Photo by ELM Property
Getting started with investing in HMOs can be challenging, but there are ways you can prepare to make sure you’re ready to begin your HMO investment journey.
In this guide for beginner investors, we’ll cover 10 key things to do and understand when getting started with investing in HMOs!
1. Set goals & objectives.
For starters, you need to set some time aside to think about your goals for investing in HMOs. What do you actually want to achieve and why? This is crucial to start considering as this will impact what you should invest in in the first place!
Your goals should be relevant to what you want to achieve and help you reach your long-term objectives. Write your goals down, and make sure they are realistic and achievable. If you’re aiming way too high, you’ll only set yourself up for disappointment.
You also need to set key performance indicators that you can target and measure frequently. On a granular level, this allows you to look towards your goals and break them down into bite sized actions that you need to do on a daily, weekly, and monthly basis.
Doing this effectively can help you be proactive about achieving your goals and get you thinking about what things you need to be focusing on from the get-go!
2. Understand the market & do your research.
This may sound obvious, but you need to make sure you do your own market research and undertake due diligence. You need to know with complete confidence that you’ll be investing in the right property in the right location that makes sense for your goals and circumstances!
So, it’s important to thoroughly understand what you’re actually investing in and where, not just on a local level but also zooming out too. Additionally, take the time to understand what strategy and type of HMO property suits your lifestyle, ambitions, and financial requirements.
You really need to start with the end goal in mind. And once you put a plan in place, stick to it. If you’re persistent and consistent with your actions, you’ll see results.
And to help you get started with investing in HMOs, it can be helpful to utilise property education. It’s imperative to learn as much as you can about finding, funding, refurbishing, filling and managing HMO properties.
3. Create a business plan.
A business plan sets out your main objectives and how you’re going to get there. You should use this as your compass – it should be a document you can refer back to at any point. This can help keep you on track throughout your investment journey.
Once you start creating your business plan, you can also start setting out a timeline and forecast. You need to be realistic and put a sensible plan of action in place. While the goal post could move some along the way, it’s better to have a plan and be prepared from the outset!
4. Comply with regulations.
Complying with regulations is an extremely big part of any type of property investment, and the HMO market comes with additional legislation. HMO investors need to know the relevant regulations locally and nationally, keep up to speed on all of 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 absolutely catastrophic. And keep in mind that national and local guidelines can often be very different!
While most of us are aware that there are permitted development rights, some of those rights might be removed on a local level for a whole range of reasons. So many investors overlook these types of rules and regulations or don’t understand them effectively.
Additionally, a lot of planning and building regulations have grey areas. 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 challenging for investors.
But no matter what, you need to be completely aware of how big the implications are of not getting these things 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 at all.
To ensure you get this part of investing in HMOs right, work with the right people – the experts. Hire experienced architects, such as our partner architects Andrew and Mary, who really understand planning permissions and HMOs. Work with a planning consultant – I still use one on every single project. And it may also be helpful to work with an experienced mentor or project manager.
5. Budget your income and costs.
Budgeting is so crucial. When you make estimates on variable and non-variable costs and create a budget, you can start to forecast things out in your HMO business. It’s really important to categorise and track your income and expenditure for your properties.
You should also look at allocating budgets for specific expenditures, such as your mortgage payments, insurance, maintenance, repairs, utilities, and management fees. You can then build those into simple models, creating the basis for a financial management tool.
This should also help you understand the importance of setting aside reserve funds for unexpected costs. As a HMO investor, you’ll need to be prepared for whatever costs come at you!
6. Mitigate risks & put contingencies in place.
Another key area is risk management and contingency planning. What measures will you put in place if everything were to go sideways, if there was a recession, if you had a major issue with rents, or if you had a big problem with your property?
A lot of investors, particularly beginner HMO investors who get a bit carried away with getting their first or second property off the ground, fail to recognise some of the major risks associated with investing in HMOs.
Contingency planning has become more important than ever. The COVID-19 pandemic and recent economic and political uncertainty should have shown that we need to be prepared for anything! And we just can’t rely on best-case scenarios…
Costs across the board have been high, so this has been hitting profits in recent years. And that means, a lot of things need to be adjusted and changed. So, you really need to be thinking about a whole range of things, including:
- What happens if you get a down valuation and you can’t pay an investor back?
