For those of you new to HMO property investment this article is for you.

In this article we will give you a quick definition, and a summary of why you should consider taking a close look.

What is an HMO?

HMO stands for House in Multiple Occupancy. The easiest definition is a shared house where tenants have their tenancy agreements. This means they have their own lockable bedrooms but share other facilities. This may include a kitchen, bathrooms and sometimes living areas. In some cases the bedroom will have cooking and en-suite facilites, but not always.

An HMO is usually defined as being three non-related sharers but can be many more.

The landlord will usually be responsible for bills including:

• utility bills (although there be have meters in each room)
• council tax
• wifi
• insurance

Why HMOs should be on your radar

The main reason is simple, GREAT YIELDS.

HMO property investment can generate yields far above other buy-to-let (BTL) property investments.

By letting rooms on individual contracts the landlord can charge higher rents. This is especially true since the rent usually includes bills. Higher rents versus a cash investment lower proportionally than single-lets means higher yields. (The extra cash is needed to change the property so that it conforms to HMO standards)

Our client-funded HMOs offer gross yields over 19%. Net yields are usually in the mid-teens.

Where else can you get that, especially in the UK?

Don’t Go Hungry

With normal BTL property there is either a tenant in place, or there isn’t.

It’s feast or famine.

With an HMO you have multiple unrelated tenants who come and go in an irregular fashion. It’s normal to expect to have some tenants in the property at all times, even if some rooms are empty (void).

This means the chances of you having no income from the property are slim. This is because the chance of the property being completely empty is low.

This is not the same as single-lets where you either have a tenant (feast) or it is empty (famine).

The only exception to this arguably are student HMOs. These tend to follow the academic year in terms of demand. The trade-off is that you can usually get a 11-12 month tenancy agreement. You may also get the parents acting as guarantors.

Let’s not forget about capital growth either. As you have seen HMOs are a yield investment play and not a growth play. That said, you should expect an HMO property investment to rise in value with the tide of the rest of the market.

Growing market

The demand for this sort of accommodation is growing. As a result this supports good rents and minimal void periods.

I was at The Property Investor Show in March 2015 and listened to a talk by Matt Hutchinson, one of the Directors of Spareroom.co.uk. His website is the UK leading website for sharers looking for HMOs to live in. His website is one of our first points of call when analysing a potential property.

He explained that over a two year period up to early 2015 the number of tenants looking for properties on their site had increased by 30%. Compare to this was the fact that the number of available rooms had increased by less than 1%.

HMO landlords are on the right side of the supply and demand curve to profit from this trend in the market.

The reasons for this trend are:

• Young people leaving home do not have enough saved for a deposit towards a mortgage. At the same time they might earn too much to qualify for social housing.
• Graduates continue to live with their friends in a location of their choice.
• A relevant but less positive demographic in this sector are the over-45s. These are often men who have been through a separation and need somewhere to live. In fact this sector has grown by almost 100% in the last five years.

What about location?

Of course you have to be careful where you invest (more on that later).

We like the North West because it offers a great combination of low prices and strong rents. We are not alone in this assertion:

Concentric Lettings of Liverpool manage over 250 HMOs in Merseyside. They report a 95% occupancy rate.

Ask any lettings agent, this is phenomenal.

Get the right property, in a sensible location and refurbished with your tenants in mind.

Follow this approach and high yields with excellent occupancy rates will be yours.

We source properties throughout the North West. Locations include Liverpool, Bootle, St. Helens, Wigan, Leigh, Walkden, Oldham, Halifax, Eccles and other solid locations.

Tenant type

Over the years we have experienced different tenures, including:

• Private, working tenants
• Local Housing Allowance (LHA) tenants (what used to be called Housing Benefit or DSS)
• Students
• Asylum seekers
• Other social housing

The two tenures we work with now are Private and LHA.

In either case, success or failure depends on one aspect:

The management agent.

As a result of years of experience there are only a handful of agents we would recommend. We can introduce you to these agents when you work with us, and even if you don’t.  Please get in touch for an introduction.

Is there anything to be wary of?

From time-to-time I get asked by investors considering HMO Property Investment about problems they have read online.  These include large fines for wayward HMO landlords.

I value these questions because it shows the investor is doing their due diligence.  This should be at the centre of all investment decisions.

