Risk Is The Job: Reducing Exposure And Increasing Profits In HMOs

In today’s episode, I’m breaking down one of the most misunderstood aspects of property investing: risk - where it actually sits in your HMO deals, how it stacks up, and how professional investors manage exposure before they commit.

Risk isn’t something to fear or avoid entirely. It’s embedded into every return we chase. Higher yields exist because something could go wrong. The real question isn’t “Is this risky?” it’s “Is the reward sufficient given the exposure?”

This episode is about structure and discipline. I walk through the four core risk categories in HMO investing, share real examples of deals that escalated due to poor planning, and explain how to build a practical risk register that protects your capital, your relationships, and your long-term business.

🎯 What You’ll Learn

• The four core risk categories in HMO investing
• Why risk stacking - not single events - is what sinks most deals
• How to stress-test valuations, refinance assumptions, and timelines properly
• The difference between mitigation strategies and contingency planning
• How to build and use a risk register before you exchange or commit funding

If you’re analysing a deal right now or about to commit to one, this episode will help you think more strategically about exposure, resilience, and long-term durability.

💻 Resources & Mentions

• Join my Accelerator Programme: If you’d like my direct input on your current or next project, you can book a complimentary strategy call with me here.
• The HMO Roadmap: Feeling overwhelmed? Access 400+ tools, templates, and lessons to help you start, scale, and systemise your HMO business - all in one place. Join here.
• The HMO Community: Got questions or need support? Come and connect with 10,000+ investors inside our Free Facebook Group here.
• Social: Follow me on Instagram for daily HMO tips, advice, and behind-the-scenes updates here.

Transcript

Andy Graham (00:02.67)

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 to start, scale and systemise your very own HMO portfolio now.

Andy Graham (00:40.686)

If I asked you what property investing really is, what would you say? Because I would say at its core, it's about making decisions today based on assumptions about tomorrow. You see, we model deals, we plan and estimate refurb costs, we forecast valuations and refinances, and we assume timelines to all of this stuff. We make decisions based on these assumptions. But the gap between our assumptions, our model, and the actual outcome is what we call risk.

And in today's episode, we're going to break this down properly. We're going to take a good and close look at where the exposure actually sits in property deals, particularly HMOs. I'm going to talk about the main risk categories you need to understand and how professional investors reduce their exposure before they commit. Because in my opinion, understanding, interpreting and managing risk properly is critical if you want to succeed in this game. Let's get into it.

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 for the future. 

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.

Andy Graham (02:44.879)

Okay, welcome back. In today's episode, we're talking about something that sits underneath every single deal you've either ever done or ever will do, whether you're able to articulate it or not. We're talking about risk, but we're not talking about it in a dramatic and sensational style. We're talking about it from an operational perspective. Where does the exposure actually sit in the deals that we're buying?

Now look, risk exists for one reason and it's because there is uncertainty. If there was no uncertainty, everybody would be doing this. The margins will get compressed. The yields would quite simply disappear. But when we're investing in HMOs, we're naturally chasing higher returns, which quite simply means we're absorbing more moving parts. There's more uncertainty. Things like timing sensitivity, regulation, more capital exposure, more operational complexity. So the question shouldn't be.

Is this risky? You know, every deal is risky. The real question is actually, is the reward sufficient given the exposure, given the risk that I can see? Now, before we get carried away with this idea of risk today, first of all, I want to talk about risk versus reward. We've all heard about it. We've all probably talked about it. Like I said, returns exist because something could go wrong. It's really that simple. That planning uncertainty, regulatory exposure, the operational complexity, the capital structure and debt risks, all of that jazz.

If there was no uncertainty around any of this, there'd be no edge to gain. There just wouldn't be a benefit to anybody doing it, right? But because the yield is higher, or if you see a higher yield, it doesn't necessarily mean that that deal is better or safer. You have to be able to understand and interpret that. When we are often looking at property deals, there are elements that we can see and interpret on a spreadsheet, but there's also stuff very much off the spreadsheet that we have to be able to interpret. And there's also stuff about us. There's elements about me and my experience and my attitude and my circumstances that are very different to yours. And so that perceived risk is very, very different. So the yield figure is an indication. It is a guide. When you see a yield of 10 or 12%, there is an indication that there is a higher degree of

Andy Graham (05:04.358)

complexity or uncertainty or risk with that investment. But it's not necessarily the whole picture. You have to put that whole picture together. And there are lots of things that make this up. I've mentioned a few already, but there are many, many, many more factors. And today I want to talk about the four core risk categories. And we're to walk through these one at a time, picking out the different elements, different facets of each of these areas, just to help make sure that you're aware of them so that you can make better decisions when you're analyzing deals, when you're interpreting the information that you're looking at either on or off a spreadsheet when it comes to a particular property. 

