Investing in House in Multiple Occupation (HMO) properties can be a rewarding venture, but one question that frequently arises, particularly for new investors, is whether it’s possible to purchase an HMO away from where you live.
As experienced HMO investors, we understand that the choice of location is pivotal in determining the success of your investment. The decision to buy an HMO property in a different location from your own involves a series of considerations, and in this article, we aim to elucidate the pros and cons surrounding this decision-making process.
HMO Investment comes with added responsibility
HMOs are often favoured by investors due to the potential for higher rental yields compared to traditional buy-to-let properties. However, they come with distinct legal and regulatory requirements.
In the UK, these regulations are designed to ensure the safety and well-being of the tenants. HMO owners must adhere to rules such as fire safety measures, property maintenance standards, and tenant background checks. Comprehending and complying with these legal obligations is fundamental to a successful HMO investment.
As an HMO investor, you’ll be responsible for managing not only the property itself but also the relationships with your tenants. This encompasses everything from collecting rent to addressing maintenance requests promptly.
HMO Location is Important
Location is often cited as one of the most critical factors in the success of any property investment, and HMOs are no exception. The geographical area in which you choose to invest can significantly impact various aspects of your HMO venture, from tenant demand to rental yields and property appreciation.
Local demand is a crucial consideration. Areas with high student populations, for example, may offer a steady stream of tenants. Similarly, locations near business hubs or city centres may attract young professionals. Understanding the demographics of your chosen area can provide valuable insights into the type of tenants you can expect, which in turn influences the property’s rental yield.
Rental yield is another key metric for HMO investors. It’s the annual rental income expressed as a percentage of the property’s purchase price. Some locations offer higher rental yields due to factors like strong tenant demand or lower property prices. Conversely, areas with high property prices but lower rental demand may result in lower yields.
Property prices themselves are also a significant factor. Investing in an area with rising property values can lead to capital appreciation, providing an additional return on your investment. However, high property prices coupled with borrowing rates in today’s market (November 2023) make yields and cashflow harder to achieve. This is why when we speak with investors it’s important to understand the objective of the HMO investment – is it a pure cashflow play, or capital appreciation, or both.
Advantages of Investing in HMOs away from home
Investing in an HMO property in a location different from your place of residence can offer several advantages, some of which may not be immediately apparent. Let’s explore these benefits in detail.
Firstly, diversification of your investment portfolio is a significant advantage. By investing in different geographical locations, you can mitigate the risks associated with economic downturns or local market fluctuations that may affect one area but not another. Diversification provides a safety net, ensuring that your investments are not all subject to the same market conditions.
Secondly, you may find that other locations offer higher returns on investment compared to your local area. Some regions, particularly those with high student populations or burgeoning business districts, may offer attractive rental yields. The potential for higher returns can make the prospect of investing away from home a compelling one.
Lastly, different markets offer unique opportunities. For example, a university town may provide a steady stream of student tenants, while a location near a business hub may attract professionals looking for shared accommodation. By broadening your geographical scope, you open the door to a wider range of investment opportunities that you may not have considered otherwise.
Disadvantages of Investing in an HMO Away From Home
While the prospect of investing in an HMO property away from your local area can be enticing for the reasons previously outlined, it’s imperative to also consider the associated challenges and drawbacks.
One of the most significant disadvantages is the lack of local market knowledge. Understanding the nuances of a local property market can be invaluable for making informed decisions. This includes insights into tenant demand, rental rates, and even the reputations of local contractors or service providers. Investing in an unfamiliar area may put you at a disadvantage compared to local investors who have a more intimate understanding of the market conditions.
Another challenge is the complexity of managing a property from a distance. Regular property inspections, maintenance work, and tenant relations become logistically more complicated when you are not based nearby. Even with the aid of technology, there’s a limit to what can be managed remotely, and you may find yourself needing to make frequent trips to the property, incurring additional time and travel expenses.
Lastly, the additional costs should not be underestimated. These can include the expenses of hiring a local property management company to oversee the day-to-day operations of your HMO. While this can alleviate some of the management challenges, it is an additional cost that will eat into your rental yield.
Mitigating the Risk of Investing Away
Investing in an HMO away from your local area can be a rewarding endeavour, but to do so successfully, it’s crucial to adopt strategies to mitigate the risks associated with this type of investment. Here are some practical approaches to help you navigate these challenges effectively:
Thorough Market Research: Prior to making an investment, conduct comprehensive market research on your chosen location. This should include an analysis of local property trends, rental demand, and property management companies. Understanding the market dynamics will help you make informed decisions and reduce the risk of investing blindly.
Leverage Technology: Utilize property management software and apps to streamline property management tasks. These tools can help you keep track of maintenance requests, rental payments, and other critical aspects of managing an HMO remotely.
Local Partnerships: Consider forming partnerships or relationships with local real estate agents, property managers, and maintenance professionals. Having reliable local contacts can prove invaluable when issues arise that require immediate attention.
Regular Visits: Plan regular visits to your HMO property. Even if you’re based far away, periodically visiting the property in person can help you stay connected with your investment and address any issues proactively.
Emergency Fund: Maintain a financial cushion to cover unforeseen expenses. Whether it’s sudden maintenance or the need to cover travel costs for property visits, having an emergency fund can provide peace of mind.
Property Management Company: If the logistical challenges of managing the property from afar are daunting, consider hiring a local property management company. They can take care of day-to-day operations, ensuring your investment is well-maintained and the needs of your tenants are met.
Case Study: Wirral HMO Portfolio
To shed light on the potential consequences of inadequate management of HMO properties when investing from afar, let’s consider a real-life case study.
In this scenario, there is an overseas-based landlord who owns a portfolio of five HMO properties located on the Wirral. Unfortunately, due to a lack of attention and oversight, several issues have arisen. Bills have gone unpaid, resulting in service disruptions and tenant dissatisfaction. There are multiple voids in the properties, causing a significant loss of rental income. Moreover, some of the properties are in dire need of maintenance and repairs, which have been postponed.
The repercussions of this neglect have been twofold. Firstly, the landlord’s rental income has dwindled due to the high number of vacant rooms and the poor condition of some properties, resulting in a below-market value return on investment. Secondly, the lack of local management and engagement with tenants has created a challenging situation that could have been prevented with proactive management.
Get our Free HMO Investment Guide
As we’ve explored throughout this article, investing in an HMO away from your local area presents both opportunities and challenges. The key to successful investment lies in thorough research, meticulous planning, and effective management. If you’re a new investor looking to navigate the complexities of HMO investments, or an experienced investor seeking to expand your portfolio, the right guidance can make all the difference.
To assist you in your HMO investment journey, we are pleased to offer a comprehensive HMO Investment Guide. This free guide covers all the essential areas you need to consider, from selecting the right location to understanding the legal requirements and mitigating risks.
To register your interest and receive a copy of this invaluable resource, please make an enquiry on our website. This guide aims to equip you with the knowledge and insights you need to make informed decisions and maximise the returns on your HMO investments. We have been investing personally in HMOs for 14 years and want to empower new HMO investors coming to the market. If we can help in any way with your HMO journey then get in touch today.