Photo by Ikon Property

When preparing to buy your first HMO investment, you may be feeling overwhelmed and maybe even a bit nervous! That’s completely normal as there’s a lot you need to understand and learn about when getting started with investing in HMOs.

In this guide for beginner investors, we’ll cover some of the major things you need to do and learn before investing in your first HMO investment to ensure you build a strong foundation that will help you effectively start and scale your property business!

Getting Started with Property Education

Many beginner HMO investors start with investing in property education to help them gain the knowledge they need to get started. While you can always learn on your own, you’ll be able to achieve your goals much more quickly if you find the right platforms, services, or products to help guide you.

There are a lot of different types of products and services available in this space, from free resources and e-learning platforms to events, mentorships, and masterminds. It may take some experimenting to help you find the best way for you to learn, and investing in different forms over time may prove to be the most beneficial.

As a starting point, you need to learn how to find, fund, refurbish, fill, and manage HMO properties and keep up with changing legislation. This will help you get started with your HMO investment journey on the right foot.

But before investing time and/or money into property education, make sure you’re serious about this type of investment and consider what you’re embarking on in the first place. And spend some time ensuring that HMO investment is right for you in the first place.

And as property education can be quite a profitable business, some people take advantage of this. So, do the right research, homework, and due diligence on the people, programs, and businesses you’re interested in working with in the property education space!

Working with a mentor in particular was the single best investment I ever made into my property businesses! But above all, keep furthering your knowledge throughout your entire HMO investment journey.

Starting Your HMO Investment Business from Scratch

When you’re just getting started, it’s crucial to understand your personal objectives. Why do you want to get started with HMO investment in the first place? What are you trying to achieve? Think about this in depth before you plan your HMO investment strategy, which includes what, where, and how you’ll invest.

So, spend some time thinking about what you want and why. If I started my property business over from scratch, I’d focus on generating cash flow to start with. This is because I wanted to achieve financial independence from my job and living expenses, and doing that would help free up more time by going part-time or leaving my job entirely!

HMO Strategies

Once you know the ins and outs of your goals, it’ll then be helpful to be aware of the different HMO strategies and the pros and cons of each as they all behave differently. Consider why you might invest in student, professional, and social HMOs.

What strategy is right for you and your circumstances depends on your industry experience, the amount of capital you have available, your objectives, and your short and longer-term goals. Until you really understand what your strategy is and what you’re looking for and why, don’t try and buy anything!

You’ll also need to dial down the exact investment location and size of the property you’re looking for. This will all help you start to see the details of what you’re looking for really specifically. Once you create your HMO investment strategy, stick to it, and you’ll be able to know exactly what you’re looking for.

Another important consideration at the outset is whether you plan to self manage or use an agent to manage your HMO. This will impact your strategy, so start thinking about it now to help you figure out what’s best for your circumstances.

Building a Strong Foundation for HMO Investment

To help you build a strong foundation when investing in your first HMO property, there are a number of things you need to know the ins and outs of that will help you make more informed decisions!

Legal Requirements & Planning Permissions

As the HMO industry is a complicated sector, a lot of new investors don’t fully grasp all of their legal requirements and the planning permissions related to this. If you don’t understand this part of HMO investment prior to getting started, there’s a real risk you’ll end up buying something that isn’t compliant, wasting tens of thousands of pounds, and possibly even more!

HMO licensing standards have changed a lot over the past five years and continue to do so. On top of that, councils across the country employ different standards. And  keep in mind that something that’s licensed today may not be licensable when it comes up for renewal and you’re assessed against new criteria.

If you are planning on buying a property and doing a refurbishment, you’ll need to check what the licence requirements are in your local area. And even if your HMO isn’t required to have a licence, there are still other requirements you need to consider!

Additionally, Article 4 directions are key to understand. You need to be aware of where in your investment location Article 4 directions are in place, and it’s worth checking to see if there are opportunities on the edges of these areas. And it’s important to know how Article 4 directions impact costs and commercial valuations too.

Renovation and Conversion Strategies

This is another challenging area for beginner HMO investors. If you don’t have experience with this, how are you supposed to be able to look at a property and have a good idea of what refurbishment is possible to undertake, what the work will cost, and how long it’ll take to get done?

The truth is you’ll likely need some help with this part, maybe from an architect, town planning consultant, and/or a builder. Especially at the beginning, refurbishment costs will be a bit of a question mark in general, and you need to build that into your model. Amenity standards and bedroom sizes can also heavily impact what it’ll cost to refurb your property.

