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Are you unsure about what type of HMO you should invest in? HMO businesses are complicated, and it shouldn’t only be about the maths. Small and large HMOs are totally different beasts… So, make sure you understand how they operate and behave differently from an investment point of view and with what’s involved for us as investors.

With large HMOs, there are more rooms to monetize, and in an economy like this where profits are getting squeezed, the temptation is to focus on larger HMOs even for newbie HMO investors.

While nine times out of 10 a large HMO will make more money than a small HMO, the majority of things that we really ought to be considering when investing in HMOs don’t appear on the spreadsheet!

So, read below or listen to the full episode on The HMO Podcast about the nine top benefits of investing in small HMOs if you’re not sure what you should be investing in, are just getting started, or are at the earlier stages of building your portfolio.

Note: What I’m not trying to do here is convince you that you should invest in small HMOs over large ones, but I want to remind you of some of the really great benefits of investing in small HMOs…

1. Small HMOs are easier to get finance on.

There are a lot more lenders in the market who are happy to lend on smaller HMOs. The bigger the HMO is, the fewer lenders you’ll find in the market. So, this means there are more products out there for small HMOs. It’s a simpler product, and there’s much less risk. Even some of the mainstream lenders have offered these products before.

2. Small HMOs are cheaper to finance.

With more lenders out there, there are more products on offer, creating more competition. As that drives prices down, it’ll physically cost us less on a mortgage or other finance.

For three and four-bedroom HMOs, a lot of lenders provide interest rates around standard residential mortgage rates. The real jump in rates starts to happen at five-bed HMOs, which is when licensing is required, making it more technical and specialised. And that spooks some lenders.

3. Small HMOs are easier to convert back to residential housing.

With a small HMO, it’s more difficult to over-commercialise it. And that makes it easier to convert back to residential accommodation and sell it on the open market if I needed to. It’s nice to have that piece of mind if anything were to happen, we changed our mind, or it didn’t work out. This provides a way to de-risk your portfolio.

4. Small HMOs cost less to run.

The ability to run and operate small HMOs at a much lower cost is quite an attractive benefit. This includes utility and maintenance costs. Because you’ve got less people in the property using less electricity across a smaller property, it will naturally cost less to heat and power.

When it comes to maintenance bills every month, it’s not the three and four-bed HMOs that cost a lot to maintain! In larger HMOs, the property gets more of a battering, and often because you have more people in a small environment, there’s less responsibility and accountability.

5. Small HMOs cost less to buy and refurbish.

Of course, it depends on where and what you’re buying, but it should generally cost less to buy and refurbish a smaller HMO. If you’re just getting started, you need to preserve your capital, or you’re working with a limited amount of capital, then it may make sense to buy a small HMO.

This reduces the barrier to entry, making it a little easier to get into the market in the first place! And there’s less property inside, so it will cost less to refurbish it as well.

6. Small HMOs are much easier to fill.

With fewer rooms, you don’t need to manage as many adverts, and you’ll naturally have a reduced turnover. Additionally, the more rooms you have the more reluctance you’ll find from prospective tenants, particularly professional tenants, who will want to live there. Most people prefer living with three strangers instead of six, seven, or eight.

On top of that, there’s often much less friction in small HMOs because there are less people, and the obstacles for tenants to overcome living with several strangers is just much easier to deal with.

7. Small HMOs are easier to manage.

Small HMOs are exponentially easier to manage. You have less tenants to deal with and the implications of one bad tenant are much smaller.

Your involvement from a managerial point of view is often quite substantial for large HMOs. Even if you’re using an agent, there will still be more to deal with and consider. If you’re self-managing, then you’re going to have a lot to actually action and take care of too.

8. Some small HMOs don’t need a licence.*

The caveat here is that some small HMOs do need a licence if there’s selective or additional licensing in place in your area. But generally speaking, HMOs under five bedrooms don’t need a licence.

For larger HMOs, you have to jump through all the hoops of whatever your local council and the national guidelines require you to do. You’ll have to pay renewal licence fees and get inspected. And that can all be quite confusing, laborious, and expensive if you’re just getting started!

So, for me, small four-bed HMOs are a piece of cake. You don’t have to worry about licensing in most parts, but make sure that you check that there aren’t any additional or selective licensing schemes in your area.

9. Some small HMOs don’t need planning permission.*

Again, the caveat is you’ll still need planning permission if there is an Article 4 direction in place in your area, but when creating any HMO over seven beds, you’ll always need planning permission no matter where you are.

For smaller HMOs without an Article 4 direction in place, turning a property into a HMO is considered permitted development. And this probably won’t be around forever, so it may be worthwhile taking advantage of this while you still can!

So those are the nine reasons why I still believe small HMOs are fantastic and why I think anyone, especially beginner HMO investors or those who are in the early stages of building their HMO portfolio, should consider investing in small HMOs!

These are all general rules and guidelines as there are of course variations to this, but balance is key. It’s really important if you’re building a portfolio to have some smaller and larger HMOs. So, you may as well get started with small properties in the first place and work on building your skill, experience, confidence, and brand!

I hope I’ve encouraged a few people to reconsider small HMOs. I, along with many other experienced investors, are on hand over in The HMO Community for any guidance and support. And if you’re really serious about building your HMO portfolio, sign up to The HMO Roadmap!

 

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!