Houses of Multiple Occupancy offer landlords an exciting opportunity to make great yields on rental properties, but they do come with their own trials and tribulations. Movebubble’s Logan Hall gives a quick overview of what to look out for if you are thinking about getting involved as an HMO landlord.
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Who will manage the property?
Agents can be unwilling to manage properties that fall under the category of HMO because of several reasons. The regulations the houses need to meet to be fully compliant are often not met, as many properties are converted without regard for these regulations. Property managers can be liable for houses they manage, so properties that aren’t up to the correct standards can result in the managers facing serious fines and prosecution.
HMO tenants can also be seen as the least desirable for an agent to manage as they’re usually lower income (and seen as less reliable in the eyes of the agent). When there are several independent people living in a property there’s more chance of additional problems or gripes. Liaising with several tenants rather than just one (usually one person in a couple or family living together will take responsibility for dealing with the agent) can be much more hassle for agents.
Agents will likely help you with finding renters but if that’s all, you will have to manage and maintain the property yourself. You may find it easier to buy properties as close to home as you can so that you can more easily ensure they are managed. This could involve house checks, checking work has been completed by contractors, completing inventories, distributing and checking the property keys, doing minor maintenance and being on hand in emergencies.
Check the population of the local towns, villages and cities. The smaller the place, the less the demand for rental, however there is also perhaps less competition. Just be sure to calculate the number of potential investors in any one area, and try to look at areas that seem underserved so that your investment has the best opportunity to make better yields.
What local economic hubs exist, and what companies are operating from this area? If there’s a large cluster of corporate businesses then there will be a fairly constant stream of top-notch renters, looking for great properties. Airport links are also another good indicator of local economic activity, because all those workers serving the airport will need somewhere to live.
HMO’s are popular in towns or cities with large universities as there’s always a demand for good quality student housing. Rural areas with large universities are usually the ones that will be most in demand.
Student areas are seen to be good investment areas, because many students want to live in properties in their 2nd and 3rd year and HMOs are seen as an easy and secure alternative for them. With lockable rooms, shared kitchens and bathrooms they are seen as a half-way house between full private rental and the fun dormitory feeling of halls. The only issue to be aware of here, is that you are likely to get additional wear and tear and that getting committal to annual agreements may be harder (as students are not at university for the whole year due to the long summers), therefore you could include the option to pay half rent for 1 or 2 months in a 12 month agreement to compromise on this (but only if you feel this is necessary). Void periods can be expensive with HMOs (or any property for that matter) because the properties are larger in size with a likelihood of larger mortgages.
Regeneration and investment are also always important factors to look at too. What infrastructure and transport projects are due for completion in the near future? Have a look at the companies that are undertaking the work, and what previous work of this nature has done to the area. Again, this is all about the long-term not short-term gain, so bear in mind those towns with a developing infrastructure and transport systems for those longer-term investments.
Who do you think is likely to rent your property?
Professional renters are everywhere and as more and more people find it difficult to buy their own home, demand in the rental market is growing, especially if you have a property in an urban area, near transport and economic areas. All you really need to be sure of here is that potential renters have a regular income, and that they come with adequate references from previous landlords (aka owners) and employment references.
If you are near a university as stated above then you can likely bet that your renters might be students. Bookworms by day, and party animals by night. Be sure to have hardwearing furnishings. It might be that you can choose to only rent to a particular sub segment of students, including overseas students or post grads who are perhaps more mature and less likely to cause issues. You will always have your safety net, as most things that could go wrong can be covered by the deposits and house insurance. Your student renters will be receptive to a good owner who takes pride in the house and endeavors to solve any issues quickly. Students are used to living in poor quality accommodation with agents or landlords that don’t seem to care about the state of the property or ongoing issues; forming a good professional relationship with your students can be extremely beneficial to both parties and also result in a waiting list of next years renters wanting to move in.
If you’re thinking about renting to those on benefits or Local Housing Allowance then this can be a good option as you are paid directly from the government, therefore arrears are very unlikely. However, you’ll find that this form of rental income is less profitable, as the local council doesn’t pay as much as private renters typically would.
Types of Property
The type of property is important because this will affect the likely tenants, and the potential rent you can ask for.
How big can you go?
Look at the number of rooms, because it is generally understood that big is better in the world of HMOs. You need to maximize your rental return against your workload, and the more monthly rental payments the better. Therefore, you should be looking for properties with at least 4 bedrooms. But you will have to be aware that the larger the property, the larger the project to convert to an HMO. You will require more up front investment to purchase the property (or a bigger mortgage) and more licenses and planning permission from the local council.
Ex-commercial properties are always an exciting option to look at, as they offer you the opportunity to develop your vision, and offer an exciting property for your renters. They are also likely in less residential or quieter areas, and thus the number of complaints will be far reduced. They also will likely have a lot of space, and this means that you can divide the property into more bedrooms, which in turn will result in more rent. Just a word of warning, make sure that you don’t slice and dice a property too much. Your renters will still need a lovely place to live, and will expect space. If you cannot offer this, a competitor will and you may not be able to rent the property.
Again, these are normally a great option, and are usually bigger than un-council property. Although they might not be as pretty on the outside, you will be able to make a great HMO with the right space. Cheaper to buy, they will result in good rental yields. The only issue is perhaps the capital gains will be lower than other more period property. It is always worth checking the local area, if the area is in reasonably good condition and it’s relatively safe, you could be onto a winner.
What should you be paying for an HMO?
The larger the property the more rented rooms you should be expecting to have. A guide is that you shouldn’t really be overstepping 400K for your property purchase (unless you’re in London or looking at large commercial building as stated above). Make sure that you become a local property guru, and get to know where the good areas are. If you’re willing to purchase a few miles outside town you can get a bigger property for your money (check transport links) but keep in mind there will usually be more demand for central properties.
The local area should set your rental rates. Seeing as you’re renting to individuals, you’re generally looking to compete with one-bedroom studios. This should be your maximum price point. Anything under will seem appealing to a potential renter.
Some of the main issues with HMOs
HMOS are a great source of rental income, but they do require regular maintenance and generally have a higher turnover as people move on to the next stages of their lives. Finding a great platform to manage your properties is useful, and ensuring that you have access to an easy system for amending and signing rental agreements is paramount. You will require access to local maintenance providers, in the case that you undertake the property maintenance yourself.
The UK population is growing and employment rates are now rising. The demand for HMO’s are increasing as property prices rise and people spend longer in their careers before settling down. This could be a great time for HMO’s within the property market.
So if this tickles your fancy and you’re intrigued to find out more, you can join Movebubble’s Expert Webinar Series on 30.04.14, at 19:00, all about HMO property investment, from an HMO property advisor of Easy Living Property (Speaker Ash Zuberi -pictured).
Just follow this link to the Movebubble.me Expert Webinar Registration Page for more information.