[00:00:00] Hey, I'm Andy and you're listening to the HMO podcast. Over 10 years ago, I set myself the challenge of building my own property portfolio. And what began as a short term investment plan soon became a long term commitment to change the way young people live together. I've now built several successful businesses. I've raised millions of pounds of investment and I've managed thousands of tenants. Join me and some very special guests to discover the tips, tricks, and hacks, the ups and the downs, the best practice and everything else you need to know.

[00:00:40] In today's episode, we're going to talk about five things that could implode your HMO business. If you don't take them seriously, these are the sorts of things that if you're not aware of, if you don't know how to avoid them, if you just let them happen. It will completely destroy your business. Now, if that sounds scary, then good, because it really should do. And unfortunately, I've seen these things happen to a lot of people, but the good news is it's quite easy to avoid them. It's quite easy to make sure that they never happen. So today I'm going to give you a lot of advice and information to make sure that you can do just that. So whether you're just getting started, or even if you've got an established business, today's episode is definitely one you want to stick around for. Please sit back, relax, and enjoy today's episode of the HMO podcast.

[00:01:25] Hey guys, it's Andy here. We're going to be getting back to the podcast in just a moment, but before we do, I want to tell you very quickly about the HMO roadmap. Now, if you're serious about replacing your income, or perhaps you've already got a HMO portfolio that you want to scale up, then the HMO roadmap really is your one stop shop. Inside the roadmap, you'll find a full 60 lesson course delivered by me teaching you how to find more deals, how to fund more deals and raise private finance, how to refurbish great properties, how to fill them with great tenants that stay for longer, and how to manage your properties and tenants.We've also got guest workshops added every single month. We've got new videos added every single week about all sorts of topics. We've got downloadable resources, cheat sheets and swipe files to help you. We've got case studies from guests and community members who are doing incredible projects that you can learn from. And we've also built an application just for you that allows you to appraise and evaluate your deals, stack them side by side and track the key metrics that are most important to you. To find out more, head to thehmoroadmap.co.uk now and come and join our incredible community of HMO property investors.

[00:02:32] Okay, welcome back. So today we're going to talk about five things that could honestly destroy your business if they were to happen. Today we're going to talk about solutions to these different things to make sure that that is never the case. But the truth is these sorts of things do happen. They happen quite regularly and.

[00:02:54] They can happen quite easily if you're not paying attention to your business, if you're not aware of what they are, and if it destroys your business, sadly that can often destroy you on a personal financial level as well. So it's really, really, really important. We never, ever, ever let this happen to us and our business.

[00:03:11] The good news is it's also quite easy to avoid this stuff. And today I want to make sure that you're completely aware and taking this stuff really seriously so that it never happens to you. We've got quite a bit to cover today. So the first thing that I want to kick off with is discussing the importance of doing your market research.

[00:03:29] Now, unfortunately I see a lot of people who either enter the HMO space or have already entered the HMO space and they've done a very limited amount of market research. And what this means is they don't really and thoroughly understand where they're actually investing or what they're actually investing in.

[00:03:48] And not just on a very local level as well. If you zoom out a little bit, there's lots of other things that we have to think about when it comes to finance and our sort of lendable position and how we're actually going to logistically make certain things happen and manage timelines and all the stuff going on in our lives.

[00:04:08] There's a lot to think about when we're investing in HMOs. And certainly when people are just getting started, it can be overwhelming. But I think one of the real risks is actually not quite knowing everything that you really ought to know. And so when I see people doing a lack of market research and then getting into an area, investing in an area, what that means is there's a very, very high likelihood that at some point down the line, whether it's six months, 12 months, a year, two years, there's going to be an issue with that project or their wider project plans to refinance, maybe even issues with occupancy and management and things like that.

[00:04:42] It's so, so important. I've seen probably in the last 12 months, four or five businesses or individuals who've started HMO businesses, really struggled to get their business off the ground, actually struggled to achieve the numbers that they had in the spreadsheets. And that is honestly, because they just didn't do the research.

