As property investors, we envisage ourselves as buying a property, adding some value to it, by refurbishing it to a high standard and then letting it out.
We then see ourselves sitting back and watch the rental profits roll into our bank account each month.
Meanwhile, we know that all the time our new asset is appreciating nicely in value over time.
At least this is how many see property investment. We then hear about the extra income that can be obtained by investing in HMO’s. This, therefore, seems like the logical next step.
Before embarking on your first HMO property investment project let’s take a moment to understand what is involved; how to avoid some of the pitfalls and how to get the most out of our new asset.
We’ll begin with the basics.
What is a HMO?
Quite simply ‘HMO’ is the abbreviation for House in Multiple Occupation. In other words a property that is shared by two, or more unrelated households, under one roof.
If you are relatively new to property investment, property management, or you are a new landlord because circumstances have dictated it thus, it is likely that you have started your property journey with a single/family buy-to-let rental property.
This is often considered to be the ‘vanilla’ form of property investing because of its relative simplicity. Please take note here: there is absolutely nothing at all wrong with vanilla!
We have already noted in our Golden Egg blog-post, single/family buy-to-let investing can provide safe, secure and often lucrative returns. Especially given time and consistency.
With this kind of investing, it is relatively easy to hand off your property to a letting agent to manage it on your behalf, making it a relatively hands free (and stress-free) investment.
Over time, you will hopefully receive a modest monthly income from your rental property. You really can sit back and let capital growth work its magic!
Obviously, it is still Important for you to get the right letting agent.
However, you may also have heard of the much greater returns that can be achieved by investing in HMO’s.
Indeed, while single-lets may provide a net return in the region of £200 pcm, we can expect to achieve at least double this from a HMO.
If you are looking to replace your employment income, or are seeking a method of providing greater immediate cashflow, rather than awaiting any potential capital gains, then HMO’s may be the way to go.
When we invest in a single buy-to-let property, we assume responsibility for maintaining the fabric of the building. (Roof, boiler etc.)
We may also have a mortgage on the property, which will need to be serviced each month.
Additionally, there are safety responsibilities such as ensuring that a gas safety check is completed annually. Now we also need to conduct an electrical safety inspection once every 5 years.
Let’s not forget that it is also compulsory to have a valid energy performance certificate (EPC). These must be updated every 10 years.
Last, but not least, we’ll be wanting to ensure that our asset is adequately insured, by taking out a suitable landlords/buildings insurance policy.
However, beyond these things and assuming that we have a decent lettings agent managing the property for us, there’s not much else to worry about.
Our agent will oversee the property for us. Good ones will remind us when the aforementioned safety checks become due. They will also ensure that they get completed, by organising the relevant contractor.
Probably, their main responsibility is to ensure that the property is tenanted by finding prospective tenants. They will check their suitability and credit worthiness. They will also take a deposit and file it with a legislated tenancy deposit scheme.
Once the property is tenanted, our agent will collect the rent each month and forward it to our bank account. (Less their fee of course).
Everything else then becomes the tenants responsibility, including keeping the property clean and tidy and paying all the bills.
Additional HMO Responsibilities
As HMO landlords, we market our rooms as ‘all bills included’, which is part of the appeal for some prospective tenants. They just want one bill to pay each month and to not need to worry about the rest.
Obviously, someone does need to worry about ‘the rest’. This burden usually falls on the shoulders of the humble HMO landlord.
We need to ensure that the council tax is paid, as well as the gas, electric, water, broadband and cleaning.
Furthermore, legislation around HMO’s is much more stringent. Most HMO’s fall under some form of licensing scheme.
Licensing’s purpose is to ensure that consistent minimum safety standards are applied to all HMO properties within a given area.
National mandatory licensing guidelines apply, which can be found here. However, requirements can also vary from borough to borough. It is worth checking with your local council, before diving in to your first HMO project.
In addition to all the responsibilities and costs listed so far, HMO landlords must ensure that licensing requirements are adhered to, which can include (but are not limited to):
- PAT (portable appliance testing) – annually.
- Fire panel servicing – annually.
- Fire Risk Assessment – reviewed and updated annually.
- Emergency lighting testing and certification – annually.
We can see from this that as well as the initial additional investment costs (e.g. installing a fire alarm system and emergency lighting), there are also extra ongoing costs to consider. Not least the licensing process itself!
Furthermore, we mustn’t forget additional regulations surrounding HMO’s such as minimum room sizes. (Details of which can be found here).
With HMO’s, we are letting the property out room-by-room, which is why we can make so much money from just one property.
Unfortunately, having several tenants under one roof presents its own set of challenges:
- More wear and tear.
- Transiency. i.e. constantly having to look for tenants due to the relatively quick turnover of HMO tenants.
- Squabbles between tenants.
- More paperwork.
- Clear need for organisation and planning ahead.
Working in Property
- Investing in HMO’s comes with a job attached.
- Investing in HMO’s is not a passive form of investment.
This is the reason why it is relatively easy to find letting agents who can competently manage single/family-let properties, but there are pitifully few who can do the same HMO’s.
In fact, many traditional letting agents will refuse to offer their services to HMO landlords as they understand the pitfalls and the additional work requirements that will be placed upon them.
This is also the reason that many landlords end up managing their HMO’s themselves, even though this might not have been their original intention.
Finding the Right HMO Lettings Agent
If you are determined to get the most out of your property investment and have decided to turn it into, and run it as a HMO and have it managed for you, you need to consider the merits of your chosen lettings agent.
One of the reasons you might choose to have your HMO managed by someone else is its proximity to your home.
We, at Golden Egg property live and operate in the Preston area. We know that a sizeable chunk of the Preston rental market is owned by people who live hundreds of miles away, most notably in London.
There are in fact many oversees speculators who see Preston as a great place to invest in property.
Many of these same people choose to invest their capital in HMO’s.
Now that we understand the potential pitfalls of investing in HMO’s, it is clear that logistics dictate that these people do not actively manage their HMO’s personally (although some do)!
If you do choose to manage your HMO yourself, it is much easier if it is within easy reach of your home.
Similarly, we also manage HMO’s on behalf of other landlords, but we will not manage them if they are outside of a 30 mile radius of Preston. The closer to our base, the better.
When deciding upon an agent to manage a single/family let, the choice often comes down to the agents fees alone.
Given the whole can of worms that HMO’s present, agents fees should probably be the least of your considerations.
If an agent offers their services for 10% across the board irrespective of the property, given the additional workload demanded by HMO’s, do you really think that they are going to deliver the same level of service across the board?
As well as being within easy reach of your property, ensure that they understand the additional demands that will be placed upon them, when managing your HMO.
In addition, they should be familiar with HMO licensing guidelines (both local and national).
There needs to be clear agreement between the agent and yourself on all matters relating to your property:
- Who will be responsible for the cleaning?
- Who will manage contractors?
- Who will assume responsibility for getting the periodic safety checks completed?
- Who will be responsible for carrying out the monthly and annual fire alarm checks?
- Who’s will be responsible for licensing?
- Who’s name will be on the license?
- Who will liaise with the local housing officer on licensing issues?
- Etc. etc.
It is not our intention to deter folk from investing in HMO’s. They represent a truly exceptional form of investment, providing excellent returns on investment as well as providing a durable asset for as long as one chooses to keep it.
However, to attain a state of tranquility, as a HMO landlord, it is important to understand the implications.
Clearly HMO’s bring a much greater level of complexity over single/family lets.
When choosing an agent to shoulder most of the burden on your behalf, you must be confident that they also understand the unique demands of HMO’s.
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