We get asked frequently for top tips on what to focus on when investing in HMOs.
I have put together 7 top HMO tips which will make sure you fill your rooms with the right tenants and receive the best investment returns.
As a minimum you should focus on having 5 tenants or more in each house/flat. I often see people going for units with 3 or 4 tenants in them, but they will rarely provide a good net income after all costs. You need at least 5 tenants to successfully spread the cost of electricity, gas, water and council tax sufficiently to create a healthy profit. Typically the first 3 tenants cover your costs, further tenants are profit.
I find that 6 is a sweet spot as you don’t need to apply to planning permission in most areas for a HMO of this size and returns with this number of tenants are good. I would not have more than 8 living together in 1 unit as it becomes more like a hostel and may become difficult to let.
Many HMOs run with a room empty because rooms are too small, or accommodation is not up to standard in some way, this costs a significant amount reducing your net return.
2. Location, Location, Location
When choosing the location of your HMO I would focus on an area which is within 10-15 mins walk of the town centre. As only around 1/3 of the tenants in our HMOs have cars many look for properties that are walkable to the town centre or at least to public transport.
If the quality of areas could be graded 1-10, with 1 being the bronx and 10 manhattan we would probably choose area 3 on the scale. Somewhere where professionals want to live but somewhere that is still cheap enough to ensure your yield is good.
3. Don't mix HMO tenant types
My favoured type of tenant for this type of property is certainly professionals. Whilst LHA/less referenced family tenants in houses can be more challenging to manage, I find LHA/less referenced tenants in HMOs are significantly trickier and time consuming to manage- Bad debt, damage to your property (which can require early and often costly refurbs), Police involvement due to drugs and other activity can make these types of tenants very troublesome.
Well managed student HMOs can work well as long as there is demand and the local university hasn't built too many blocks which usually draw the students out of the houses.
Test demand using the Spareroom and Easyroom mate websites. Mixing the 3 different tenant types above rarely works, issues over noise and other disagreements between tenants often follow. It's important to create a community within your HMOs that people want to live in over the long term.
4. HMO Gross yield should be 12% or above (yearly gross rent divided by the purchase price and refurb)
Its important to make sure the HMOs you are looking at are creating the right return. A simple way to check this is by taking the total yearly expected gross income and dividing this number by the purchase price and refurb. A gross number of 12%+ is a good target to shoot for. I have many examples running at 15%+, increasing the number of tenants in a building really helps with this metric.
5. Get a cleaner in every fortnight
Keeping the communal areas such as the kitchen, living room and corridors clear and tidy is essential to the tenants having a good experience. Tenants in HMOs will frequently not take responsibility for these areas and they can cause dissatisfaction and create voids.
A cleaner can also become responsible for check fire alarms work and can be a good set of eyes and ears to check up on how tenants are looking after the property.
6. Go for higher end HMO rooms
As you move up the value chain and create higher quality HMOs with nicer finishes and ensuites you will usually attract commensurately higher rent in return.
Unlike with a single let where you might add a maximum of 10% to the rent achieved with a top quality refurb, HMO rents can be increased by up to 50% for a room with nice flooring, wall finishings and an ensuite unlike with single let properties big screen TVs, attractive kitchens and quality living spaces area are rewarded with higher rents, they will also attract better tenants who are typically easier to manage.
7. Pick bigger old victorian type properties
Older properties such as victorian or Georgian (or sometimes even 70s) type properties are much larger than their modern equivalents. These types of properties often have more storage and communal spaces and larger rooms. These more cavernous properties allow you to use the separate dining room as a bedroom, add ensuites to the big rooms and use storage or other spaces for washing/drying facilities.
The larger gardens in these types of properties often allow you to put a conservatory on the back of the property creating a living area, this would free up the existing living room up to be used as another bedroom.