A recent analysis by Octane Capital shows the average market value for HMOs sits significantly above wider market values. The average HMO in Britain is valued at £364,508, which is 32% above the wider market. This equates to an additional £87,375 – now that’s a serious sum of money!
It may seem like positive news if you have already invested in HMOs as you may already be reaping the rewards of capital appreciation, but it could sound more pessimistic for those looking to get started buying HMOs or expanding their portfolios.
No matter whether you’re a veteran HMO investor or brand-new to HMOs, you need to understand what higher market values mean for your current and future HMO investments.
In this blog post, we’ll cover what this means for HMO investors and the ever-increasing importance of becoming a local expert and mastering funding – in addition to tips to help you do just that!
What Does Higher Market Values Mean for HMO Investment?
For starters, if you’ve already invested in HMOs, this means you could have already earned capital appreciation from your existing properties. Figuring out how to add genuine value will become even more important. Finding HMO deals where you can do this allows you to earn strong returns, particularly in the long term.
With higher market values, this means the initial cost of investment for HMOs will often be higher. And as overall house prices remain on the rise and as more and more investors enter the HMO market, this also means properties suitable for HMOs will likely continue to be more expensive. Because of this, we’ll need to start figuring out how to raise more funding.
Keep in mind that the purchase price of a property impacts the profitability of a HMO. Finding and appraising deals will require even more diligence and persistence from now on. When assessing a deal, factor in different levels of purchase prices and see what the entire deal looks like.
The Importance of Being a Local Expert
Naturally, there are regional variations in market values, and location is key in determining the success of your HMO investment portfolio. Certain areas, in particular, are seeing especially high premiums for HMOs.
Octane Capital’s analysis revealed the North East has the highest HMO premium of 109%. London follows with a 72% premium and the West Midlands with a 55% increase. At the bottom end of the table, the East Midlands and Wales see only a 2% and 3% premium on HMOs respectively.
Because of how much prices vary across the country, it’s increasingly important to become a local expert in the specific locations you’re investing in. Understanding the ins and outs of the local market, including what’s happening with supply and demand, HMO room prices, long-term capital appreciation prospects, and rental strategy profitability, is crucial.
This can allow you to be unequivocally confident in what you are investing in! Let’s face it, investing in HMOs can be very complicated. The stakes are high. And as we’re talking about huge sums of money, there’s a lot that we can get wrong. So, we need to make sure we get values right for the properties that we buy.
Why You Need to Master HMO Funding
To help ensure you have the cash available when you want to buy your next property, you need to work on mastering the four pillars of funding. This will help you scale your HMO portfolio quicker even as property values rise further.
The four pillars of funding include knowing your numbers, raising private finance, recycling capital, and accessing mortgages. If you can tap into all four of these, financing deals won’t be an issue – even as the HMO market grows! This will give you a solid foundation to be able to act on opportunities and secure the right properties as they become available.
4 Tips for Navigating The Growing HMO Sector
Here are a few of our top tips to help you navigate this growing market by becoming a local expert and mastering HMO funding.
- Figure out the average cost per square foot in the area you’re investing in. This will help you understand approximately what a property is going to be worth in the area you’re investing in. This is pivotal for the decision-making process about whether you should buy a property and will help you understand the price that you can offer to ensure you’re buying a good value.
- Understand a location’s capital appreciation prospects. Before investing in a specific area, look at the local infrastructure and regeneration plans. If you know there are numerous projects and developments happening, then property values could go up over the next five or 10 years, which can help you recycle capital out and grow your HMO portfolio.
- Get yourself into a super lendable position. Understand what mortgage lenders like and don’t like. Make your credit score, deal analysis, and entire deal prospects as strong as possible, and get yourself into a position where you don’t need to borrow as much capital from the bank, to begin with. If you’re able to do these things, you’ll get a much better deal and be able to progress much quicker!
- Create a strategy for raising private finance. As HMO investment is SO capital intensive, raising private finance is an important way to access the money that you need. Figure out how to let private investors find you and build solid relationships with them. Also, learn about the different ways you can raise and use finance. You should write your strategy down on paper and give yourself objectives to work towards.
If you effectively become a local expert and master funding, you will create a solid, future-proofed, and very profitable and sustainable HMO investment business! And what more could we all want?
For more advice and resources on how to start, scale, and systemise your HMO property 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!