- What if the market turns upside down?
- What if some of your tenants suddenly can’t pay rent?
All of these scenarios could leave yourself open to major damages, losses, and that could really impact your HMO business. And in some instances, it bankrupts people! This is serious and has happened thousands of times to investors all over. So, it’s crucial to make sure you’re prepared and that it doesn’t happen to you.
This is really vital, so you need to identify the potential financial risks to you, plan realistic scenarios around what you would do if certain things happened, and design plans to mitigate them. This may include having a financial buffer or diversifying your portfolio.
7. Get property management right.
A lot of people, particularly beginner HMO investors, enter the HMO market and fully focus on finding deals that cash flow really well and allow them to recycle lots of money. But so many often overlook who’s going to manage their properties.
If you want to self-manage, you need to put a plan in place for that. Skill yourself up on everything you need to know about HMO property management. You also need to be able to deliver a certain level of service, and this takes time, skill, and knowledge to be able to do that effectively.
If you’re wanting to outsource the management of your properties to an agent, you have to seriously think about who’s going to be capable of doing that. You’ll need to find a great manager, someone who’s been on the ground with lots of experience, contacts, and knowledge and is credible and reputable.
For student HMOs, this will be relatively easy, especially if your property is in a major city as you’ll likely find several decent sized and well-established agencies. But with professional HMOs, particularly if it’s in a small town or peripheral zone, it’ll be much more challenging to find the right person.
However, if your property ends up being managed poorly, you could experience long void periods 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 everything.
But overall, there are tons to think about when it comes to HMO property management! It’s something that has to be done on an ongoing basis, so whether you’re going to manage your own properties or use an agent, it needs to be done in the right way.
But what’s all involved with property management? Here are some of the main things you need to do when it comes to managing HMOs:
- Understand the local market
- Advertise rooms
- Screen tenants
- Process deposits and tenancies
- Process inventories
- Collect the rent
- Manage tenants
- Manage maintenance
- Undertake inspections
- Manage evictions
- Keep up with compliance
8. Systemise your business.
Systems should be implemented in everything you do within your HMO business, from managing your properties and building investor relationships to dealing with phone calls and emails.
Implementing systems involves pulling all of the pieces together on how to deliver specific tasks. Writing these down on paper allows you to have a process that can be followed. Systems also help ensure that tasks are done consistently and to the right standard and provide a way to hold yourself accountable.
Doing this can help you be more efficient, productive, and profitable. There are also ways you can achieve more while working less! This includes batching your processes and finding areas of your business you can simplify, automate, delegate, or eliminate.
9. Stay informed & remain adaptable.
Throughout your entire HMO investment journey, you need to stay informed and remain adaptable. Things will change, and you need to make sure that you’re able to adapt quickly. This means being flexible, staying informed, and keeping up to date with what’s actually happening – not just the news headlines!
To do this, keep an eye on sold figures, asking price data, the percentage of properties being reduced in value, occupancy levels, supply and demand on SpareRoom, and what’s happening to rental values.
This will help you to stay ahead of the curve, and it means you could be making the changes you need before everyone else. That could be the real difference, allowing you to take advantage of whatever opportunities come forward.
10. Build an investment roadmap.
In order to get your HMO investment journey started on the right foot, there are a number of key areas you should focus on and map out. Building any business will be an evolutionary process, so create an investment roadmap and keep coming back to it as your portfolio grows.
Making a plan will allow you to better understand what you’re trying to achieve and what you currently have in terms of resources and limitations. And then you can start creating a list of tasks and activities to help you reach your goals!
Don’t be overwhelmed – you don’t need to have every single task mapped out yet, but start planning the first few steps and put these pieces into action. Having this sort of detail mapped out and written down will allow you to take the leap and focus on starting and growing your HMO portfolio with actionable steps.
A good place to help you get started with investing in HMOs is by becoming a premium member of The HMO Roadmap! We have in-depth and practical lessons, case studies, worksheets, spreadsheets, and templates to help you start, scale, and systemise your own HMO investment business.
And if you’d like to be a part of our free community of experienced HMO investors, join 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, 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!