Is HMOs the right kind of investment for everybody? The honest answer is no, but how do we know if investing in HMOs is the right thing for us or not?
It can be difficult to know and looking from the outside in, it can seem easy and sound like anyone can do this. But that’s definitely not the case. If you’re trying to figure out whether investing in HMOs is the right strategy for you, then this blog post is for you!
Read below or listen to the full episode on The HMO Podcast about the 10 questions to ask yourself to help identify whether investing in HMOs is the right choice for you.
I believe the areas we cover here define what investing in HMOs is like, and hopefully, with that, you can make an informed decision about whether you want to pursue this form of investment!
1. Do you understand the importance of investing in assets that pay you?
The first thing you need to understand in order to decide if HMO investment is right for you is the importance and value of investing in assets that pay you. If you do get this, then thinking about investing in HMOs is a really good start.
Not everyone wants to invest in brick-and-mortar assets, but many benefits come with investing in something physical that you can actually touch and feel. With a strong track record of performance, property can appreciate in value over time and generate an income while you sleep!
2. Do you want or need your money to work harder?
If you want or need your money to work substantially harder through leverage and the ability to generate a fairly high yield, HMOs can be a very attractive investment option.
One of the beautiful things about investing in property is that it’s leveraged and asset-backed. If you want to buy a £400,000 property, you only need about £100,000 in cash or maybe even less than that.
And while we might all have different opinions on what a high yield is, I personally believe anything upwards of 6-7% is a pretty high-yielding HMO, which has the opportunity to provide solid returns.
3. Do you have a personal interest in property?
Investing in HMOs is not easy enough to do just for the money. Because of that, if you don’t have a genuine interest and passion in property and doing deals, creating cool accommodation, and dealing with problems and people, then this kind of investment is not for you.
If you are interested in this and are inspired by incredible architecture, what people can do with spaces, and the experience people can create in an environment, then HMOs could definitely be for you.
4. Do you prioritise steady cash flow over creating big chunks of equity?
A lot of people want to generate strong recurring cash flow AND big lumps of capital. With HMOs, this is often done through forcing the capital up by developing that property, commercialising it, and adding loads of space.
While there are opportunities to do both with HMO properties, it can be difficult to find the property that gives you the cash flow and allows you to recycle big chunks of capital, especially when first starting out.
Sometimes it’s better to just accept it if you’re looking to create big chunks of equity. If this is the case, you may want to invest in something else rather than trying to do it all at once with HMOs.
Maybe consider working on small development projects and learning all about that world first. But if you prioritise steady cash flow over creating big chunks of equity, then HMOs can be a great strategy for you.
5. Do you have a really long-term view of investing?
There’s no point investing all of your time and money into a HMO in the hopes of short-term returns. As there are so many additional costs nowadays, HMO investment is not worth it unless you’re holding onto the property for the long term.
With buying an asset, developing it, and getting tenants in, you must have a long-term view, and that’s where you win in property anyways and especially so with HMO investment. It isn’t just about buying the property. It’s about what you do with the property, how you manage tenants, and how you run your business.
I bought my first HMO property 13 years ago now. I still have it, and not only does it generate cash every month, it’s over doubled in value! If I’d have cashed it after two or three years, I wouldn’t be where I am today.
6. Do you have an appetite for more risk?
If you have an appetite for more risk, particularly more risk than standard buy-to-lets, then HMOs could be for you. It’s not only because we’re generally talking about bigger projects and more money when it comes to HMOs, but with having more tenants, the risk of things going wrong is much higher.
You could get a bad tenant that causes a lot of disruption and costs you money. There’s a higher risk of awful things happening like fires. Because of all of these factors, investing in HMOs just isn’t right for you if you have a very low threshold to risk!
7. Do you have cash or have access to this?
Investing in property requires a LOT of capital, and HMOs in particular generally need even more. You need to be able to secure the property in the first place and pay all of the legal and refurbishment costs. Because of this, be aware that if you want to invest in HMOs, you will need to be able to get your hands on a certain amount of capital!
If you’ve got cash or have access to this, then investing in HMOs could be for you. If you don’t, then you’re going to need to find a solution to fund your HMO portfolio. This may mean borrowing in part from the bank and private finance.
8. Are you committed to learning and developing, creating a better product and service, and investing back into your business?
If you’re committed to learning and developing as a landlord, in addition to creating a quality product and customer service, then investing in HMOs might be for you.
The real work isn’t when you find the deal or do the refurb. It’s when you move tenants in, and because this is such a long play, you’ve got to be really committed to keeping up with things like legislation, best practice, and finding solutions to make sure your business remains profitable.
This really isn’t a set and forget strategy. Currently, there are lots of legislative changes that we must navigate. You’ve got to have your eye on the ball and that means committing to constantly improving your properties and projects!
9. Can you multitask, problem solve, and manage stress well?
There are lots of moving parts when it comes to HMO property investment. You’ve got all sorts of things to think about at the same time, from enquiries, viewings, and paperwork to legislation, certificates, and inspections, all the while you’re managing cash flow, paying mortgages, and chasing rents.
HMO investment is a really mechanical business and needs a lot of time and attention. There will be many, many times when you need to problem solve, but there are systems and processes that you can put in place to help you automate, delegate, simplify, and eliminate certain tasks and activities.
Things can also go wrong, and tenants can be difficult. But that’s just part of investing in HMOs. You need to be well prepared and be able to manage these sorts of stressors. If you can do all these things well, then HMOs could be the right investment strategy for you.
10. Are you prepared to work hard enough to not have to work again?
With HMO investment, it isn’t just about buying the property and doing that refurb, it’s an ongoing process. Over time, you’ll get better, develop helpful contacts, and build your confidence, but you have to be prepared to work really hard at the beginning.
If you’re just starting, getting all of the necessary pieces in place can be really difficult. It gets a little easier the more you do it, but you have to be prepared to work really hard to get those first few properties up and off the ground and generating cash. When they are, then and only then can you start to sit back some.
Keep in mind that it could take you a few years to get to that point. You will likely have to make compromises with your time, money, and personal life. That is just what investing in HMOs commands, but if you’re prepared to work hard enough to not have to work again or at least not have to work much in the future, then HMOs might just be the right thing for you!
So, those are the 10 questions you should ask yourself to determine whether investing in HMOs is right for you. If you’ve answered yes to these, then it may well be!
Hopefully reading this has inspired you and given you the confidence that you should get started investing in HMOs, but be honest with yourself. If there are things that aren’t a good fit for you, then it may be better to consider doing something else.
You can always come back to investing in HMOs in the future if things change, but you need to make sure that it’s right for you at this time. It’s not worth spending all of your time, money, and effort to then figure out that it isn’t.
If you have decided to start investing in HMOs, then the next step is figuring out the technical bits. If you want to learn all of the details behind starting, scaling, and systemising your HMO business, become a member of The HMO Roadmap! And for additional support from fellow HMO investors, come join us over in The HMO Community Facebook Group.
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!