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There’s been a rise in investors entering the HMO sector as more people are seeing and understanding the benefits of HMO property investment. Demand is high across the private rented sector, and this includes HMOs and co-living spaces, which are particularly popular among young professionals, students, and social renters.

With such a significant supply and demand imbalance in the UK, these trends will likely continue for quite some time, which may lead to more people getting started in HMO property investment.

When it comes to this kind of property investment, there are higher starting and operating costs to keep in mind, in addition to extra rules and regulations HMO landlords need to be aware of.

But there can be much higher returns if you get this type of investment right. You just need to make sure you do your research and due diligence and take the time to understand the ins and outs of this type of investment!

There are a number of things beginner HMO investors need to understand and consider before getting started building a HMO business. Here we’ll discuss the basics, including finding, funding, refurbishing, filling, and managing HMO properties and keeping up with changing legislation, to help you get started in this exciting industry!

 

Finding Properties

To get started with HMO property investment, you need to know how to find the right property, what investment strategy is right for you, and the different ways to source or acquire HMOs. Firstly, consider what you really want to get out of HMO property investment.

Then, start thinking about what kind of HMO is right for you and how that aligns with your short and long-term objectives. Will you be investing in student, professional, or social HMOs? They all have their own unique set of advantages and disadvantages, so take the time to understand these.

Once you decide what type of HMO you want to invest in, you can then start looking at different locations and property sizes. It’s all about picking the right location and the type of property to attract your target tenants. Dial down the exact investment location, including the proximity to amenities, transport links, and employers.

You also need to know what size property you’ll need for the size HMO you want to create. What types of floor plans will be conducive for your strategy? You may also want to look for things where you can really add value through garage or loft conversions. You need to start to understand the details of what you’re looking for really specifically!

Once you know in detail what you’re looking for, you can then start searching for properties. Naturally, the easiest way to do this is through working with local estate agents as they hold the keys for most of the properties out there.

It’s possible to find properties off-market too, but this may be more difficult and take additional time. You can do that through direct-to-vendor marketing or by working with a sourcer. However, you could be waiting months to secure a property – or even longer! It’s also possible to find properties at auctions, but this can be challenging for beginners.

Tips: Get started by thinking about your goals for HMO property investment, figure out how this can align with the type of HMOs you invest in, and focus on building and nurturing relationships with local agents as much as you can!

 

Funding Your HMOs

There are a range of options when it comes to funding your HMOs, such as various financing options from the high street, bridging loans, specialist HMO mortgage products, and private investment. You can even use a mix of backed finance and investment.

However, be aware that lenders all have different requirements. Sometimes you’ll be more heavily scrutinised if you’ve borrowed from an investor, while other lenders won’t care. It also depends on what you’re proposing to do with the property and your level of experience. This is where a mortgage broker can really help you.

Your valuations and refinancing at the back-end will also be a really important part of your strategy, especially if you want to recycle cash out of your deals. You’ll need to know how to do that and access commercial valuations, in addition to ways to max out the value at the back-end.

Different lenders, property sizes, locations, types of tenants, licensing requirements, and Article 4 directions all play a role in this part of HMO property investment, so make sure you start to understand how these can impact you.

Tips: Take the time to understand the basics of funding your HMOs before diving in, and if you’re planning to utilise HMO mortgage products, it can be really helpful to work with a specialist mortgage broker.

Refurbishing Your HMO Property Investments

This is often the area where beginner HMO investors struggle the most. It can be really challenging to look at your first HMO property and have a good idea of what it’s going to cost to refurbish it, especially if you don’t have any experience with this. You also need to know what your target tenants are looking for and the best layout and design for your HMOs.

Personally, I like to buy the same sorts of properties, so I can get within 5% of my budget every single time. But that of course takes experience. Without that, how can you expect yourself to be able to do that? So, you’ll likely need some help with understanding the cost of a range of work, such as: 

• Updating flooring
• Adding a new kitchen
• Updating electrics and plumbing
• Adding ensuites
• Re-roofing a house

Refurbishments will be a bit of a question mark though, and that needs to be built in as most people underestimate these costs. If you’re doing a full back-to-brick refurbishment, you could end up spending around £100k!

However, you can do refurbishments for far less, especially if you’re doing cosmetic refurbs where you’re lightly upgrading the kitchen, changing the furniture, or updating one or two of the bathrooms. But with cosmetic refurbs, you’ll find it much more challenging to add value. 

Tips: Research what kinds of work you should be doing to your properties for your target tenants. No matter what kind of refurbishment you end up doing, you need to be realistic and practical about the cost of whatever you’re planning! And it can be helpful to learn how to effectively execute lower budget refurbs when you need to.