My response is usually to suggest they look a little deeper into the story.  There’s rarely smoke without fire.  Often the recipient of the fine has been breaking the rules;

• Perhaps putting more people in the property than they should
• Not providing adequate fire protection
• Providing sub-standard accommodation.

The truth is, they probably deserve it.

We landlords and developers get enough bad press as it is (undeserved in most cases). If the system flushes out the rouge landlords I think we should applaud it.

Whoever you work with there are three simple checks you should always carry out:

1. Make sure all works comply with the required local council standards.
2. Ensure you have all Building Control regularisation certificates
3. Ensure you have your Gas, Electrical and any other safety certificates

And then stick to the rules!

You’ll find more on licensing and planning permission later in this article.

There are two other elements to owning HMOs which could be considered as negative:

1) You will have more paperwork.

Unfortunately it’s true. Each room will have its’ own AST and you will be responsible for the utility bills, wifi bill and council tax.

Of course you can get your management agent to take care of all this for you. Or most of it can be managed online. This is no different to single-let properties.

2) It can be hard to get finance.

This is particularly true for inexperienced buy-to-let investors and ex-pat investors.  It’s not impossible, please speak to us and we can put you in touch with brokers who might be able to help.

HMO licensing and planning permission

In some locations your property will need a license to be an HMO. Some areas have mandatory licensing. Others locations only need you to license your property when there are more than two stories and more than five tenants. It’s quick and easy to check on the local council website.

Most councils also have an HMO Officer who will be able to provide this information. Give them a call. Without exception we have always found them to be helpful and willing offer advice.

Article 4 designation

In certain areas of the country there are restrictions on the type of work that can be carried out on a property. This includes conversion into an HMO.

These restricted areas are usually the subject of an Article 4 Directive. This means any moderations to a property usually need planning permission. This is the case even if, in other locations, you could make changes under permitted development clauses.

We tend to stay away from these areas. We can get good enough returns from HMO property investment for our clients without extra hassle. In fact, the yields tend to be higher because A4 locations are often within prime cities like Manchester.

Even in areas without Article 4 designation there are still some situations where planning permission is needed:

For example in Merseyside if you want more than 7 bedrooms you will need to get planning permission. It makes sense to check with the council before parting with any cash. Remember an unscrupulous vendor might do the work without the planning being in place. It’s unlikely a solicitor would miss this in the conveyancing process, but check yourself.

Where a property has three or more stories and will have five or more tenants you are likely to need a license.

When we know this will be the case we try to work with the local HMO Officer from the beginning of the project. They will usually provide a report that your builder can follow and ensure compliance.

Even better, this is often free. I suspect our cash-strapped councils will soon start to charge for this service.

More on the location

We work in locations where we can get the best, reliable returns for our clients. At the moment this means we focuson the North West of the UK.

These areas offer investors the best blend of low prices (typically between £80K and £150K), and strong rents. As a result excellent gross yields of over 19% are achievable.

As you might expect with these price levels we are not targeting prime city centre locations. We opt for straightforward residential streets with good investment fundamentals. These include access to transport links, schools nearby and shopping facilities within easy reach. This fundamental investment criteria we all know works for the long term.

Options for exiting your HMO property investment

As time passes you may choose to exit your investment.

Of course HMOs are not specifically capital growth investments. You do not need to sell them to realise your return.

However, your circumstances may change and you make the decision to sell the property. The obvious choice is to sell to another investor. We can sometimes help in that initiative, as can other agencies close to your property.

You may also choose to try out one of the new online-only agencies who will charge lower fees.

They also use the same sales portals as high-street agencies: Rightmove and Zoopla.

My suggestion is that periodically, every 6-12 months, you should review your portfolio and consider what you would do if you needed or wanted to exit.

• Will your properties be attractive to other investors?
• What can you do to increase the yield, and therefore the appeal of your property to another investor?

Even if you don’t sell you will still potentially benefit.

Like what you have read?

As you might expect this is just a light delve into the world of HMO property investment.

Of course each property has its’ own characteristics and challenges and potential which is too much to cover in a single blog post. If you like what you have read I’d ask one favour, and make one suggestion:

Suggestion: subscribe to our blog using the form on the top right of this page. Feel free to get in touch, even if you are not ready to invest now. By subscribing to our blog we’ll let you know about deals we have available. We will also post which will include how-to’s, market comment, and useful resources.

Coming soon will be a chronological walk-through of a typical project. We’ll take you through a conversion step-by-step with photos.

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