fact, HMOs are now so removed from student housing, that we’ve given student housing its own section as it has more specific characteristics.
What is the HMO Property Strategy?
A House in Multiple Occupation is where three or more unrelated tenants live in a property together which is owned by a landlord. The occupants usually share facilities like kitchens and bathrooms and then have a bedroom to themselves. This strategy involves either buying an HMO ready property or converting one yourself. The idea behind this one is that you can make more money renting the property in single rooms than you can renting the property as a whole. The more rooms you’re able to split your property into, the more money you’ll make.
This isn’t a one size fits all strategy. The type of tenant you want to attract will impact how much you can expect to make from this strategy and in turn what kind of property you should be buying and the rental options you should be offering.
Boutique HMOs:
These are by far the most profitable, but they also require a large initial outlay of cash. In this model you’ll be providing accommodation for high-end professionals in more affluent parts of a town or city close to the centre. Using this strategy, you can get the highest rent. For this to work the property needs to be of a high specification and you’ll need to find the right property in the right location to make this work for you, usually London, Cardiff Bay, Leeds and the centre of other big and popular cities.
Professional or post graduate HMOs:
Like with the boutique model you’ll be looking to rent to professionals or post graduate students, but they don’t require such a high-end property. You’ll find there is more demand for postgraduate and professional HMOs than there are for boutique HMOs. The property needs to be furnished, so again there is an up-front investment to get started, but the furniture and fittings don’t have to be high end. The right property for this market is close to transport links or to business centres (or universities if you’re offering accommodation for postgraduates).
Blue-collar HMOs:
This is a larger market again than boutique and professional HMOs. A blue-collar HMO looks to attract younger blue-collar workers. HMOs of this type can be found in lower priced areas and often located close to the main industry of the town, such as a large factory, industrial estate, hospital etc. The property should be furnished, but unlike boutiques and professional properties basic furniture will usually be acceptable.
Social Housing HMOs:
This strategy involves providing an HMO for tenants on benefits. There are a lot of tenants on benefits looking for housing, so there is plenty of opportunity in this market. Benefit tenants are only able to pay so much when it comes to accommodation, so you’ll need to ensure your rents reflect what the government are happy to pay for. It isn’t that lucrative if you’re putting in a lot of capital up front as you won’t make as much per room as you would with other tenant types. This segment should only really be pursued by experienced landlords as often benefit tenants require more management and may have issues making rental payments on time due to issues with the government’s benefits system.
Pros of HMO Strategies
HMOs tend to have high yields even after the high operating costs.
An HMO is rarely completely empty, even if one person moves out, you should have a few more tenants in situ which helps to spread the risk of void periods. With an HMO a void rarely means a totally empty property which has less impact on your finances overall.
The HMO strategy allows you to make more revenue from fewer properties leading to a streamlined portfolio and a reduction in maintenance costs over a traditional buy to let.
If you decide to make improvements to an HMO such as adding an extension these can be considered revenue costs and so can be deducted against your tax return. In a standard property these are considered capital costs and can’t be deducted until the property is sold. This isn’t always the case though and will vary based on your circumstances, so make sure to get tax advice before taking this as read.
In some areas of the UK HMOs are in demand particularly in towns and cities, because they represent convenience for professionals and because tenants find them cheap and easy to budget for, they will often withstand market fluctuations.
There is less exposure to arrears, if one tenant falls behind on their rent it isn’t as impactful as it would be in a standard buy to let.
Cons of HMO Strategies
Councils are doing more to regulate HMOs because there were (and still are) a spate of landlords abusing this strategy. A trend of carving up two-bedroom properties into 8 cupboards and renting them out for a small fortune became known as the beds in sheds phenomenon. Due to this HMOs need to be licenced. In some areas, councils may refuse permission for a new HMO to be set up. Along with the licensing there are stricter rules around HMOs than any other kind of strategy most notably, but not exclusively, room sizes and fire precautions.
Unless you go for the boutique model, HMOs tend to attract people of more limited means. Those living in HMOs tend to be at a higher risk of losing their jobs and so it is imperative that HMO tenants are properly screened and that the landlord or managing agent carries out regular inspections. This isn’t the kind of investment where you can let things slide.