[00:05:00] You know, the demand was actually never there and they got their numbers completely wrong. They weren't practical about who's actually going to manage their property and hadn't really vetted the people that were proposing to manage their HMO. They overlooked issues like planning and building regs. And some of this stuff we're actually going to move on to in today's episode and go into a little bit more detail on.

[00:05:20] But unfortunately, these sorts of mistakes when you're buying a property that might be worth a hundred 200, 400 thousand pounds. We're talking about very big sums of money. And of course, at the minute, with interest rates very high and operational costs very, very high, the margin for error has significantly narrowed. And unfortunately, people who haven't done the research, who've got their numbers wrong, who've got their plan wrong, are at risk of completely imploding their HMO business.

[00:05:48] A really good example of how much work you should do, and I can almost guarantee that very few people either think about starting their HMO business or have already started their business, have done anywhere near the amount of research. But go and listen to episode, I think it was episode 206 with Samuel Hemmings.

[00:06:07] Samuel is based over in Amsterdam building a remote portfolio here in the UK and Samuel talked me through on that episode, the process that he went through, making sure that he got the location where he actually invested and the whole strategy just right. And I was absolutely blown away by the amount of research and due diligence that Samuel did in his business.

[00:06:30] So go and listen to that episode. Cause it's a really, really good and really useful one to get your head around this stuff. But if just very quickly, some of the stuff that you certainly should be doing is making sure that you've got plenty of sole data, sales and lettings data using different sources like Rightmove and Zoopla and the ONS.

[00:06:48] I really like property data. That's a good tool to extract a lot of data all at once, but then you have to verify this data as well. You have to actually get on the ground and test it. Is this actually what's happening on the ground? Talk to agents, talk to other investors, talk to landlords, talk to builders, talk to tenants, talk to prospective tenants, and all of this stuff is useful to just verify your plan.

[00:07:10] But inside the roadmap, we've got a business plan, put everything down on paper, plan everything out. It's really, really important. But unfortunately. A lot of people don't do this. They skip parts of it. And actually when it comes to things like getting it revalued at the end or putting it on spare room, if their numbers are wrong, then it can be fairly catastrophic to the whole deal.

[00:07:29] And that can be fairly catastrophic to a business. So it's really, really important that we get this right. Go and make sure if you're just getting started, you do do your market research. This may well take you weeks, if not months to do. And that's absolutely fine. You should be at the point of investing.

[00:07:46] Completely confident that you have turned over every single stone that there is, and that there's nothing left for you to know. At some point, you've still got to make that decision. You've got to proceed. So you have to make an informed decision. And I'm not suggesting everything has to be completely perfect, but once you know everything, you can factor all of that into your model and your strategy.

[00:08:07] Okay. The second thing then that really does have the potential to destroy your business is noncompliance with regulations, getting that stuff wrong. We've got planning regulations, we've got building control regulations, we've got HMO licensing, and there's lots of other stuff as well. Now, it sounds quite obvious, doesn't it?

[00:08:23] Because we all really know that there are regulations to do with these things there. But unfortunately, a lot of people still make mistakes with this stuff, and some of these mistakes can be massive. And unfortunately, even recently, I've seen some really big and very, very, very expensive mistakes be made regarding this sort of stuff.

[00:08:41] National and local guidelines can often be quite different. We're often aware that there are things like permitted development rights, but actually on a local level, some of those permitted development rights might be removed. And I can't tell you how many times and how many people I've spoken to that just overlooked this, just didn't get it quite right.

[00:08:57] They've invested or tried to buy and convert a property into a HMO in an area where there's an Article 4 Direction, simply because they didn't understand the rules and regulations. I've seen people try and do certain extensions and things that might be under PD in certain areas, but actually because there's a conservation area or because it is in an Article 4 direction with certain restrictions, they've not been able to do it and they've been in force.