So to begin with, let's talk about financial risk. All of your capital related exposure sort of sits here really. You've got things like your loan to value, you've got interest rate sensitivity, you've got debt service coverage, you've got your refinance dependency. This is huge, especially for newer investors who haven't got a lot of capital, are very reliant on borrowing money from either lenders institutionally or privately. You've got to be able to get their money out of the deals or at least have a solution for getting their money out of the deals. Things like personal guarantees, taking into consideration your cash reserves, working capital buffers, over reliance on lots of financial elements. 

There's so much from a financial perspective that dictates the risk in a particular deal. And this risk determines really how tight your capital structure is and theoretically how exposed you are if your assumptions about your model don't land, don't kind of hit the target. 

So for a second, let's just think about what happens if that valuation that you've put down on your spreadsheet doesn't actually happen. What if it comes in softer? What happens if the interest rates that you've planned in here don't pan out like that. What if you come out and interest rates are more expensive? I can tell you firsthand from my own experience, I was refinancing a large block of flats when there was the big wobble and blip with Liz Trust and the interest rates spike. That was a very, very difficult time. And actually because it was a block of flats, the debt service coverage ratio wasn't particularly good. So as the rates went up, it became increasingly difficult for me to get back out the capital that I wanted because the only way to

Andy Graham (07:30.652)

past the stress testing was to reduce the loan to value. So lots of this stuff co-exists. One element can affect another and so on and so forth. So you have to be really mindful that these are not singularities. When we're thinking about financial risk, it's not just the loan to value or the interest rate or the debt service coverage ratio or your refinance dependency. It's the potential impacts of elements of these being detrimentally impacted simultaneously.

And what the consequences of that would be. And I am so granular on this stuff. I really, really labor on this sort of detail because when I'm buying a deal, I want to understand what all this means and what might happen if my assumptions don't come to fruition. You've got to think about whether your financial structure, whether your financial plan is resilient. What are the chances that it will materialize the way that you hope or maybe in a slightly different way. 

I'm going to talk as we progress through today's episode about some of the ways that you can deal with these risks and how you can think about it. So for now, I'm really just painting the picture. I'm just putting the items down on the table so that we can see them. This is not an exhaustive list, but certainly the key things when we're talking about financial risk are there in that list I've just given you. Let's talk about the other big one. 

Number two, planning and regulatory risk. So we're talking here about things like planning permission, Article 4, licensing, upcoming legislation changes like EPCs, minimum energy efficiency standards. We're talking about things like delays that happen as a result of this. Planning delays is a really, really, really big one. Let's talk about the way that rules and regulations are often interpreted differently across the country, across different local authorities, and even internally in departments. The way that some of the rules and regs are interpreted are different and that makes it very, very, very difficult for us.

We have to understand that not everything that we are doing and dealing with is binary. It's not always completely black and white. Sometimes there are gray areas and sometimes things can be interpreted differently. There's often why things go to appeal and get reviewed by an independent inspectorate because somebody might have a different interpretation of planning policy frameworks. So understanding all of this stuff is so important, but you need to remember that planning risk often looks very, very procedural.

Andy Graham (09:56.678)

But time, if you lose time on a deal because it takes longer to revise drawings and resubmit and to get additional consultant reports or maybe go to an appeal, that time is so valuable to you and it comes at a massive cost. And it might not be a direct financial cost, but it's certainly a time cost, certainly a cost of opportunity. You could be doing other things with your money. There are lots of costs and sometimes they are hidden.

Out of view of the spreadsheet. So need to remember that delays, they do extend debt delays because they extend time. They increase the chance of something else left field happening. So something out, let's just say something happened to your building because it was left vacant. Or I'll go back to the blip with Liz trusts and the interest rate spikes. If you were in planning and something took three to six months longer, and that dragged you into a scenario like that, can you see how that's sort of a left field event. I really couldn't have anticipated that. COVID would have been another great example, but because you've taken longer, you've significantly increased your risk and lots of other things that could happen might happen. And that can be very, very detrimental and it can spiral very, very quickly. 

Regulation can definitely alter the viability of your deals. The outcome of things like planning and regulatory challenges can definitely change the viability on and off the spreadsheet. And I think a lot of this stuff is overlooked. Some of the big stuff, yes, we're almost all paying attention to, is it an article 4, do I need planning permission for kind of a change of use? I mean, I have seen so many examples of people almost approaching planning with quite a complacent attitude and sometimes getting stung very, very badly because they just didn't understand the planning risks and maybe they got the decision they wanted in the end. Maybe it came at a huge cost. Maybe they didn't. Maybe they had to sacrifice elements. Maybe they couldn't get the rooms that they wanted, whatever it is. 

