For those in the know, an HMO is a 'House in Multiple Occupation'.
Its a fancy way of saying 'renting the rooms out'.
A typical 4 bedroom house where I invest, may get a rent of 700 per month. If I rented 4 separate rooms out, it would pull in about 1400. After taking off a few bills (utilities, council tax, broadband, that sort of thing.) It really is a huge difference in profit margin.
When you have got someone telling you that they have mentored other clients, who now have more than one property making £1400 a month , its doesn't take long for your mind to start wandering to the beach, where you will surely be lying shortly, cocktail in hand, counting the rent from all your big houses.
It takes slightly longer to realise that this, generally speaking, is bollocks.
Whilst HMO's provide a lot more cashflow, they also provide much much more headache. If you have a full time job, then you MUST factor in the cost of someone to manage the property. I did not initially factor that in, and certainly have a few more grey hairs because of it.
Whilst one tenant can be a nightmare, having five constantly texting and calling for things crazy things, did make me wonder what I had let myself in for. Especially as I was also working full time. Some of the more annoying were:
" One of the light bulbs has gone out"
"We need more kitchen cloths"
"Geoffrey is stealing my chicken" (I assume they meant some kind of packaged meat, not a live one.)
"there has been a power-cut on the whole street, what should we do?"
and my personal favourite, "There is a homeless person outside "
It was not long after this I got Jim in to manage things for me, and who was far better equipped than I to tell tenants to piss off when they phoned with something ridiculous. I've stated before what a legend Jim is, but its worth repeating.
It is possible to have a house that makes you £1400 a month - I went inside one once. Owned by a 'famous' Swindon landlord, who has apparently "made millions" from these sort of properties.
It was a fairly harrowing experience. It seems that to do this, you have to crowbar 7-10 people into a single house. the one I went into had 12 people living in it. It turns out that there are three groups of people who don't like this:
1) The tenants. Lets be fair, living like that is a bit shit. They will soon move out, and you will be endlessly turning over tenants. This costs more in terms of time, hassle, and advertising costs. As the famous landlord was finding.
2) The Council. Contrary to popular belief, the councils really don't like houses with armies of people living in there. They even have rules about it. It is worth speaking to the council BEFORE you buy a place, if you are intending to rent the rooms out to see what there rules and regulations are. They seem to be fairly subjective from area to area. To use an example, quite a few landlords bought large properties in Swindon, on the advice from a property expert, that if it was under 3 stories, the property could not be classed as an HMO, and as such, they could put six, seven or even 8 bedrooms in. They have since been inspected by the council, and told that the maximum they will allow is 5 bedrooms. This obviously has a big impact on profit margins and figures. Again, as experienced by said landlord.
3) The Neighbours don't like living next to a house with loads of people in it - they are noisier, make more rubbish and take up parking space. Getting on the wrong side of the neighbours is a bad idea as a general rule. They tend to complain to the council.
I am a firm believer in not making people live in a way I would not want to, and then charging them for the priviledge. I think its a bit of a shitty way to treat people. There are a lot of unscrupulous landlords out there who don't mind doing this, but I try to get on with the tenants, in the hope they will stay longer.
Actually making money out of this style of property investment is dependant on finding tenants. There is a very simple way to make sure there is sufficient demand - dummy adverts. I would recommend the following sites to do this:
http://easyroommate.com
http://gumtree.com
http://spareroom.com
I do this from both sides. Ie, advertise as a tenant looking for a room (to see how much competition there is) and as a landlord (to test demand). This will give you a basic ratio of tenants to rooms. I did this a while ago in Swindon, and worked out there were 32 rooms to each prospective tenant. I believe that is known as saturation point.
The level of tenant turnover is the key part of letting a property in this way. A friend of mine, Ash, who invests solely in this way, has the least tenant turnover I have ever heard of. His company, EasyLiving Property (www.easylivingproperty.com ) have achieved this through a simple philosophy: High Quality accommodation.
He does not mind that there are 32 rooms to each potential tenant, because he backs his to be the best rooms around.
He does not scrimp at all when setting up the property. He will spend much more capital in the first instance, on kitting the place out. This means that to set up an effective HMO, he will need a fair amount of capital to start with. From kitchen fittings, to furniture and bed sheets, it is all stylish and plush. The other result of this, aside from tenants staying for longer periods of time, is that the nicer the property, the more respect the tenants will have for it.
He also vets the tenants, by sitting down and meeting them, and assessing whether their personality will fit with the other tenants. This obviously takes a lot of his time up in the early stages of setting up the property.
He does high quality, all inclusive rooms, and pays attention the atmosphere and personality of each house, and all the tenants with it.
Before even buying the property, he does a second viewing, accompanied by the HMO officer from the council, to assess whether it works as a property from the viewpoint of the regulations.
As a result of these things, Ash has a lucrative business model, happy tenants. a good relationship with the council and a fairly relaxed lifestyle, if he doesn't mind me saying!
This, for me, sums up investing in HMO's. It can be very lucrative, if done well. The flip side of it is that it can be very time consuming, and creates a lot of work, if not done properly. As with most things, to do something properly takes a fair amount of money, time and a lot of hard work.
I now have only one property as an HMO - its in a great location, is decked out nicely, and is easy to rent out, and is therefore highly lucrative. I have converted the other HMO's back into standard family lets, because, just a mile down the road, the demand is not as great, and its too much hassle and work to keep 4/5 rooms full.
I now concentrate on smaller standard lets, with decent yields, but would certainly do another HMO, but only if it was in a great location, that i knew would let easily and with minimum work.
I'm sure others may have had other experiences with using this strategy, and maybe some who are considering might find this a useful read (hopefully).
As usual - more than happy to answer any questions or comments people have!
Cheers