[00:09:19] And of course, a lot of planning and a lot of building regs is actually quite great. Even myself, I've been doing this for 15 years and sometimes this stuff does surprise me. And we've talked about examples, haven't we? Like doing garage conversions and Detached garage conversions and how that sits and in some areas and with some planning officers It's probably okay and in some areas with some planning officers It's probably not which makes it really really difficult for us What that means is we have to be completely aware of just how significant the implications of not getting this stuff can be Just getting enforced by planning is the start of it.

[00:09:54] Unfortunately, even this year, I've seen somebody who did an extension that actually wasn't compliant. In the end, they couldn't get the lending that they needed for refinance because they couldn't get the certificates. They couldn't get the sign off from planning. And it sounds like they must have done something really obvious and overlooked something incredibly obvious here.

[00:10:13] But actually, it isn't quite as simple as that, and this is a case that dragged on and went to appeal, and it's been an absolute nightmare. But unfortunately, and at the end of the day, this has cost an individual a huge amount of money. It's cost them reputational damage, it's meant that they've actually, you know, the investment just has not worked whatsoever.

[00:10:33] And of course, it's completely put them off doing any more. investment into the HMO space because it's been so stressful. So it's really important to make sure that you get this bit, this stuff with compliance and regulations absolutely spot on. Now it's all well and good me saying, look, you've got to be aware of this stuff.

[00:10:48] You've got to make sure you get it right. But how do we actually do that? Well, my advice on this is really, really simple. You need to make sure that you're working with the right people. You need to be working with the experts, the people who are actually qualified and do this stuff day in day out. Use the right architects like Andrew and Mary who really understand planning permissions and HMOs.

[00:11:09] Use planning consultants. I still use a planning consultant for every single project. Now use experienced agents when it comes to managing HMOs. Make sure you're working with the right people. People who can actually demonstrate that they've been doing this for a long, long time. And I don't just mean two or three years because that's nowhere near enough to know what HMO management.

[00:11:29] It's about, ideally, you need someone who's been in this at least 10 years with experienced mentors. If you're thinking about getting a mentor, you've got a mentor, are they actually qualified to be teaching you and showing you the way here? Have they actually done these projects themselves? Have they been doing it for long enough?

[00:11:44] Have they experienced the ups and downs of this stuff? It sounds really, really, really simple, but unfortunately, a lot of people skip the step. We get excited about starting the project, spending our money, getting it up and running and making money from it. But this can be so expensive if we get it wrong.

[00:11:59] So let's make sure that no matter what, we get it right. Okay. Moving on to the third idea I want to share with you today. This is financial management. Poor financial management really does have the potential to destroy your business. It's really simple. And this I would say is probably the area where most people struggle, and this is why most businesses fail.

[00:12:17] I'm not a financial wizard at all. It's something I've had to learn over the years. I still don't particularly enjoy it. And I get that this might not be your strongest area either, but it's so important. We have to get it right. Look, if we get this wrong, we could run into cashflow issues. We might have difficulty refinancing a project.

[00:12:36] We might find that our deal just doesn't look anywhere near how it should do. We might get all of our numbers wrong. And actually by the time it Is all said and done, the performance of that deal looks completely different. Might not even be worth having done it in the first place. Possibly reputational damage if you've got an investor involved and the returns or you don't get the money back to them quickly enough.

[00:12:55] Any of this stuff has the potential to damage your credibility, damage the cash flow, damage the amount of funding available in your business. And all of that could bring your business to its knees. So it's so important that we avoid letting this ever happen. I actually want to share a quick story with you.

[00:13:09] I know an investor bought the property, planned out a big refurb, spent a lot of money planning it all out, went through planning, did a huge amount of work, and they'd borrowed quite a large amount of private finance to do this project. And actually when it came to it, they didn't manage the build very well or the project very well.

