The British property market has long been a magnet for investors both domestically and abroad. Within its vast landscape, HMO investments have emerged as a mature asset class of their own due to rapid growth since 2010. Their potential for high returns, coupled with a surge in demand for shared living spaces, has made them increasingly popular. However, as with any lucrative venture, the path to success is riddled with potential pitfalls. This article delves deep into the intricacies of HMO investments, highlighting common mistakes and offering insights from an experienced HMO developer’s perspective.
Why Invest in HMOs
An HMO, or House in Multiple Occupation, is more than just a property; it’s a unique investment opportunity. Defined as a property rented to at least three tenants from different households who share facilities, HMOs stand apart from traditional single-family rentals. The multi-tenancy model means multiple rent streams from a single property, leading to higher potential yields. As urbanisation increases and the quest for affordable housing solutions becomes paramount, HMOs are positioned as a promising solution for both investors and tenants.
Common HMO Investment Mistakes to Avoid
Let’s dive right in and hopefully this definitive list will help all readers avoid the mistakes so many HMO landlords have had to resolve.
Inadequate Market Research
Market research is the bedrock upon which successful HMO investments are built. A common pitfall many investors face is not delving deep enough into the local supply and demand dynamics. Every locale has its unique characteristics, and understanding these is paramount to ensuring your HMO property is both desirable and profitable.
Firstly, it’s essential to discern which tenant type aligns with the locale. Is the area predominantly populated by professionals due to its proximity to business hubs? Or is it a student hotspot because of nearby universities? Perhaps it’s an area where housing benefits or social housing leases are prevalent. Each tenant type has its own set of requirements and expectations, and ensuring your property aligns with these can be the difference between a thriving investment and a stagnant one.
Furthermore, the location’s compatibility with the tenant type directly impacts the achievable rent. For instance, a property in a student area might not fetch as high a rent as one in a professional hub, but it might offer more consistent occupancy. Conversely, an HMO in a business district might command higher rents, but could also face longer vacancy periods.
Before committing to a purchase, it’s prudent to test the waters. Engage with local letting agents to gauge demand, conduct surveys, or even host focus groups with potential tenants. Exploring online platforms and forums can also provide invaluable insights into tenant preferences and expectations.
Neglecting Property Maintenance
Property maintenance isn’t merely a responsibility; it’s a essential. As any seasoned property expert will attest, the upkeep of an HMO property plays a pivotal role in its long-term viability and profitability.
Conducting regular monthly inspections is highly recommended. Inspections allow investors to identify and address maintenance issues promptly. By acting swiftly on maintenance it keeps tenants happy but also circumvents potential larger, more costly repairs in the future.
However, the implications of neglecting property maintenance extend beyond just repair costs. The state of the property has a direct bearing on the quality of tenants it attracts. A well-maintained property is more likely to draw responsible, long-term tenants, while a neglected one might only appeal to those with fewer options, potentially leading to frequent tenant turnover and associated costs.
Moreover, tenant retention is intrinsically linked to the property’s condition. Tenants are more likely to renew their contracts and stay longer in a property that’s well-looked-after, ensuring consistent rental income for the investor.
From an asset perspective, regular maintenance is crucial in preserving, if not enhancing, the property’s underlying value. In the property market, first impressions matter, and a well-maintained property not only commands a higher rent but also appreciates more in value over time.
Underestimating Running Costs
HMO investments, while lucrative, come with their share of running costs that investors must not overlook. Management fees, though seemingly minor, can accumulate over time, impacting overall profitability. Utility bills in HMOs, given the multiple tenants, are typically higher than in single-occupancy properties and can vary with seasons and usage. Additionally, there are other recurring costs like council tax, insurance, and safety checks like fire panel inspections.
Failing to account for these expenses can lead to budgetary imbalances and potential cash flow issues. Such oversights might force investors to tap into personal reserves or seek external financing. In essence, for a successful HMO venture, it’s crucial to balance income with expenditure meticulously. Proper financial planning ensures steady cash flow and long-term investment health.
Failing to Vet Tenants Properly
Tenant selection is a pivotal aspect of HMO investments. Thorough tenant screening is not just a procedural step; it’s a protective measure for the property and its profitability. By ensuring potential tenants have a reliable rental history, stable income, and positive references, investors can mitigate potential issues down the line.
However, the consequences of inadequate vetting can be severe. Problematic tenants can result in unpaid rents, property damage, or disputes that might require legal intervention. Such issues not only strain the investor’s resources but can also disrupt the harmony of the HMO environment for other tenants.
In short, while it might be tempting to fill vacancies quickly, it’s paramount to prioritise quality over haste. Proper tenant vetting safeguards the investment, ensuring consistent returns and a harmonious living environment. It can be difficult to get a problem tenant out and don’t forget “people buy people”. Bad tenants will attract other bad tenants.
Ignoring Legal and Compliance Aspects
Local licensing requirements, both mandatory and selective, are crucial and vary across regions. Overlooking these can lead to non-compliance, putting the investment at risk.
Additionally, investors must be aware of local regulations, such as Article 4 restrictions, which can limit the conversion of single dwellings into HMOs in certain areas. Ignorance of such regulations can result in costly legal disputes and potential fines.
In essence, non-compliance doesn’t just carry financial implications; it can tarnish an investor’s reputation and jeopardise future ventures. It can impact you getting a licence in the future and you also run the risk of not getting lending on the property.
Striking the right balance in HMO investments is pivotal. It’s not just about the capital outlay but understanding its relation to potential returns. Before diving in, assess the capital investment against the anticipated return. How much are you allocating for the purchase and subsequent refurbishment?
Monthly and annual cashflows, both gross and net, provide a clearer picture of the investment’s health. It’s essential to calculate the return on capital to gauge the efficiency of the investment. While high net yields are attractive, one must also consider the property’s market value. Will it appreciate in line with inflation, or could it stagnate?
Furthermore, the potential to refinance the asset can offer additional financial flexibility. In essence, while HMOs promise lucrative returns, it’s crucial to invest judiciously, ensuring that every pound spent works optimally for the investment’s growth.
Incompetent Power Team
HMO investing is a collaborative effort. If you have a well-rounded and competent power team then you are 80% of the way there. This team, comprising experienced property professionals, solicitors, agents, tradespeople, builders, and letting agents, mortgage brokers and so on are your lifeline if you’re going to make it.
You can’t do it on your own. “It’s the sum of all parts that make a whole”…
Poor Tenant Relationships
Good tenants equate to longer tenancies, reduced turnover, and the elimination of the hassle associated with chasing rents. It’s a straightforward equation: contented tenants lead to a steady, hassle-free income stream.
Conversely, strained relationships can spiral into complex challenges. When tenants become disgruntled, it’s alarmingly easy for them to withhold rent. And in the interconnected environment of HMOs, one discontented tenant can influence others, potentially leading to a collective grievance against the landlord or agent.
Such scenarios aren’t just about missed rents; they can disrupt the harmony of the entire property. Hence, swift resolution is paramount. Addressing concerns, opening channels of communication, and ensuring tenants feel heard are essential steps in maintaining a positive cash flow.
We hope that you can learn from these mistakes to help you with your HMO investment journey and maximise your cashflow as a result.
About the Author
I’m Gemma, I have been working in HMOs since 2009 from sourcing, development, financing, construction, tenanting, management, refinancing and exits. You name it I’ve done it. And don’t get me started on speaking to utility companies (*#$*!!). I set this business up to help other fellow HMO investors sell their HMOs in a manner that suits them – be that price, ease or speed. I aim to help as many HMO landlords as possible navigate the HMO sales process, if I can help you too please reach out, I would love to meet you.