While having a HMO business is rewarding, there are some challenges, particularly with managing the properties, that you have to overcome along the way. I’ve been investing in HMOs for over a decade. In that time, I’ve managed thousands of tenants and have experienced my fair share of ups and downs.
In this blog post, we’re going to discuss some of the difficulties that come with managing HMO properties that could put you in hot water or send you under if you get it wrong. This is not to scare you off from investing. This is to help you understand everything involved with managing HMOs.
Read my 10 truths about managing HMO properties and how to prepare for worst-case scenarios below or check out the full episode on The HMO Podcast.
1. Choosing the wrong location can be catastrophic.
Location is key for every HMO property. If you get the location wrong, there’s a good chance your business won’t be profitable, and it will be a huge liability. The truth is most locations can work if you know what you’re trying to achieve and how your local market performs and behaves.
If the location doesn’t match your model or you don’t understand the demographic and the location, then this could be potentially catastrophic for your business. Whatever you do, make sure that you pick the right location for your investment strategy.
2. Professional HMOs are substantially more challenging to manage than student HMOs.
Student HMOs are much easier to manage compared to professional HMOs. Understanding the difference between these models is important. For starters, professionals have high expectations, and due to these tenants’ transient nature, it’s difficult to maintain high occupancy and leads to more time being spent on admin and managing relationships.
On the other hand, students come and go as groups. They move in together on one day of the year and move out 12 months later. You can talk to them as a group and do all the paperwork once, helping you consolidate a huge amount of work.
Professional HMOs can still be a phenomenally powerful business model and I’m not trying to persuade you to pick students over professionals, but they both have their pros and cons. So, if you’re planning on creating a HMO property for professionals, be aware of the challenges that come with it.
3. Glossy refurbishments are overvalued.
Within the HMO community, we place a huge amount of value on the most incredible, fully kitted-out HMOs. And of course, we like making high spec accommodation for our tenants, but that is not what determines a successful HMO investment. In fact, the hard work begins after you finish the refurbishment.
If you’re a new HMO investor, it’s okay to be excited about doing a great refurb, but don’t overvalue it. It’s not all gloss and glamour. It’s hard work, and it’s all about what you do day in, day out.
4. Commercial mortgages are not that easy to access.
Be aware that it isn’t that easy to get commercial values for HMO properties. There are some lenders out there who will place a degree of commercial value on a HMO, but this isn’t mainstream.
Every lender has differing criteria. Most lenders won’t consider anything outside of an Article 4 Direction as being commercial. If you stack a deal up, take out finance, buy the house, do the refurb and end up over-investing in it, then you could get that equity you hoped to create locked up for a long, long time! But this is a mistake that is easy to avoid if you plan and have conversations with the right people beforehand.
5. Things will go wrong.
It isn’t a case of if things with your properties, tenants, tradespeople, and lenders will go wrong. It’s a question of when. No matter how many systems and processes you have in place, things will break down, people will let you down and sometimes, things will be out of your control.
You need to expect that HMO investment is not all going to be plain sailing. You’ll have to overcome obstacles you don’t foresee but anticipate that now. You’re not going to be able to just sit back and collect the rent because trust me, that’s not what HMO property management is about.
6. You will have voids.
Voids are unavoidable, so you always need to factor this in and be prepared for dealing with it when it happens. You should always have some cash in reserves to weather any storms.
The easiest way to avoid voids is to choose a strategy where there almost isn’t ever the opportunity for the property to be vacant. Student properties are really good examples of this. With professional and low-income HMOs, then you’ll naturally end up with some voids. I always recommend when appraising a HMO deal to look at whether it still performs at 80% occupancy.
There are also some ways to mitigate experiencing voids too through having guarantors, undertaking periodic inspections, serving the correct paperwork, putting effective rent chasing processes in place, and of course, owning properties in areas with a good supply of potential tenants.
7. You’ll need to undertake improvement works on your HMO at least every five years.
HMOs are subject to a lot of wear and tear. It’s significantly more than in a single let, so we need to plan for this from the outset. Look at solutions to ensure that when you need to make periodic upgrades, it’s easy, fast, and efficient.
You should expect that you’ll need to do some substantial improvements at least every five years. Factor that cost in. If you do, you’ll be able to better manage your forecast and plan the growth of your HMO portfolio.
8. Maintenance is substantially higher for HMOs than most people anticipate.
Compared to a single let, the amount of maintenance you have to attend to for a HMO is substantially more. Ideally, you’ll have a good team and system in place to manage this.
For starters, factor in estimated maintenance costs into your initial deal appraisal when considering buying a HMO. Chances are that maintenance costs are going to be significantly more than you think. As an absolute minimum, factor in £50 for maintenance every month. However, I have seen it cost double that before.
9. Legislation is one of the biggest headaches in the HMO market.
It’s so important that you understand the substantial amount of admin and legislation involved with HMOs. Put time and attention towards that. There are certain fundamentals that we can’t drop the ball on whatsoever.
You also can’t assume your liabilities are going to be taken care of by someone else, like an agent or tradesperson. Ultimately, we own the property, so the responsibility is ours.
10. At some point, you’ll have to deal with difficult tenants and formal complaints.
A difficult tenant is so challenging to manage, and the law is not on your side when it comes to removing them. There are certain processes and hoops you have to jump through to get to court.
Try to mitigate the risk of ever having a difficult tenant in the first place, but this is something that you should expect to experience at some point. Understand how to manage this when it does crop up and how to avoid things ever getting to that point.
Those are my 10 truths about managing HMO properties! I hope I haven’t scared you off from investing. If you’re following the right guidance, getting the support from the right people, and know what you’re doing, then you can mitigate most of these, but I wanted to make you aware of the realities of investing in HMOs.
To learn more about HMO legislation and managing properties, there are lessons and courses on this within The HMO Roadmap, so become a member today!
About the Author:
Andy Graham is the founder and the lead trainer at The HMO Roadmap! He is also the co-founder of The HMO Mastermind and Smart Property, a specialist HMO property investment and management company. He writes as a regular columnist in different magazines about a variety of HMO topics and is the host of The HMO Podcast! Follow Andy on Instagram!