[00:13:27] They did have a builder who was theoretically supposed to be managing the site, managing the project. But actually what they didn't manage very well was the finance and the cash flow. And what happened was they got towards the end of the project and extras added on. And these sorts of things haven't been managed particularly well and it wasn't necessarily all the investor's fault at all, but nonetheless, it got to a point where The project was almost done and the builders wanted paying for the most recent works that they'd done.

[00:13:57] And the cash simply was not available. It just wasn't that it had been swallowed up by everything else. And the builders refused to finish the project until they got paid. This meant that they couldn't progress. It meant they couldn't refinance. And ultimately this individual had to go back to their investor, explain what was going on.

[00:14:17] And it was all a bit of a nightmare, really. They fell out, actually, over this, and the whole project, in the end, just came to its knees, and it was really unfortunate. There have been some mistakes made along the way, for sure, but it's the planning part that wasn't dealt with properly enough. You know, there wasn't enough transparency, there wasn't enough awareness that this was happening.

[00:14:35] It may have even been the case that the investor who was backing the project simply didn't have any more money to hand over and inject into the project. And why should they? That's not their job. Their job was to invest the money. It was somebody else's job to run the project and make sure everything else worked there.

[00:14:49] If there wasn't a contingency in place, well, somebody has to sort of accept responsibility for that. This stuff can happen so easily. Easily. And it's really easy for projects to overrun to extras, the things that we find out. So we have to make sure that we're well prepared and we're managing all of those finances.

[00:15:06] Now let's talk about how you can make sure that you're pretty good at this stuff. How do you actually figure out how to financially manage your business? Well, go back and have a listen to episode. 207, I think the title was financial planning for your HMO business. And I remember recording it and I remember thinking, this is a pretty dry episode.

[00:15:23] Like I'm not sure you guys are going to absolutely love this one, but it turned out to be a really, really popular episode and I had loads of messages about it. And I obviously hit struck a little bit of a chord with it, but things like systems and processes, doing forecasting exercises and a whole lot more covered a lot of it in that episode, but it's really good and really important stuff.

[00:15:43] And I would say not necessarily just for. Property business, this is essential stuff for any business. So make sure that from a financial management point of view, you're taking it seriously and you're always keeping on top of it. Okay. Moving on then, the fourth thing that I want to discuss today is the importance of understanding the role of management in your HMO business.

[00:16:02] A lot of people, certainly a lot of new investors as they enter the market. They fixate on finding the first deal, finding a great deal, finding something that allows them to recycle lots of money, finding something that cash flows really, really well. And they overlook the big question, which is who is going to manage this property?

[00:16:19] Now, if you're going to self manage and you've got a plan in place for that, That's fantastic. That's great. And you can skill yourself up. There's lots of information, knowledge in there. It's all inside the HMO roadmap. So if you're planning on doing that, if you're trying to do that, a lot of that information is in there and you can hold yourself to account.

[00:16:36] You know that you'll be able to deliver a certain level of service, but you have to, of course, be able to deliver that service. You need the time, you need that skill and knowledge. If you're planning to outsource the management to somebody else, you've really got to ask yourself who is going to do it.

[00:16:49] Who is going to be capable of doing this for me? Because buying the HMO and doing the refurb and then just getting it refinanced, that is 5 percent of everything. The remaining 95 percent is all about management. So if there isn't a good manager there, someone who's been on the ground for a long time, somebody who has lots of experience, lots of contacts, lots of knowledge, and is very reputable and credible, you can see that they've been doing this for a long time, there's testimonials to support it, you have to really seriously think about whether or not they are going to be capable.

[00:17:23] Now, in the student market, this is pretty easy, because if you go to any major city, you're probably going to find several fairly decent sized, well established agencies that manage your HMO for you. But if you're doing professional management, and certainly if you're doing these in peripheral zones or small towns outside of big major city center conurbations, it's going to be much more difficult to find a property manager.

