The usual thing investors say to me is ‘I’m going to buy a HMO as my next property investment’. The high cash flow is the temptation, without looking at anything else that is going on.
Yet, increasingly my deal analysis for investors is highlighting that HMO shouldn’t be the first thing you do with your next property investment.
Although, yes I agree there is a higher monthly income. Expenses are also higher, with Landlords of HMO’s having to pay for all bills including internet and TV licensing plus additional fire safety and landlords licensing (as of 1stOctober 2018).
On top of that you’ve got the higher set up costs. The property needs to be fully furnished and that’s roughly £350 a room.
HMO’s are expensive, cost more to let and more to manage. They drain time and so the fees are more expensive. And, with more tenants, there is more than can go wrong.
Whereas with single lets you don’t have those costs. You are moving in one tenant, they pay the bills and usually come with their own furniture. No, you won’t be getting multiple rooms worth of rent. However, you will get a quarter of the hassle.
I’ve just done a deal analysis for an investor who wanted to turn their own home into a HMO. Looking at the costs, there is £90 difference in profit a month between a single let and HMO. By the time the investor furnished 4 rooms that’s more than the difference wiped out over the year.
Instead, the plan is to single let. Save the profit rent. In 12 month’s time reflect, is there money in the pot to change it into a HMO? Do you want to change around the property? It’s something that can keep being reviewed.
Rents could change in the next 12 months which would make the HMO more lucrative.
Don’t always follow the crowd. Follow the profit. You are building money making assets that need to support you. Spending all of your money for no return isn’t investing, its pouring your money down the drain. Think smart. Reflect. Revise.
HMO’s can be a great property investment, but they don’t work well on every property. Make informed decisions by doing a robust deal analysis.
Will you be doing single lets or HMO’s for your next property investment? Comment below, I want to hear from you!
Natasha
