Photo by Wilson Finch Properties
When it comes to your HMO business, are you prepared to enter a recession?
I don’t want to be known for scaremongering… That’s not what I’m trying to do, but I want to ensure that we’re all prepared if we do end up going into a recession. And let’s be honest, the economy has looked a bit dicey over the past year.
While I don’t have a crystal ball, it’s practical to think about the possibility of a recession and what we might do if it happened. This will allow us to plan ahead of time and put contingencies in place right now, which would allow us to make informed decisions if a recession happens.
Read below or listen to the full episode on The HMO Podcast for nine strategies that will help you navigate a recession if this were to happen in the future.
Whether or not we end up in one, these will still be useful to your HMO business and are very sensible strategies to at least understand!
1. Understand the impact of a recession and what a lack of preparation could mean for you.
For starters, it’s important to understand just how at-risk you’ll be as a property investor if you don’t think about this ahead of time. Back in 2008, property prices dropped by an average of 20%. That is significant, and you can imagine it has pretty catastrophic consequences.
The risks associated with not preparing for a recession are really big for us as HMO investors, especially as we’re putting huge amounts of capital at risk. If you end up not being able to repay the bank or an investor, you’ve got a really big problem!
A report from UK Finance revealed that mortgage repossessions increased by 15% back in 2009. So, after the crash, repossessions rocketed simply because people couldn’t keep up with their debt. Additionally, you could get caught out when you’re expecting a valuation at “x” and it comes back at “y” because the market crashes and there’s a big discrepancy in values.
So, it’s important to really understand what the impact of a recession could mean for you. We had all become so accustomed to historically low interest rates. Obviously, that’s changing quickly. So, don’t be fooled into thinking other things couldn’t change quickly as well.
2. Understand the risks of undercapitalisation and the importance of having reserve funds in your business.
Property investors are often accustomed to getting a lot of cash in the bank, spending it as quickly as possible, and then having no cash whatsoever for some time. A lot of us have gotten very good at maximising everything we have.
However, if the market were to crash and a recession looks increasingly likely, you can’t operate with barely anything in the bank. You have to make sure that if something happens and you end up with void periods, non-paying tenants, or higher costs, you aren’t left in a position where you can’t pay your bills!
Not having cash reserves is how businesses fail. So, make sure that you put something in place so this doesn’t happen. I think it’s a very good idea to have at least three months of cash that you could burn through if you needed to at any point. And looking ahead, I really like to have up to 12 months of cash in the bank.
I’m not saying that I will always have that amount. It will wax and wane a bit. But if everything stopped or halted because there’s a real cash crunch, I want to make sure that I can ride it out.
3. Diversify your property investments and business ventures.
There is a real consideration and possibility that if things turned upside down, the people who would probably struggle the most are our tenants. Younger people who are graduates in their first, second, or third years of employment tend to be the first to lose their jobs during a recession.
If that happens while they’re living in your property, what do you think is going to happen? If they can’t pay the bills, they’re going to have to move out and find other accommodation. And that is a real risk to your business. So, think about how at risk you would be if the economy takes a downturn.
Because of this and the other risks you face as a HMO investor, you need to be thinking about how you can diversify. Make sure you invest in different types and sizes of properties, across varying locations, and with a range of target demographics. And you may even have other business ventures that are unrelated too.
You of course can’t do this overnight. And diversification too early is a problem as well – it’s important to focus at the beginning of your property investment journey. But it’s sensible to make sure that you don’t have all of your eggs in one basket!
4. Improve your tenant retention strategy.
If we were to go into a recession, your tenant retention plan would never have been more important. Moving forward, it’s imperative that you’re doing whatever you can to keep your tenants. This can help ensure you don’t end up with as many voids and could end up keeping you in business!
This is something you need to have in place well before a recession starts – when tenant retention could become an issue. There are so many proactive measures that can help you improve your tenant retention strategy.
This can be done by providing a great management service, responding to maintenance quickly, communicating well, and providing a cohesive environment among tenants. All of this can help with tenant retention. Overall, it’s about not giving anyone a reason to leave and convincing them to stay.
5. Work on your cash flow management and cost reduction.
It’s super important to manage and project out your cash flow and be in a cash-positive position. You need to understand what’s going on in your business at all times and where you’re going to be at any point in time.
You should know exactly what all of your costs are, and you’ll need to be able to mitigate anything coming from left field and taking you out. That’s really crucial as this is how so many businesses go under.
Look at where you can cut or reduce overheads. Could you renegotiate any of your subscription costs? Make sure you’re using everything you’re paying for, and if you’re not, scrap it!
6. Prepare for the opportunities a recession could present.
It sounds rude to even mention opportunities alongside a recession, but we’re all in business here. And the reality is recessions can create opportunities too, because some people will have to dispose of their assets.
You want to make sure that not only can your business ride out a recession, but that you will also be positioned to take advantage of it! This means you need to be well-funded through backing from private finance and the bank. Make sure you have great credit and are continuing to nurture relationships with private investors.
Work on this consistently, so you’ll be ready if and when any opportunities arise. Build up all of those resources in your arsenal so that if a recession does happen, you’re already prepared and well-placed to take advantage of it. If you don’t, I guarantee you somebody else will!
7. Stay informed and remain adaptable.
Things are going to change, and you need to make sure that you’re able to move quickly. This means having systems and processes in place. But, it’s also about being flexible, staying informed, and keeping up to date with what’s actually happening – not just what’s in the news headlines.
To do this, be keeping an eye on sold data, asking price figures, the percentage of properties being reduced in value, occupancy levels, supply and demand on SpareRoom, and what’s happening to rental values.
This will allow you to stay ahead of the curve, and it means you could be making the changes you need before everybody else. That could be the real difference, allowing you to stay in business and take advantage of whatever opportunities come forward.
There are also legislative and local policy changes with licensing schemes coming up. Get ahead on all of this. The last thing you want to be doing if you go into a recession is having to fix other problems in your business. So, keep on top of everything.
8. Prepare for the recovery from a recession.
You need to make sure that if a recession does happen, you’re prepared to recover from it as well. After the financial crisis in 2008, property prices did bounce back. By about 2014, the average property value was back at the level it had been.
It did take a few years, but it’s important to have an understanding of how the economy works and what happens in the wake of a recession. And as property is a long game, we should all be planning our businesses out 5, 10, and 15 years down the line.
When it comes to the HMO market, that also means you need to be thinking about what will change there. What does the sector look like in the wake of a recession? It’s key that as HMO investors we’re thinking about this.
9. Don’t panic and stay logical.
No matter what happens, you need to stay calm and keep a cool head. It’s so important in business that you make informed decisions. But if you’re not surprised when a recession happens, you can be prepared for it. It might be difficult for a period of time, but it’s really important not to get too emotional about things.
We’re already feeling some of the strains of a struggling economy. Rising interest rates are really crippling us, and the cost of running our businesses has been very difficult to manage. The one saving grace is that it’s been very easy for us to fill our rooms and push rents up. But this is unlikely to last forever.
There are a lot of people out there who can help support and guide you along the way. So, make sure you’re surrounding yourself with the right people. Involve yourself in communities with fellow property investors. Listen to other people’s ideas and thoughts, and see what other investors are doing.
If you’re looking for a group full of HMO investors where we can discuss things together and support each other, come over and join us in our free Facebook Group The HMO Community!
I hope you can see that you can dodge the worst of a recession if you adopt the right strategies in your HMO business right now! It’s so important to make sure that you’re prepared or at least considering what a recession would mean for your properties and business as a whole.
If you want to take this a step further and really scale and systemise your HMO business, become a member of The HMO Roadmap 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!