[00:17:46] If this person hasn't been doing it, or this manager hasn't been doing it, like I said earlier, for 10 years, you really have to think about whether or not they know enough about this industry to be offering you any advice. And I feel so strongly about that. I've been doing it for 15 years and you learn a huge amount over those years.

[00:18:04] I can't tell you how many people I know that have bought HMOs through sourcing agents and that sourcing agent just happens to be able to manage it as well. And of course, when they've handed it over to be managed, they've really struggled because there's no systems and processes in that business.

[00:18:19] There's no organizational structure. There's no leadership. And then of course, People change and plans change. I think if that business isn't established and that's all of that stuff isn't there, then there's a good chance that actually they might just up and leave and go and do something completely different or might find their business, their management business actually isn't profitable and they can't afford to run it or run it in that particular way.

[00:18:44] And I've seen this happen so many times. I've seen people buy HMOs through these guys and then end up. With really poor management, lots of voids, a lack of accountability, people fall out. And then the big question is, well, what do I do now? And if there's nobody else there to manage that HMO, if there's no good established agency, what do you do?

[00:19:02] If you live two, three, 400 miles away, can you. Really self-manage that from there. Maybe you can, but it's going to be tough to do viewings for professionals. It's going to be tough to go there and deal with problems or assess maintenance and refurb. So you have to think about all of this stuff, but this is one of the reasons why, unfortunately, I see a lot of businesses.

[00:19:20] start well. A lot of HMO businesses start well, but over a two to five year period, they really struggle and eventually end up just throwing the towel in because they're not making enough money and it's all too stressful. So this really is one of those things that has the potential to ruin your business.

[00:19:35] So please, please, please don't let that happen to you. All right. The fifth and final thing that I want to talk to you about today is the importance of making sure that you anticipate market changes and the competitive landscape where you're investing. If you don't get this right, it has the potential to completely ruin your business.

[00:19:52] And unfortunately, a lot of people think that once they've done their initial research, they've got that HMO up and running, looks nice, then that's it. It's set and forget. But the truth is, it just isn't. There's so much more involved and the market is. always evolving. If I've learned anything over the last 15 years, investing in HMOs, I've learned that when I first started, my HMOs were better than anybody else's.

[00:20:16] And then several years in, they look quite different. And a lot of people coming on the scene and there's a lot more competition. And all of a sudden the. Prices are a lot higher and the operational cost to run those HMOs is, is a lot higher. So the returns are quite different and everything starts to move sideways.

[00:20:34] And if you're not careful, things can really run away with you. But let me use some real standout examples from the last five years. COVID was catastrophic for a number of people, anybody with professional HMOs. And certainly anybody running a rent to rent business in central London during the pandemic really struggled.

[00:20:52] It was so difficult as everybody just left London, there was a mass exodus, a lot of tenants just left their properties, and that left a lot of people very, very exposed. Now, I'm not saying that we could have... At all anticipated that there's going to be a global pandemic, but things do happen. And now we know that that's happened.

[00:21:11] What have we actually done in case it were to happen again? Do we have a continuity in our business that would allow us to operate for six or 12 months? That sounds like it would probably be quite a smart idea because a lot of people just simply went out of business. They could not afford to pay their landlord's bet.

[00:21:27] They couldn't afford to pay their mortgages. So they sold their properties very quickly. There was a fire sale. So we've got to make sure that this stuff doesn't happen. I'll give you another example, something perhaps a little closer to the bone. I know a lot of people on social media are investing in HMOs.

[00:21:41] And I know that some of those people have over the last few years really struggled with their occupancy. This is because they invested in properties in particular areas where there wasn't actually a huge demand. Now, when they first did their project, it was a really great spec and they were able to get those top rents and they need to get those top rents because they had to pay investors back and they had to pay a very expensive mortgage back and they needed to make a certain amount of cash from the deal.

[00:22:06] But as time goes on, that property gets a little bit worn. Other people enter the market. They see what they're doing, and they've done something that's equally as good, if not better. And all of a sudden, it gets a little bit more difficult to rent rooms. And all of a sudden, there's voids, and there's a real stickiness, and that's costing a lot of money.

