Some people in the property industry seem to have a fear of HMOs. This could be due to the legal requirements surrounding them, the cost involved in converting a property to HMO or maybe lack subject knowledge. I hope this article will give you an insight and help explain a bit about HMOs as a whole and, most importantly, why they can offer one of the most secure forms of property investments in today’s economic climate. I will explain the basic ways to best source and understand how to approach purchasing HMOs.

What is an HMO?

An entire house or flat which is let to three or more tenants who form two or more households and who share a kitchen, bathroom or toilet.

A house which has been converted entirely into bedsits or other non-self-contained accommodation and which is let to three or more tenants who form two or more households and who share kitchen, bathroom or toilet facilities.

A converted house which contains one or more flats which are not wholly self contained (i.e. the flat does not contain within it a kitchen, bathroom and toilet) and which is occupied by three or more tenants who form two or more households.

A building which is converted entirely into self-contained flats if the conversion did not meet the standards of the 1991 Building Regulations and more than one-third of the flats are let on short-term tenancies.

In order to be an HMO the property must be used as the tenants’ only or main residence and it should be used solely or mainly to house tenants. Properties let to students and migrant workers will be treated as their only or main residence and the same will apply to properties which are used as domestic refuges.

The main logic behind government’s strict HMO regulations is fairly simple. Their views were that if a fire broke out and a family were living together they would help to save each other. However, in a house of three or more unrelated people living together, inevitably the individual’s priority would be him or herself. The fire safely regulations were applied to ensure everyone has the best chance of escape, with features including thirty minute fire doors, smoke alarm detectors and fire escape windows etc.

So why HMOs?
The answer is simple high yields, high occupancy rate and less risk overall. The high yields are achieved as you are letting the property room by room and can convert reception rooms to bedrooms. An example being, a typical three bedroom two reception house would achieve as a whole £750pcm, but if converted to an HMO four bedroom one reception at £69pppw you would achieve £1196pcm, nearly doubling the rent. Also, with regard to occupancy, if you were renting the property as a whole and the property was vacant for two months, you would have the full mortgage to pay and additional costs such as bills and water. Whereas even if you had two rooms occupied at £69pppw, then you would still have an income of £598pcm. So, therefore less financial risk overall.

Another positive factor about HMOs is that the economic climate normally does not have a direct impact. In fact a down turn in the market can boost the demand from tenants, especially young professionals who are unable to get on the property ladder, but do not want to live at home with parents.

Types of HMOs
In my view there are three types of target tenants, two of which have the benefit of often overlapping.

Student market - the majority of universities intend to expand student numbers in the next ten years so the demand for good quality accommodation should increase. The downside to student HMOs is that timing of purchase is crucial as the window for moving in is normally mid to late summer. Therefore if your property is available from February, it is likely to be vacant for several months. However once you are in the cycle you should achieve year round occupancy, but please ensure you do your own due diligence as in some cities students only expect to take ten month contracts, so you may have void periods. Some areas are over saturated with student accommodation and as a result the market is competitive and standards have to be high. There are other factors to consider but these are a few.

Professional market – Nowadays many jobs are transient or contract work and as a result, combined with young professionals struggling to purchase their first home, including post graduates and key workers, there is a constant and high demand for quality accommodation in good locations. This target market often overlaps with the student market and therefore you have access to multiple markets.

Social Housing market – As a result of councils not building homes and a shortage of housing nationwide this can be a lucrative target market with rents being around £95 per room per week, more in some areas. Also, if your investment budget is low then these types of properties can be ideal in less desirable areas due to cheaper purchase prices. However please be aware that if long term capital growth is part of your investment strategy then maybe avoid less desirable areas as less likely to increase in price in the long term. On the flip side if you want more or less guaranteed 100% occupancy and high yields then it is definitely worth considering.

If you plan to purchase property yourself and not use an HMO sourcing company then it is imperative that you carry out your own due diligence as there are many factors to consider. A few questions you need to ask yourself are: Are rents realistic? Are property prices realistic in the area? What is the demand in area? If managing the property yourself, have you got the time and expertise to do this? What is your cash flow analysis? Speak to the local experts such as estate agents and letting agents. Also speak to the local council as regulations vary from city to city, and most importantly, if you are planning any conversion work, will the particular council allow it?

A client of mine, whom I might add I did not know at the time, bought a terraced house for himself in a good HMO rental location, the figures stacked up nicely as he planned to convert the loft to create an additional two bedrooms. However when he approached the council after completion he was told that planning for loft conversations were no longer allowed in that particular location. So to reiterate, it is imperative that you obtain the correct information from councils and relevant professionals in advance of purchasing.

Cost implications
• Set up costs - including solicitors, sourcing fee (if applicable), survey costs, mortgage broker fee
• Renovation costs and mortgage payments during renovations (if applicable)
• Furnishing packs and window dressings
• Marketing costs - Letting agent fees and/or own time implications if doing yourself and advertising
• Management fees if using letting agent to manage property and remarketing costs for new tenants after each tenancy period
• Bills and repairs/maintenance costs

Are HMOs for you and costs to consider?
Deciding factors to consider are affordability, short to long term goals, and especially what is your main reason for investing in the first place? Make sure you seek the best professional advice with regard to financing, as in the current economic climate it can be difficult to get the right finance in place. Do you have the upfront monies available including deposit, furnishings and the cost of any renovations? There are however some mortgages lenders that will lend on the end value after works completed. Please note that the vast majority of HMOs are furnished, so remember to build this cost into finances. Other financial implications are the cost of an HMO licence, planning permission if required and void periods during renovations.

With all of the above considered, and if purchased correctly, HMOs can offer the investor not only instant capital growth with yields into double figures but also long term capital growth, with the inevitable rise in property prices.

Once you understand the benefits of purchasing HMOs and see the money coming in, it is likely that this is will be your favoured residential property investment route. So to conclude, which investor wouldn’t want high yields, less risk and overall investment growth?

About the Author:
Claire Elliott has worked in the property industry for many years and has been an HMO sourcing specialist and Regional Manager for a large national HMO investment company.

Claire now runs her own successful property investment sourcing company InvestB2L in the North East of England and specialises in HMOs. Her company offers the full HMO and investment package from sourcing, and renovations through to furnishings.

If you would like further information on HMOs and property investing please contact: claire@investb2l.com
Office: 0191 519 2216, Mobile: 0777 330 9111, Email: sales@investb2l.com Web: www.investb2l.com