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There are some mistakes investors must avoid making otherwise they could completely destroy their HMO business. In this industry, there are certain things you have to be aware of and take very seriously.
So, read below or listen to the full episode on The HMO Podcast for the five mistakes that could spell disaster for your HMO business whether you’re just getting started or have an established business! If you make these mistakes, they wouldn’t just be minor hiccups – they have the potential to completely implode your hard-earned venture.
This might sound daunting, but it’s essential you understand this. I’ve witnessed these issues befall countless individuals across the HMO industry. But the silver lining is that these pitfalls are relatively easy to avoid with the right knowledge and strategies!
1. Lack of market research.
It’s so crucial that you effectively do your market research and due diligence. If you don’t thoroughly understand what you’re actually investing in or where you’re investing, not only on a very local level but also zooming out too, this can lead to very expensive problems.
There’s a lot to think about when investing in HMOs, especially for new investors, and it can be overwhelming. However, some of the risks of not knowing everything that you should before you get started investing is that you could face issues with demand, occupancy, management, planning and building regulations, and achieving the numbers you expected.
With interest rates and operational costs high, the margin for error in HMO investments has significantly narrowed in recent years. So, making these sorts of mistakes when you’re buying a property that might be worth hundreds of thousands of pounds will likely be a big financial hit.
At the point of investing, you should be completely confident that you’ve turned over every single stone and that there’s nothing left for you to know! Getting the market research piece right may well take you weeks if not months to do, but then you can factor everything you’ve learned into your model and strategy.
To do that, make sure you have plenty of sales and lettings data using a range of sources like Rightmove, Zoopla, ONS, SpareRoom, and Property Data. But you also need to verify that data. Get on the ground and test it by talking to agents, other investors, landlords, builders, tenants and prospective tenants.
2. Non-compliance of regulations.
As a HMO investor, you must know all of the relevant regulations locally and nationally, keep up to speed with those, and make sure you follow them in the right way. Getting planning regulations, building control, HMO licensing, Article 4 directions and lots of other things wrong can be catastrophic. And national and local guidelines can often be quite different!
While most of us know that there are permitted development rights, some of those rights can be removed on a local level for a range of reasons. Many people overlook these types of rules and regulations or don’t understand them effectively.
On top of that, a lot of planning and building regulations are grey. I’ve been investing for 15 years, and sometimes this stuff still surprises me. In one area with certain planning officers, some things are okay, while in other areas, it’s not, which makes it really difficult for us.
But no matter what, you need to be completely aware of how big the implications are of not getting this right. Getting enforced by planning would only be the start of it. You might not be able to get the lending you needed for refinancing. It could cost a huge amount of money and reputational damage, and it could mean that your investment won’t work whatsoever.
To ensure you get this part of HMO investment right, work with the right people – the experts. Use experienced architects, such as our partner architects Andrew and Mary, who really understand planning permissions and HMOs. Hire a planning consultant – I still use one on every single project. And it may also be helpful to work with an experienced mentor.
3. Poor financial management.
This is the area where a lot of investors struggle, and it’s why most businesses fail. If you get the financial management of your HMO business wrong, you could run into issues with cash flow, refinancing, and paying refurbishment costs.
You may find that your deal doesn’t look anywhere near how it should do. And it might not even have been worth investing in the first place! There’s also possible reputational damage if you have an investor involved and you don’t get their money back quickly enough.
Any of this has the potential to damage your credibility and the amount of funding available in your business, which could bring your HMO business to its knees, so it’s important that we all avoid this ever happening.
But how do you figure out how to financially manage your business? For starters, use systems and processes and do forecasting exercises. Make sure that from a financial management point of view you’re taking this seriously and always keeping on top of it.
Put time aside for financial planning and creating contingencies. Keep in mind that it’s really easy for projects to overrun and be hit with extras that come up. So, make sure that you’re well prepared and manage all of your finances propertly.
4. Not understanding the key role of property management.
A lot of people, especially beginner HMO investors, enter the market and fixate on finding their first deal that cash flows really well and allows them to recycle lots of money. But they often overlook who is going to manage their property.
If you plan to self-manage, you need to have a plan in place for that. Skill yourself up on everything you need to know about HMO property management. And you need to be able to deliver a certain level of service, and this takes time, skill, and knowledge to be able to do that.
On the other hand, if you’re planning to outsource the management to someone else, you really have to think about who’s going to be capable of doing it. You’ll need to find a great manager, someone who has been on the ground for a long time with lots of experience, contacts, and knowledge and is reputable and credible.
In the student market, this will be relatively easy. If your HMO is in any major city, you’ll likely find several decent sized and well-established agencies that could potentially manage your property for you. But if it’s a professional HMO, especially if it’s in a peripheral zone or small town, it’ll be much more difficult to find the right person.
However, if your property ends up being poorly managed, there can be lots of voids and a lack of accountability. And if there’s nobody else to manage it, what do you do if you live hundreds of miles away from the property? You might be able to do it, but it’ll be tough to handle viewings, any issues that crop up, and assess maintenance and the refurbishment.
So, you have to think about all of this before investing. This is one of the reasons I see a lot of HMO businesses start well, but over two to five years, they really struggle. And so many investors eventually throw the towel in because they’re not making enough money and it’s all too stressful!
5. Failure to anticipate market changes.
The final thing I want to talk about is the importance of making sure that you anticipate market changes and the competitive landscape where you’re investing. Unfortunately, a lot of people think that once they’ve got their HMO up and running, then that’s it – it’s set and forget. However, that just isn’t the case.
There’s so much more involved with HMO investment, and the market is always evolving. When I first started investing 15 years ago, my HMOs were better than anyone else’s on the market. And then several years in, they looked quite different, and there was a lot more competition.
On top of that, operational costs to run HMOs have increased, so the returns are different. Everything can start to move sideways, and if you’re not careful, things can really run away with you!
The COVID-19 pandemic was also a good lesson to put contingencies in place that’d allow investors to operate for six to 12 months. Some are even still struggling with their occupancy levels.
This could be because these investors bought properties in areas where there actually wasn’t huge demand. And when they first did the refurbishment on their HMO, it was a great spec and they were getting top rents, which they needed to pay investors back and make mortgage payments.
However, as time goes on, the property gets worn. Other people enter the market, do a refurb equally as good – if not better, and it gets more difficult to rent rooms. Then, there are voids costing you money. Some people even have to sell their properties to pay investors back because they didn’t have the cash flow to fulfil the deal they initially agreed.
This can happen in part because they haven’t kept an eye on the market and the competition. So, stay on top of what’s happening across the market, look at the competition, and research what’s happening in the wider property sector with values and rents.
Those are the five things that have the potential to destroy your HMO business if you don’t get right, but these are so easy to avoid if you just know how. So, whatever you do, make sure that you don’t make these mistakes!
Don’t overlook these areas. Be proactive and build a strong, robust, and future-proofed business that stands the test of time and continues to generate an income month after month, year after year, and ideally, decade after decade.
If you want to level up and skill yourself up on topics like property management and financial planning, become a member of The HMO Roadmap today! If you have any questions about this, join us over in our Facebook Group The HMO Community.
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. 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!