There is a lot of information out there on the dos and don’ts of investing in an HMO. If you do your homework, so to speak, you should feel confident enough to jump in with both feet. Believe in yourself and learn from your mistakes as well as your victories. Accept that much in this business is an act of faith, though there are some rules that will help.
Tip 1: Managing Cashflow
A rough rule of thumb is that an HMO, to be viable, needs to have at least five tenants. Though there are exceptions to this rule. The rule goes like this: The first two tenants pay the mortgage if you have bought using a mortgage or the rent if you are renting. The third tenant pays the bills i.e. council tax, gas, electricity, water, insurance, etc. The fourth tenant covers maintenance, voids, and bad debts and the fifth is profit. Try and have six or more tenants as all the extra tenants are extra profit. I find it costs the same to operate a four-bed HMO as it does an eight-bed.
Tip 2: Assessing Purchase Price
Use the rule of 5, to assess whether to buy an HMO. But if the purchase price of the property plus the cost of improvements and other costs equal or are less than five times the gross rent. Follow this rule if you can and you will not go far wrong. Unfortunately, not everyone invests in areas of low-cost housing so to successfully invest in the right areas the alternative way to assess a prospective HMO is to do the income and expenditure calculations for the property very carefully.
Tip 3: How you treat your tenants
Give respect – you will find it much easier to deal with tenants and others if you are nice to them even if they do not deserve it. Remember they are your customers. Do not expect respect in return and you will not be disappointed. Also, don’t expect fair play. You are expected to and have to follow the law – if your tenants don’t there is little you can usually do, apart from evicting.
Tip 4: Engage an Agent
It’s often worth employing a property management agency who can maintain the property, find and deal with tenants, and collect rent. Prompt and firm chasing up of rent payments will go a long way to reduce bad debts. Those bad debts could be reduced by 80% by acting firmly and quickly. Once a typical HMO tenancy agreement is allowed to get over £500 in debt, this is the tipping point, there is little chance they will pay the arrears and they often just leave when chased for payment.
It is rental growth which makes this business so good but emphasises that it’s a long term business and not a get the rich quick scheme. Keeping this and other rules in mind, you can have a very successful HMO business.