Photo by Cosi Living

When I look at any deal, whether it’s something I’m buying myself, agreeing on a rent-to-rent deal, or when I’m advising someone, I’m always thinking about three essential things. And these will determine the performance of any HMO.

When it comes to HMO properties, there’s so much to think about, and it can be overwhelming and can even cause you to put off buying HMOs. So, this is really about simplifying it. Of course, you still need to think about other things in addition to this, but if you get these three things right, the rest of it matters so much less!

If you’re thinking about buying your first HMO or want to scale up your HMO portfolio, read below or listen to the full episode on The HMO Podcast to learn about the three essential ingredients that you need to bake the perfect HMO deal every single time!

If you get these in the right balance (and there is thankfully flexibility with this), you’ll make almost every single one of your HMO deals work. And this will help you mitigate almost all of the worst-case outcomes. So, every time I look at a deal, I think about the:

• Location
• Spec
• Room rental price

Location

The location of a property is of course fixed, so you have one shot at getting this right. If you don’t, this could mean your HMO deal won’t be successful. But if you do get the location piece right, the chances of baking this deal successfully are going to greatly increase. So, you have to be very clued up on where you’re buying at the front end.

We all want to buy in the best possible location – those A1 locations where demand is the best, the street scene is safe, tidy, and attractive, and there’s parking and garden space. But the reality is we can’t always invest in these locations! These desirable areas usually cost substantially more, and this can sometimes make it uneconomic (not always though!).

So, if you can’t find something in the very best location, you could compromise and buy something on the fringe that’s close enough with good transport links. Maybe it’s a five-minute walk or drive from our first-choice location and still has a nice street scene, is desirable, and has parking.

Additionally, sometimes a city can grow into a peripheral location, and it can become more popular. But keep in mind that the opposite can happen as well. So, you have to think about what the future might hold.

Now, location isn’t absolutely everything. It’s of course a really important factor, but actually combined with spec, you can still make your HMOs a first choice even if you buy outside of the most desirable area among your target tenants!

Spec

The spec of a property is a piece that is very controllable by you. You could decide to renovate the HMO to a platinum standard if that made sense in the location and for the demographic that you’re targeting. And you’d charge a bit more for this. But you can also decide to do a pretty bog-standard refurb. 

You can almost offset any compromise you might need to make on location by improving the spec. So, if you have a property that isn’t in the first-choice location, you could do something clever, exciting, and different with the spec to make it stand out. And if you pull off a high-end spec, it could mean that you could still compete with the properties in the best location!

This also helps mitigate a lot of risks going into a deal. Because if you know that the chances of you being able to rent the property out consistently are there, you are offsetting the risk of having voids or struggling with finance and valuations.

Room Rental Price

When it comes to price, you also get to dictate this. A smart HMO investor looks at the market and compares themselves to what else is on offer. Look at your competitors and see what they’re charging, and be strategic about what you think you can charge. 

Now, of course, we all want to charge the most we can as business owners! There’s nothing wrong with that. But remember that your key driver here is almost always going to be value for money, and that will be driven by the location and spec of the property.

So, if you have a property in the best possible location and it has the best possible spec, you’re going to be at the very top end of the price bracket. But if you’ve had to make a compromise, because your location or spec isn’t quite the first choice, then you’ll likely need to charge less in order to compete. 

You’ve got to marry the location and spec with the rental value that you set. It’s also important to keep in mind that sometimes you’ll be able to get that top rental value, to begin with, if you did a great job on the spec. But six, 12, or 18 months down the line, you may struggle to maintain that as the spec gradually wears off.

And if everything in the front end is based on those super high rents, that’s going to be a problem. When the valuer comes to refinance, they might be stingy about what they give you back, and you could then struggle to pay an investor back. 

Concluding Thoughts

If you understand the relationship between location, spec, and rental price and you get the balance right, you can be strategic with every HMO deal. So, if you have a little bit more of one ingredient, you can afford to have a little bit less of another. And if you haven’t got too much of one, you’ll need a bit more of the other.

There’s a lot of flexibility here, but it’s all about making sure you have a desirable product amongst your target tenants! 

In an ideal world, we will buy a property in the very best location, create the very best spec, and charge the highest possible rent every single time. But the reality is that finding those opportunities is incredibly tough… And actually, the economics and rental confidence of buying in secondary and tertiary locations can be really good.

If you focus on these key ingredients with every deal, you’ll buy much better, it’ll give a lot more scope, and you’ll get a lot further as an investor in the HMO market! This is a practical way of looking at HMO deals, and it can really help you see the value. So, go away and employ this in your area evaluation and deal analysis process!

If you’d like to take your HMO business to the next level, become a member of The HMO Roadmap! You can then access our HMO Deal Stacker Tool to help you easily appraise, evaluate, and store all of your HMO deals – all in one place.

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!