The tenant turnover is higher in an HMO than in buy to let. Tenants are less emotionally invested in the people they live with and will often leave the property when they’re earning enough to afford their own space. If you aren’t using a letting agent, frequently finding new tenants may be a bit of a drain on your time.
HMOs are usually furnished, and the rent often includes bills, so there are higher costs associated with running an HMO. There is also likely to be a higher amount of wear and tear with more people living in the property.
As HMOs are more heavily regulated, you’ll need to fit fire doors and fire alarms as well as heeding other safety precautions, so this will add to the up-front cost. As a result, management will also be more time consuming because there are more people to look after, so either more time is needed from you or a higher management fee will be demanded from a letting agent.
It is possible to get a mortgage for an HMO, but it usually requires a higher deposit and the interest is usually higher than a standard buy to let mortgage. The mortgage may also contain terms and conditions that you wouldn’t find in a standard buy to let mortgage.
Not every property will work as an HMO and it may be more expensive to purchase one that is already converted or difficult to find a property that can be converted. Even once you’ve found the perfect property you must have a good exit strategy in place. You may lose capital growth on an HMO property because when it comes to selling you’ll either need to sell it exclusively to a landlord who wants to take on an HMO or to someone who’s happy to convert it to a family home or flats (unless you convert it yourself before you sell.)
It is harder to find a letting agent who is happy to manage HMOs than traditional buy to lets and when you do find one the fees are likely to be higher as HMOs require more work. Self-management can be very time consuming.
What’s Needed to Make an HMO Strategy Successful?
An ability to read, understand, keep up with and act on the latest legislation.
Plenty of capital to invest in the property both before it is let out and afterwards to cover voids, wear and tear and the costs of replacing worn out furniture.
Time to manage the property or a high enough yield to take on a good letting agent or property manager.
A cast iron screening process.
The key to this strategy is being able to manage your tenants and the building properly, compliantly and in a timely manner.
There is no getting away from the fact that this kind of strategy is harder work than the others, but then HMOs make great investments if you get everything right.
When HMOs go Right
You’ll end up with a well-functioning HMO housing tenants who are all happy living together, you’ll be making good yields and all that will be needed from you is the occasional bit of maintenance and the ability to find new tenants when old ones move on.
When HMOs go Wrong
Unfortunately, there are many ways this strategy can go wrong. The council could refuse to let you set up an HMO or to licence you. You may purchase the wrong property in the wrong area and struggle to find interested tenants. Or you may do everything right and end up with tenants who don’t get on with each other and make management a bit more difficult.
Who Does the HMO Strategy Suit?
An organised person who has the time and ability to manage the property and multiple tenants.
A people person with managerial experience would find it easier to manage multiple tenants particularly blue-collar and benefit tenants.
If you are studious and have a good eye for detail and a willingness to get into the weeds of the legislation around HMOs, you’ll do well with this strategy.
DIY skills would be a huge advantage as they will help you save money on maintenance and wear and tear issues.
If you take your responsibilities seriously and don’t let them slide, especially in terms of property inspections and maintenance you’ll do well with this strategy.
What is the Student Property Strategy?
Student lets have been around for a long time and for good reason. They are often high yielding, easy to get started with and until recently have been relatively undisrupted. They are technically a sub-type of HMOs, but the market has its own characteristics, so we’ve drawn it out into its own section.
This strategy sees you providing residential accommodation for a group of students. Unless you are renting out single flats (which is very unusual for student style accommodation) then you will be running an HMO.
Pros of the Student Property Strategy
The income and your void periods are predictable and usually stable. You know every year when the tenants will arrive and when they will leave. This makes it easier to manage and model finances.
Student tenants’ expectations of a property are lower than for most other types of HMO.
Unlike a traditional HMO you let to students on a joint contract, so if one student leaves the others will have to continue paying the absent student’s share of the rent. This is better if one of the tenants drops out before the end of the academic year, or if interpersonal issues cause a student to want to move out.
