Investing in Houses in Multiple Occupation (HMOs) in the UK is a nuanced venture and requires careful consideration and strategic planning. Higher returns, more flexibility and reduced rental-void risk are among the potential benefits of going the HMO route, which often outweigh the administrative load for the keen investor. Drawing from the insights of the HMO Architect Team, here are key strategies and tips tailored to help you navigate the shared housing market confidently starting with the sourcing of the ideal property for your next project.
- Researching the market for HMO properties
- Evaluating potential HMO properties
- Financial analysis before buying an HMO property
- Navigating the buying process for a future HMO
- Compliance and licensing for HMO properties
- Managing and maintaining HMO properties
- Expert advice and resources for sourcing your HMO property
The deal with HMO Properties: What to consider before you buy
Understanding HMO (House in Multiple Occupation) properties, as well as the key players in the market, potential benefits and risks, and the underlying regulatory framework, is a non-negotiable for budding investors and landlords. If you are a seasoned investor, updating your knowledge base is equally important.
Before we get stuck in, let’s start by revisiting the HMO concept. An HMO is essentially a rental property that’s occupied by multiple tenants who don’t form a single household, such as a family. You can immediately see that such a cohabitation arrangement could present diverse challenges and that, while HMOs can be lucrative investments, they require superior commitment and expertise in property management compared to traditional single-tenant properties.
So, why is the HMO business a favoured prospect? This type of property can be lucrative, offering potential benefits such as higher rental income due to housing multiple tenants, more stable occupancy, and potential for professional management. The appeal in terms of latent demand hinges on factors such as location and services in the vicinity. In areas with high student populations or limited affordable housing, HMOs can hope to see stable, long-term rental demand. These properties also offer flexibility in terms of tenant types, from attracting students to young professionals.
Whether you are looking to acquire HMO properties to diversify your existing portfolio or as a primary investment strategy, your goal is likely related to maximising return on investment. Let’s kick things off by identifying everything you need to assess before making an offer on a suitable HMO property.
Identifying and selecting the right location is paramount to a successful HMO investment. To ensure you’re on the right track, start by carrying out market research. You want to identify the areas with high demand for HMOs, considering key factors and variables that influence current and longer-term trends. These include:
- Proximity to public services: Pay attention to the available transport links as well as projects to improve transportation infrastructure.
- Economic hubs: What businesses and institutions in the area might drive housing demand? Consider universities, the range of industries and business types.
- Local employment rates: What is the current and future forecast for the local job market, including income, wealth, and demographic growth. For instance, rising incomes and wealth are associated with demand for higher standards of housing.
- Other trends: Take note of the population growth rate, the availability and affordability of housing, and new developments in the area.
Due diligence is your first stepping stone, and should incorporate property condition assessments, rental income projections, renovation costs, and a solid understanding of local . Collaborating with estate agents and exploring auction houses can also prove invaluable when it comes to revealing possible properties to match your interests and needs.
Assessing property viability is another important aspect of your decision-making process. To value an HMO property involves studying factors beyond the basic property assessments. Important considerations when assessing a prospective HMO property include:
- Achievable rental income and yield
- Location and related trends
- The property’s suitability for regular letting of individual rooms
- Maintenance costs
- Prospective property value increase
A word of caution is to determine if the property of interest is or has been previously let under the shared house scheme. While are non-transferrable, such a property might already have undergone renovations and improvements, updates to comply with the latest regulations, and have historical information regarding return on investment and other critical measurements.
Moreover, surveyors and investors must be aware of local planning regulations such as the and lender-specific criteria. The valuation process in HMOs is intricate and involves layered considerations. Therefore, it is often advisable to obtain a specialist valuation.
As is the case with any real estate acquisition, investors must rigorously analyse general and market-related financial aspects before investing in an HMO.
Key performance indicators (KPIs) play a crucial role in gauging the potential profitability of a property. One widely recognised KPI in the HMO sector is Return on Investment or ROI, a metric that enables investors to estimate profitability by evaluating the income (or percentage of profit) generated as a percentage of the investment cost. However, for a comprehensive assessment, it’s essential to consider additional relevant indicators. These may include cash-on-cash return (the annual return earned on a property relative to the amount of mortgage paid during the same period), net operating income or NOI (revenue generated minus operating expenses) and capitalisation rate (measuring NOI against the current market value of the asset).
Should the property have an HMO history, consider including past performance in your deliberations.
Additional metrics crucial for evaluating your HMO investment, both before purchase and for effective management, encompass:
- Initial investment: Purchase price; legal costs; stamp duty; sourcing fee
- Other expenses: HMO licensing fee, mortgage interests, and insurance
- Project management: Renovation and furniture costs; bills; maintenance costs
- Potential rental income: A realistic assessment of rental for each room based on location, quality and number of rooms and amenities, etc.
Best practices include choosing relevant KPIs for your project, considering the use of software and tools for data management, setting specific targets, and regularly tracking the performance of these metrics. This is a balancing act between risk and potential returns, and a comprehensive approach will allow you to make informed decisions.
The process of buying an HMO involves several steps. Let’s assume you have completed the previous stages: you evaluated if HMOs align with your investment strategy; you have considered their hands-on management requirements; confirmed critical factors such as licensing and local regulations; and your location of choice aligns with high tenant demand and other targets.
Your financial analysis can’t be completed without a solid understanding of the requirements and scope offered by professionals. This includes architects, insurance providers, mortgage advisors, and, if you chose the HMO financing route, lenders specialising in HMO mortgages, all of whom will cover specific requirements to help bring your project to life.
Collaborating with experienced professionals and surveyors will offer you valuable insights. You’ll want a specialised valuation for your HMO property, one that takes into account its specific use and relevant factors to ensure an accurate market value. While this tailored guide might involve higher costs, opting for lenders with a focus on low fees could result in subpar service and potentially elevate the risk associated with your investment.
Ensuring your HMO venture is compliant from the offset will grant you more than peace of mind. Consider that managing a compliant HMO requires careful adherence and consideration of HMO regulations. Whether you are a landlord or a real estate investor, you must observe licensing requirements, safety standards, and health regulations. Factor these in alongside other vital points such as maintaining minimum room size requirements and undertaking regular tenant checks. Staying informed about regulatory changes and seeking expert property management support can help you navigate these complexities effectively.
It’s likely you’ve realised now –if didn’t already– that buying an HMO property may be research intense but is also a fascinating investment opportunity. An advantage for property owners and investors is that they can draw on experts to run the day-to-day operations of their HMO. Property managers can oversee this multi-faceted process, from maintenance and tenant relations to financial reporting.
The successful management of HMOs involves, for instance, maintaining high occupancy rates, ensuring efficient rent collection, and cost-effective operations. Property managers also focus on tenant satisfaction, lease renewal rates and other influencing factors. These KPIs help when it comes to making informed decisions and enhancing the overall profitability and sustainability of HMO investments.
Investing in HMO properties can be rewarding, but it does come a unique set of challenges. The type of property investment requires a comprehensive understanding of the market, thorough financial analysis, compliance with regulations, and effective property management. Aspiring investors are encouraged to seek professional advice and consider all aspects before diving into an HMO investment.
Partnering with HMO experts like architects and regulatory specialists can be invaluable, and this is where we excel. Our expert team at HMO Architects can provide insights into the wealth of architectural considerations HMO properties require. We can help you optimise layouts and design to ensure tenant satisfaction and regulatory compliance. Contact us for a free quote today. We look forward to transforming your vision into a successful HMO investment.