Here it is: Investor Tips for HMO First Timers. It’s a collection of all of the top tips and useful info that I’ve gathered over the years from working with HMO’s.
Disclaimer
I want to first tell you about where my information has come from. I ran a huge portfolio for over 6 years and HMO’s were included within that portfolio. No, I don’t have any HMO’s within my own personal portfolio, but it’s personal preference, maybe one day I will, maybe one day I won’t.
Who is this information for?
Any one who wants a bit of free insight. HMO’s seem to be all the rage, which is great, you get it right and they are good for cashflow. But, there are pitfalls, which no one really seems to be talking about, and they are more difficult then you think (but not impossible).
I’m going to give it to you straight (when don’t I?!). And, I always budget/plan for worst case scenario, so if best case scenario happens then I can crack out another bottle of Prosecco. So If you read down and think OMGOSH SHE IS DOOMSDAY I’m not sorry, it’s good for you.
Investor Tips for HMO First Timers
Permission for HMO’s
- Can you even get HMO status on your property? You need to check if the property is in an Article 4 restricted area (Check out my blog here for info about this). You should also check with your local council on their planning page to see if the property already has a HMO license. If you are at all unsure then give the Council a call directly.
Location
- You really need to sure that a HMO will work in the area you are looking to buy. As a general rule of thumb the property needs to be in an area where employment is high, such as hospitals, universities, factories, and within good proximity to the town centre and local rail links.
- But, you’ve also got to make sure that you aren’t in an area of high competition i.e. are their loads of other HMO’s around?
Development / Conversion
- Are you going to need to put in partitions or change rooms into bedrooms to make the property a HMO? If this is your plan then you need to know that 1. your development / conversion falls in line with permitted development rights i.e. you don’t need planning permission 2. After the conversion the room sizes and the property still falls within HMO guidelines and regulations for the area.
- Please do note that the council are going to expect you to be totally and utterly health and safety compliant. At a minimum thats going to include a fire safety system, electrical safety and PAT testing and gas safety. You will have to answer questions about this when you get the property licensed so make sure you factor this in with your plans.
- Again if there are any uncertainties at all get in contact with the Council. The last thing you need is the HMO being shut down by environment health or the planning office.
- Your local fire brigade should be able to help you with the fire safety so don’t hesitate to give them a call.
Development Budget
- As a very general rule of thumb before getting quotes for works I would budget the following:
- £3,000 – £4,000 per bedroom renovation (no joke here, you are going to need nice finishes because the better the quality the longer it lasts).
- £3,500 per bathroom
- £5,000 per kitchen – unless you are putting elfin kitchens in every room then you are looking at around £1,500 per bedroom.
- If you are going to need planning permission or to get a HMO license then this is going to cost money to get right. For both you need some sort of floor plans. The cost varies depending on area, but please please make sure that you get the cost right. It’s an expensive thing to get wrong and could add thousands onto your budget.
Mortgage
- You need to make sure you are using a lender that accommodates HMO’s
- If you are letting to students then you also need to make sure that your lender is also happy with that.
Monthly Income
- You have to budget for worst case scenario. Look at comparable properties and their rents and knock 5% off. Trust me if you are still making a profit at this rent then you are good!
Monthly Expenditure
I’ve seen quite a lot of people quote this wrong. When you are first doing your figures, here is what you need to be taking into account:
- Mortgage
- Maintenance – roughly 10% of the annual rent
- Council Tax – Find out the band from the council and the cost
- Water Rates
- Electricity
- Gas
- Health and Safety maintenance – fire safety / gas / electrics
- Management fees
- Cleaning
- Void periods – 4-8 Weeks per room
- Letting Fees – Again about 10% of the annual rent
- Insurance
- HMO Application fees (you may only have to do this every few years, but you need a pot of £;s ready so you can afford it when it comes around)
- Contingency – 10% of the total expenditure – just in case + 2 months mortgage payments
Day to Day Management
Finally, please take into account that day-to-day management is also more intensive on HMO’s. So think about a strategy for if someone get’s locked out, do you have key safes you can direct them to or a key handling service? Also it is more likely that you will be called out of hours, so how are you going to deal with this, do you have a call handling service or 24 hour contractor you could use? Remember I am an awesome coach for this type of thing, so if I can help you manage this better than do get in contact with me: [email protected].
Again, don’t get me wrong, HMO’s are very lucrative. However, there is a lot that you have to take into consideration and the above tips are a summary of all of the things that I think you should be considering before you buy your property. I also think it’s possible that you could go out and do it a lot more cheaply than I have noted, but I don’t want you to get caught out. Please, do your due diligence!
I hope that this blog has been super useful. I would love to hear what you think and whether any more tips should be added in the comments section below. Please share this around if you think it could be useful to other investors, because I don’t want anyone to get caught out!
NC