Because the tenants aren’t there all year round, you’ll enjoy the increased revenue of HMOs but with less management overheads, or at least you know there are certain months where you’ll have no students to manage. The student cycle is predictable.
There is a niche within this strategy of letting high spec flats to international student tenants who tend to look for more expensive accommodation with all the mod cons. If you have the capital to put into this kind of accommodation there are even higher yields to be made. As this is a niche it requires some research to ensure that there is a market for this kind of property in the university town you are investing in.
If the university town is popular as a tourist destination or if the university holds events over the summer, you could let rooms in your property on a short-term basis over the summer months minimising your void periods. If you have finance, you will need to check terms and conditions on this as lenders sometimes prohibit short-term lets.
Cons of Investing in Student Property
As with other HMOs there will be extra wear and tear on furniture, fixtures and fittings. Also many students living away from home for the first time struggle to understand how to keep a property truly clean, so you might expect a dirty cooker, crumbs in cupboards etc. This increases the amount of time it takes to turn the property around for the next group of students the following year. There is a higher amount of maintenance involved and a higher level of management. Student tenants are more likely to be in touch over minor issues such as lost keys and interpersonal issues with other housemates.
There are voids in the summer months and the property will likely be vacant around Christmas and between terms. Students don’t always make it through an academic year, they can drop out for whatever reason, so that can leave you with a void. If you don’t have students on a joint tenancy agreement, it’s a void you must fill.
There is increasing legislation in the HMO sector and this shows no signs of abating.
Traditional student house shares are coming under pressure from new purpose-built student accommodation. These purpose-built house shares are usually managed by the university and are often built on or very close to the campus. They are also cheaper for students to rent, so there is less need for students to look for private rentals outside of this. It is possible to invest in these purpose-built accommodations, but options tend to be limited and yields are uncertain.
What’s Needed to Make Student Property Successful?
Large multi roomed properties that are within a mile of the university. Properties further away than that may appeal to postgraduates, most students won’t want to spend money on transport, so the university should be within walking distance of the property.
An eye for a good student, remember a lot of students aren’t going to have references to give you as they’ll have been living with parents up until this point. You should ensure students have a guarantor and that you’re able to contact them.
To make this strategy successful you’ll need the resource to advertise your property and to get it ready for the next group of tenants between July and September every year.
If you want to let the property on a short-term basis in the summer, you’ll need to be able to turn the property around quickly once the students have left.
When Student Properties go Right
You can expect stable income and if you find a good group of tenants who live well together, they could potentially occupy the property for the entire length of their degree, so you could end up renting hassle free for three years at a time.
If you’ve bought the right property, you can expect high yields, most students tend to pay up front at the start of each term, so this can help protect against missing rent.
When Student Properties go Wrong
With student tenants living away from home for the first time there can be issues, if you’re not a very involved landlord expect things to go wrong. You will need to conduct regular inspections, be able to speak up about any issues that are highlighted during inspections, be able to help with any interpersonal issues that arise etc. If you’re not up to this it will go wrong at some point.
Students are more likely to randomly sub let to friends, family or other students who don’t like where they are supposed to be staying. This can be an issue for insurance purposes and is often prohibited by lenders as well.
If you buy a property too far away from the university or you don’t research purpose build accommodation and demand in the area you could end up with a property that you can’t find tenants for.
If you are too hasty and you don’t follow all the usual rules of an HMO you could end up being fined or worse.
Who does the Student Property Strategy suit?
Are you thick skinned? Naturally parental? Do you have the time to turn around a student property every summer? If you answered yes to these questions this might be the strategy for you.
If you are an enterprising person who can afford to spend the time looking for new occupants every September and potentially during the summer months as well this strategy may suit you.
An ability to understand, keep up with and act on HMO rules is essential.
There will be more wear and tear than usual, so you will need to be the kind of landlord who keeps money in reserve to cover damage to property and wear and tear.
You’ll either need to be a hands-on landlord or you’ll need to be willing to sink revenue into a managing agent. It will be important to carry out regular inspections and to make yourself available to students when they have a question or want to report an issue.
