Hello readers,
There are several different property investment strategies that people tend to opt for, however one popular approach is investing in an HMO.
For investors with the right amount of available capital looking at getting as attractive returns as they can, HMOs prove to be a popular avenue however with that reward comes increased risk and regulatory requirements. In my view, these are all worth it!
Before diving into this article that tells you everything you need to know about an what HMO investment strategy is, there are a few previous articles you might be interested in reading:
- HMOs Provide Medway landlords with an excellent yield whilst saving tenants over £11k per year!
- Fact… Medway HMO Capital Values Outstrip The Market Average By 32%
- HMO vs Single Let – Which Strategy Is Best?
- Five key considerations when investing in an HMO
- Six Quick Fire Interior Design Tips For HMO Investors
- Five first time HMO investor tips
- How to Value Your HMO
- HMOs Have The Best ROI. FACT!
So, now you’ve brushed up let’s dive in to answer the first question ‘what is an HMO?’.
What is an HMO?
An HMO, short for “House in Multiple Occupation,” is a type of accommodation owned by a private landlord and shared among multiple tenants.
This category includes houses or flats where distinct tenants rent individual rooms along with the communal areas of the property. HMOs encompass diverse forms such as hostels, multiple bedsits in a large building, converted flat blocks, and self-contained cluster flats.
Simply put, an HMO is a shared residence where multiple individuals live together and share common spaces without forming a single-family unit. According to government definitions, an HMO is any residential property occupied by three or more tenants from two or more households sharing basic amenities.
HMOs generally become licensable when five or more tenants reside in the property, however rules do vary from one local authority to another.
How does an HMO investment strategy differ and why is it popular?
An HMO investment strategy tends to focus around generating strong cashflow through multi-room occupancy as opposed to generating the best returns through capital appreciation.
Compared to a single let property, an HMO investment strategy tends to generate returns in excess of 10% return on investment. The calculation below gives you an example of how a six-bedroom HMO financed at 75% loan to value could work.
You will see how the reward is greater when compared to a single let property with the illustration below that gives you a return of just over 6%.
Two big differences to an HMO investment strategy compared to others is the start-up capital requirements (typically upwards of £150k) and regulatory requirements. Both these barriers to entry mean less skill and finance is required to obtain a single let property and let it out. Obviously there are other strategies such as serviced accommodation, title splits, new build and planning gain but for this example I thought I would compare largely to a single let.
From the attractive returns, you can see how an HMO investment strategy is so popular and if excellent cashflow today (followed by appreciation later) rather than appreciation for tomorrow is your game then an HMO investment strategy is one you will want to consider.
Even if an HMO strategy is not your prime focus, it can be an excellent way to generate the cashflow you need for other investment avenues (perhaps even with single let properties).
Who lives in an HMO?
Students, young professionals and blue-collar workers are the most common types of individual who live in an HMO.
Students
For students, HMOs present an affordable housing alternative compared to renting an entire house or flat.
Beyond cost considerations, the social environment of HMOs is particularly enticing for young individuals navigating new cities or university life.
The communal nature of HMO living fosters opportunities for students to forge new friendships and establish a support network while pursuing their studies away from home.
Young professionals
Young professionals, embarking on their careers, often find HMOs appealing due to their financial constraints.
These individuals may not yet have the means to lease a standalone apartment or house, making HMOs an economical choice. The social dynamics within HMOs also attract those new to a city or industry, offering a supportive community.
The convenience factor is noteworthy as well, with furnished rooms and shared amenities like fully equipped kitchens, white goods, and laundry facilities.
Blue collar workers
Blue-collar workers constitute a substantial market within the HMO landscape.
Geared towards younger individuals in blue-collar professions, these HMOs are typically situated in more affordable areas, often in proximity to major industries like factories or industrial estates. I would also include healthcare workers in this bracket as this is a large market within the Medway towns.
While furnishings are still provided, the expectations for basic furniture are generally more lenient compared to boutique or professional HMOs.
How do I get started?
There are two ways to get started with an HMO investment strategy; purchase an existing HMO or source a property and convert it.
I would always advise potential HMO investors to get educated first as making the wrong decision when it comes to HMO investing can be an expensive move. Some people will simply devour as much advice as possible, whilst others will choose to find a suitable coach.
The next step is to identify the area you would like to invest in and see what HMOs already exist. You might want to plot them on a map using the HMO landlord data or simply speak with other investors.
After you have identified the area, you will want to speak with the local council to find out what licensing requirements are within the area and once you are confident with this, you can start looking for that perfect property.
You might also want to choose to joint venture with an experienced investor as this will give more certainty to all involved.
Other considerations
Obviously there are a lot more points to consider that I cannot cover here and if you’d like to know more about HMO investment strategies, you can grab a copy of my eBook here.
A few other points to consider, however, are:
- Changing rules and regulations
- Obtaining specialist finance
- Specialist HMO insurance
- Having substantial start up funding
- Conversion requirements including fire safety
- Potentially lower capital growth (but excellent cashflow)
If you’re thinking of investing in an HMO and have additional questions about what an HMO investment strategy is and how it could benefit you then I will be more than happy to help. The best way to get in touch is through LinkedIn.
Hasan