Deal Analysis

In HMO investment, it’s common to encounter problems that’ll cost you more than you originally thought. Maybe the refurb will cost more because of issues with materials, or maybe certain bills will exceed your monthly cap! There may even be a global pandemic that’ll scupper your plans and leave you with empty rooms for longer than you expected…

Anything can happen! So, you need to stress test all of your deals thoroughly before purchasing anything. And this is where deal analysis comes in. There are a range of areas that you should always stress test in your deal analysis. This will also help you negotiate a better price so that you can achieve the numbers that you need to on a less optimistic view.

You need to see what a prospective deal might look like under ANY circumstances, which has become even more essential throughout the ongoing cost-of-living crisis. This helps you look at the bigger picture and allows you to make more informed decisions.

Deal analysis is something you’ll really need to spend some time on figuring out before you get started with HMO investment. And it’s crucial to understand the real implications of being too optimistic with your deal analysis as this can heavily influence what you can earn at the back end of a deal, and it can even impact your re-evaluation!

So, don’t just make the numbers work to fit the outcome that you want. It’s perfectly fine to look at pessimistic and optimistic positions, but you really need to make sure that you stack deals up based on realistic scenarios. 

If you need help with this, you can gain access to my HMO Deal Stacker Tool by subscribing to The HMO Roadmap. This tool will help you easily appraise, evaluate, and store all of your HMO deals in one place!

The Paperwork

Before you get started, you’ll also need to invest in the right kind of paperwork and agreements. You’ll naturally need tenancy agreements. There are different places you can get these, but so many aren’t specific for HMO properties. So, you need to be careful with what tenancy agreements you use.

Over the years, I’ve found that there are many things you need to add, take out, and tweak, because otherwise, it wastes tons of time and can end up costing you money. So, you need to be clear about all of the little details regarding who’s responsible for what. If something isn’t covered in your tenancy agreement, it’s going to come at your cost!

If you plan to invest in more than one type of HMO, like student and professional lets, you’ll need two different types of tenancy agreements as they’re quite different with a range of varying considerations.

If you’d like to see a copy of my tenancy agreements and use them as a template for your own properties, head over to TheHMORoadmap.co.uk and sign up for the premium subscription.

Scaling Your HMO Business Up

Once you’ve started to build strong foundations, you also need to think about how you’ll scale your HMO business up. And there are even certain strategies that’ll help you do this more quickly!

Funding Your Investments

Funding is one of the key pillars of HMO investment, so this should really be an important growth area from day one. And it’s something you should build on and scale up over time so you can always find the cash you need to buy your next property or do another refurbishment.

It may be helpful to adopt creative and innovative solutions to do this, such as taking advantage of opportunities that allow you to get into deals without having lots of capital or cash.

It’s not enough to understand the importance of getting finance together – it’s about really prioritising what’s involved in actually getting it on the table. And if you’re going to rely on raising private finance or securing mortgages, a huge amount of work needs to be done.

I see so many beginner HMO investors leaving this way too late. They wait until they get an offer accepted or get prices in for a refurb before they realise they need to find more funding. However, this limits the number of investors and lenders they’ll be able to speak to, and it puts potential investors under pressure to make decisions quickly.

So, raising and managing finance needs to be on your radar at all times. Start building a finance-raising strategy and set clear fundraising objectives. Keep in mind that if you want to scale up, you’re going to need to focus on this, and the best time to start is now – not later when you need it!

Networking & Building Relationships

Throughout your HMO investment journey, having good people around you will help you leapfrog issues and stand on their shoulders. This has certainly been one of the most important reasons behind my successes in the property industry! The people I’ve worked with along the way have really helped catapult me forwards.

So, invest time in networking and building relationships. Build a good network of people around you who can help you solve different problems. You don’t have to be an expert as this isn’t easy for everyone, but it’s something all HMO investors need to do and ideally get better at – no matter if they’re a beginner or veteran investor!

There are a range of professionals that are helpful to build good relationships with from fellow landlords, private investors, and mortgage brokers to builders and tradespeople. Build and nurture relationships with local agents as well.

Resources for Beginner HMO Investors

It can be overwhelming when you’re investing in your first HMO property as there are so many factors to think about and consider and areas you need to learn about and get off the ground! But there is reputable help out there to guide you every step of the way.

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

If you’d like to be a part of our community of HMO investors, join our free Facebook Group The HMO Community! Feel free to start a new thread to ask questions or for advice on anything regarding HMO investment.

 

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!