Some key considerations before you start investing in HMO property

publication date: Jul 29, 2010
author/source: Guest article by Sarah Walker, Freelance Property Writer & former presenter of BBC1’s ‘To Buy Or Not To Buy’

Some key considerations before you start investing in HMO property

If, as a property investor, you’re concerned with generating income, you should be looking at an HMO strategy (renting rooms in a larger house to individuals).  This should provide you with at least double the rental income you’d get from renting the property as a whole to one party, and it’s become a very popular strategy over the years, for precisely that reason, with the best income and least troublesome tenants coming from renting rooms to working adults.  The problem is that it’s not simple or easy – among other things, you need to be concerned with:-

  • Submitting a planning application if there are three or more unrelated people living there
  • Conforming to building regulations, fire and health & safety regulations
  • Understanding the legal methods of renting rooms; knowing what you can provide in a room without needing to produce individual EPCs
  • The gas and electrical checks you need to have done and when
  • Having a system in place for managing the tenants
  • Having the right insurance products

... the list goes on.

And you’ve got to be very careful about exactly where you buy.  When you’re looking to invest in HMOs – indeed, any kind of property – you need to look at the local economic and demographic fundamentals that support demand and growth in the specific area you’re looking to invest, and I can’t stress that enough.

It’s no secret that the property market is driven by supply and demand, so you ideally want to buy something that’s in limited supply, for which there is great demand.  That principle is simple enough, but how do you actually assess the demand?  Each area will have its own specific criteria, but here are three key factors you absolutely need to look into:-

1.  Employment
One of the key drivers in terms of both sales and rental demand is employment, and it falls into two key areas.  Firstly, you need to look for large businesses that are well-established and also those who are launching or expanding in the area.  And secondly, you need to see what kind of jobs they are creating, because your prospective tenants or buyers will have different profiles.  For example, if your strategy is going to be HMOs for working adults, you need to be sure that there are good employment opportunities for young people and some excellent prospects for short to medium term contracts, because the kind of tenants you’re probably looking for will be aged between 20 and 30 and won’t want to commit to a long-term rental agreement.  You’ve chosen this strategy to make money every month and aren’t looking to sell your properties at any point in the foreseeable future, so you have to be certain that there will be a constant flow of people to rent from you.

2.  The neighbourhood, local facilities and council
If you’re looking to invest in multi-lets for students or working adults, the locale has to be appropriate for their lifestyle.  And with the HMO planning regulations that came in in April 2010, you have to be very confident before you buy that the council will allow you to operate such a property in that location.  Although that policy of more than three people sharing a house needing planning permission will fall back to more than six people in October, councils will still retain the right to require planning permission for an HMO of any size, under an Article 4 direction.  Given the additional paperwork this will create, not every council is likely to be in favour of heavy usage of this right, but it is a major consideration and one not worth trying to dodge.  In short, the specific location has to be right, because you don’t want to end up with an investment that, in isolation, stacks up brilliantly on the figures, but later turns out to be in completely the wrong location, unfit for purpose.

3.  Other housing
There’s a fine line you need to tread when you’re providing rental accommodation, between investing in an area where there’s proven demand and joining an already overcrowded pool of properties.  You can go to the local council offices and look at plans to see what’s due to be built in the area in the next few years and visit local letting agents to find out where there may be an oversupply.  Companies will tell you how rental remand stands today, they’ll rarely focus on what’s going to happen two years down the line, so make sure you’re as knowledgeable as possible about the housing stock around your proposed investment.

You, as an investor, need to be absolutely clear about why and how you’re investing and then gather your own statistics.  Buying investment property - unless you’re already established with some properties, a robust strategy and team in place – is not quick, easy or something you should do without taking the time to do serious due diligence.

I’ve seen numerous people standing at the front of a room telling people how much money they can make from HMOs and I know full well that most of those people are operating unsafe properties that are breaking the law.  They amassed a lot of these larger properties over the easy years but took the easier (and less lucrative) route of student letting, kept under the local council radar and pretty much let the properties look after themselves.  Five or ten years later, things are catching up with them, the properties all need refurbishing and the local councils are catching up with checks on non-compliance.  One very high-profile investor freely admits now that his portfolio is a chain around his neck and if he could go back and do it properly, he would.  Instead, he’s spending his days dodging the council, only able to attract the lowest end of the tenant scale and, as a result, his income has suffered dramatically.

At the end of the day, your strategy needs to be robust, i.e. you need to be confident that you’ve considered all the potential downsides – interest rate rises, void periods, rental rates fluctuating, etc – and are happy that your strategy insulates you well against the things that can negatively impact you, which an HMO strategy, implemented correctly, should do.  Never mind what people trying to sell you dreams, leads and DVD courses are saying about guaranteed this and that (usually complete rubbish), and quoting how investments have performed in the past – nobody can predict the future, so you need to be absolutely happy with what you’re committing yourself to.

Taken from the forthcoming book, ‘Beware the Property Rogues’ by Nick Carlile and Steve Bolton, founders of Platinum Property Partners, available in September 2010.

To help you avoid these mistakes, the experts at Designs on Property have developed a pack full of comprehensive information covering all the aspects of buying and running a buy to let property. This pack also includes a FREE copy of the Which? Renting and Letting Book.

With the addition of worksheets, mini-projects and checklists for you to complete, you now have a clear path through the process of finding, buying and running a buy to let property. Don't invest a penny without purchasing this Buying and Renting a Buy to Let Pack first!

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