Houses In Multiple Occupation (HMO)

 

With the chronic housing shortage in the UK & demand for rental properties there has been a growth in the market for room rentals. HMO’s – houses in Multiple Occupation offer landlords the opportunity to look at the possibility of increasing their rental income and rental profits by offering accommodation on a sharers basis.

There are many different types of HMO’s and I classify mine by the tenant profile.

I categorize the tenants into 3 main areas:

  • Students
  • Professionals
  • Local Housing Allowance tenants.

I then take it further by splitting the professional market into young white collar professionals, normally graduates and then non-graduates who may be more likely to be trade orientated than office workers.

When I look to create an HMO I ask myself - who are my target tenants.

I look at the local area to determine the demographic and I design my HMO around this market.

For example, top end professionals will usually want top end properties where things such as private bathrooms and Wi-Fi would be critical to this group. I therefore look to put in as many en-suite shower rooms as possible and install the best broadband product available.

I find that in these HMO’s televisions are not as highly regarded as the broadband speed & the need to be able to download large quantities of data fast. Another important factor is to make sure there are a good supply of local bars, coffee shops and local transport links.

At the opposite end of the spectrum we have the Local Housing Allowance (LHA) tenants. These tenants are on a tight budget and are therefore more motivated by price rather than the services on offer. In my LHA HMO's I do not provide Internet and will not invest in creating en-suites, it just doesn't make financial sense as they would struggle to pay the higher rent I would need to charge to make it worthwhile.   I have learnt over the years that I my LHA HMO’s a TV aerial is important and to make sure one is installed for my LHA tenants.

I started investing in HMO's 10 years ago, and I started with a student HMO very close to the University. 

If you are wanting to get started, the simplest HMO's would be either a 4 bed Student HMO or 4/5 Bed professional HMO.

A good way to start an HMO would be to buy a 3 bed house offering 3 large bedrooms & 2 reception rooms. You then use either one or both of the reception rooms as the extra bedrooms in order to allow for 4 or 5 sharers in the house. These days you can also find up and running HMO's for sale. 10 years ago you were unlikely to find many on the market.

Presently, I’m still a proactive investor looking to invest in HMO's and I continue to buy these 3 bed houses to convert into 5 bed HMO's as simple HMO deals to add to my portfolio.

Another way to get higher returns would be to look at houses with the opportunity to get 6 or more bedrooms by converting a loft or adding on a single storey extension –these are my favourite HMO projects.

Is my HMO Profitable?

    Just how you assess the profitability of a property is not straightforward, there are various methods of assessing profitability, I will look at each in turn. 1. The traditional way. This is the approach taken by investment books and the figures are also published in newspapers and magazines.  They take the average gross rental yield and compare it to the yield that would be received say by putting the money in the bank. Figures like 6% gross rental yield from property are stated and this is compared to other returns like bank interest and the stock market. Sometimes they also add the average capital appreciation so for example say if last year the average increase in house prices was 12% the overall return from property would be 18% (6% gross rental yield plus 12% capital appreciation).  For a property buyer these figures may give a guide to overall long...
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