[00:22:23] And investors aren't getting paid back. Before you know it, these costs amount so substantially that they have to think about selling properties. Now, of course, I'm not going to talk about who this is, and it's not actually just one or two individuals. I've seen this happen a few times. But this has absolutely happened, and it does happen.

[00:22:41] And this is because, in part, people haven't kept an eye on the market. They haven't looked at what's going on in the competition. They've Just expected that their HMO, it's done and dusted. We'll just keep running, just keep making money. And that is just not the case. I see it happen day in and day out in the student market.

[00:22:58] The student market is a huge market. A lot of people in that market and a lot of landlords just don't keep an eye on what other people are coming in and doing and eventually. They end up with an empty property. One year, when the property comes empty in June, they don't have tenants to move back in. And at that point, they've got a real consideration.

[00:23:14] What on earth do they do? Do they refurbish it? Do they sell it? Do they try and let it to different types of tenants? I get so many phone calls, honestly, from these sorts of landlords. And that is because they haven't been keeping an eye on the market. You should never be in a position where you're in a void, or a prolonged void, because You just weren't keeping your eye on the market.

[00:23:33] It's fine if you're going to take your property out to the market and do a refurbishment, you want to do some periodic improvements, but nobody should ever be surprised if they've got a void. We can all be keeping an eye on the market. We can all look at the competition. We can all be looking at what's happening.

[00:23:49] In the wider property market, what's happening with values, what's happening with rents and things like that. But unfortunately, a lot of people just take their eye off the ball. Once that property is done and dusted, they leave it, think it's set and forget. But unfortunately that's just not the case. And if you let this drift too far, it could really damage your business.

[00:24:05] And as I've mentioned, I've seen some people have to sell their properties to pay investors back because they didn't have the cash flow to fulfill the deal that they initially agreed. And that unfortunately destroyed their business and really damaged their credibility and their reputation. So there we are guys, five things that have the potential to destroy your business, but are so easy to avoid if you just know how.

[00:24:26] So let's recap. The first idea we talked about was a lack of market research. Please, please, please make sure you do your due diligence and you do all of your research. Number two was non compliance with regulations. It's so important that we know the regs and we keep up to speed with that. And we make sure that we do it the right way.

[00:24:42] Number three, poor financial management. Not the sexy side of investing in HMOs. I get it, but so important. Number four, understanding and really appreciating the role of property management. And finally, number five, we talked about the failure to anticipate market changes and a failure to understand or see what's going on competitively, what other people around you are doing.

[00:25:05] Whatever you do, make sure that you don't make these mistakes. Don't overlook this stuff. Be really proactive with it and build a strong and robust business. Build a future proof business. One that stands the test of time and does continue to generate you an income month after month, year after year, and ideally decade.

[00:25:22] After decade, that's it for today's episode, guys. Thank you so much for tuning in. I hope you enjoyed today's episode. I hope more than anything you found it useful. If you didn't, you've got 30 seconds to spare. Can I ask you a huge favor? Please, please, please head over to either Apple podcasts or Spotify or wherever you listen and leave a quick review of the show.

[00:25:39] It helps so much. It helps us continue to bring great guests on and it helps to spread the message about all the good stuff that you guys out there in our community are doing. Of course, if you want to level things up, if you want to skill yourself up on things like property management, on your financial management, on anything that we've talked about in today's episode, you'll find everything you could possibly need inside the HMO roadmap.

[00:26:00] Lots of documents, downloadable resources, expert masterclasses, or the tools to actually stack your deals up and a whole lot more. And the best thing is you can trust that all of that content, all of that information in there is from people like either myself or our community members who've been doing this for long enough to know what they're really talking about.

[00:26:19] That's it guys. Thank you so much again for tuning in. And don't forget that I'll be right back here in the very same place next week. So please join me then for another installment of the HMO podcast.