 

Filling Your Rooms

Another important area of HMO property investment involves filling your HMO rooms – or hiring an experienced agent to help you with this. If you’re investing in a prime city area with big employers and a university, it’ll likely be easy to advertise to tenants and fill your rooms.

On the other hand, if you’re investing in a more peripheral location or a smaller town that’s up and coming, this should really be factored in. It might not be as easy to keep your properties filled, so you might need to make adjustments or incentivise tenants to live there.

You also need to think about who will manage the property, which we will talk about in more detail in the next section. But start thinking about whether you want to self-manage or work with a managing agent.

If you’re going to self-manage, you need to be really prepared because how good you are at filling your properties and managing them will impact your success and how much money you make!

And if you’re going to rely on someone else to fill and manage your properties, you need to give this a lot of thought, particularly if you’re investing in social or professional HMOs. And you need to make sure the managing agent is extremely reliable and experienced!

Tips: Understand the competition in your investment area and what it will take to fill your rooms quickly. It’s also helpful to consider how you’ll optimise tenant satisfaction and retention in your properties to keep your rooms filled for longer.

Managing Your HMO Property Investments

With more tenants in HMOs than single buy-to-lets, property management in this industry takes much more effort and time. There are a number of areas that you need to make sure you understand and consider when it comes to managing your HMO property investments, including:

• Being a local expert
• Advertising rooms
• Screening tenants
• Processing deposits and tenancies
• Undertaking inventories and inspections
• Collecting rent
• Managing maintenance and repairs
• Communicating with tenants
• Keeping up with compliance
• Managing evictions

Property management is often considered one of the biggest challenges when it comes to HMO investment because of all that’s involved. So, you need to seriously consider whether you should self manage or use an agent!

All of these ongoing activities take up a lot of energy and time, and it can be quite overwhelming, particularly when you think about the responsibilities and liabilities involved. This is why outsourcing the management to a local agent can make a lot of sense for many people.

However, HMO property management fees are usually quite high as a lot of work is involved. If you’re wanting to replace your income or scale up quickly, it’s a lot of cash to part with. And it can be challenging to find the right person to manage your properties.

Tips: It’s an important decision whether you self manage or hire an agent, so make sure you effectively weigh up the pros and cons and find the best option for your circumstances!

Keeping Up with Your Obligations as a HMO Landlord

Landlord responsibilities, legislation and licensing are all areas HMO investors need to be knowledgeable about and stay on top of. And there have also been a whole range of legislative changes to keep up with recently and even more are on the way!

So, it’s crucial to keep up with any changes to the HMO industry and ensure you are compliant with all of your legal obligations as a HMO property investor.

For example, there are specific minimum standards that need to be met, including amenity standards, minimum size requirements, fire safety standards, gas and electrical safety requirements and checks, and minimum energy efficiency standards.

And of course, as a landlord letting a residential property, you have a legal responsibility to ensure the property is safe for your tenants. There’s also of few reports and certificates that you need to have in place for your HMO property investment.

Some of these need to be redone after a certain amount of time, while others need to just be done once. Here are a few of the documents you need to get as a HMO landlord:

• Gas Safety Certificate
• Electrical Installation and Condition Report
• Portable Appliance Tests
• Fire Detection System Certificate
• Emergency Lighting
• Energy Performance Certificate
• HMO Licence

To find out more about your legal obligations, take a look at the Housing Act 2004 and Housing health and safety rating systems.

Another confusing area of HMO property investment is HMO licensing. This is predominantly because it’s enforced differently across the country. And even with the guidance, there are some grey areas!

Not all HMO properties require a licence. HMOs with three or four tenants are considered a ‘small HMO’. For these, you won’t need a licence, unless there’s an additional licensing scheme for your local housing authority.

Across England, all large HMOs, which are considered to have five or more tenants, require a HMO licence. A licence is valid for five years, and keep in mind that you need to have a separate licence for every HMO you run that requires licensing.

If you don’t have a HMO licence for a property that should be licensed, landlords could be fined and ordered to repay rent, you may not be able to evict tenants using a Section 21 eviction before they are abolished, and your insurance could be invalid.

Tips: If you are unsure about any of the licensing requirements or standards you are required to comply with, get in contact with your local housing authority. They’re usually happy to advise landlords on this, so don’t be afraid to reach out!

For all of the resources, training, and advice you need to start your HMO property investment journey, become a member of The HMO Roadmap! And if you want access to useful templates and spreadsheets to help level up your HMO business, sign up for the premium subscription.

And if you’d like to be a part of our community of experienced HMO property investors, join our free 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!