But I've seen so many people make so many mistakes when it comes to planning because they think that it's fairly black and white and it just isn't on the most part. And that is often the case, unfortunately, for other regulatory elements as well. Let's talk about the third big risk I want to kind of bring to your attention today. It's project and execution risk. So there's a huge amount

Andy Graham (12:16.221)

of operational exposure when it comes to doing refurbishments. Budget overruns, you've got scope drift, really common with inexperienced investors, keep adding and adding and adding to the program. Got quite fundamentally contracted performance. You've got timeline slippages, really big one, very common problem when we're refurbishing. Just execution risk in general. If you've got poor controls in place, you will almost certainly be impacted by some or if not all of this stuff. 

If you've got loose scopes, if you don't have the clear plans. If you've got informal agreements with contractors, if you haven't got a good managerial process in place, when it comes to the project, you are almost certainly going to be impacted. And there's a huge amount of risk here. I often see people put in small contingencies to refurbs and more often than not, I see them get completely blown out of the water by unforeseen issues or poorly managed problems. I think that's a big problem. 

And naturally it is hard to manage contracts as some sort of contracts is in the cost of materials and problems that might happen that you haven't experienced because you quite simply haven't done the deals to see this sort of stuff. But it is a huge area of exposure and it's something that we all need to be incredibly mindful of. Refabs often don't look that dangerous at the very beginning. But once you start tearing a house back and once you get into it, it can unravel very, very quickly. And I know I sound like I'm scaremongering, but I don't mean to be, but you can get this bit so wrong and it's so easy to get this bit so wrong. 

Another piece I want to talk about today is relationship risk. This is so often overlooked, but mismanaging expectations between, for example, investors and business partners, ambiguity around joint ventures, roles and responsibilities, decision-making disputes that happen as a result of this. Relationships between contractors, there's definitely a blended sort of risk there between your relationship risk, but just project and execution risk. But all of this stuff is very, very real and it can happen very, very quickly. And it can have hugely detrimental consequences to your business, to you on a very personal level, to your deal. And in my opinion, deals rarely fail because of one single thing. Let me give you a quick example.

Andy Graham (14:39.223)

If you've got a challenging relationship with a contractor, that can then turn into an execution risk on the scheme. And that can then end up in a financial risk because the project has gone over budget and it has taken longer. You could end up with a compliance and regulatory risk because your contracts has walked off halfway through the job and you don't have anybody to sign off your electrics or your gas central heating system, stuff like that. You could end up in a real sticky situation with building control if a contractor walks off a job and it hasn't been managed very, very well. 

So you can see how these things often stack. It's a bit like a house of cards. If there's a problem with one, it's very likely that you will find other issues happen as a consequence. So to give you some tangible examples, I've pulled out some case studies of some schemes, some projects that either I or other people that I know of have done. I just want to highlight some problems with them. 

So I'm not going to be too specific about any of these, but somebody I know experienced what they would describe as a pretty awful down valuation. And there was a huge amount of pressure to clear a bridging loan as a result. So the expected valuation was about 1.2. The actual valuation came in at just under 1.1. And that's quite a big difference. And it was the difference between being able to exit the bridge and not being able to exit the bridge.

As a result of this, there was a significant amount of financial risk because there was so much dependency on the refinance. There was then so much pressure on the leverage because they had to push the leverage as far as they possibly could outside of policy. But this was a multi kind of problem deal as a result of a down valuation. And I use, I'll say that in inverted commas, you guys can't see me saying it, but you get the idea, right? And what escalated this? Well, in my opinion, the valuation just hadn't been stress tested upfront. 

There was an insufficient capital buffer and there was no extension strategy that had been agreed pre-deal. And so in my opinion, if I was to summarize all of that, the mitigation strategies quite simply weren't there. Had they have been, this could have significantly reduced their exposure and the problems that they would have experienced. Yes, they may have still suffered with the down valuation. Yes, the financial outcome may have been the same or similar.

Andy Graham (17:05.292)

But it could have been handled in a very different way. And really it shouldn't have ended in a way that put them under huge strain, really put them and their business and their investor at risk. I'm going to give you another example. This one is a planning delay, like a domino effect. So somebody assumed, somebody I know in the experience, assumed that planning would take around eight weeks. It took more like 40 weeks and it impacted pretty much everything. 

Obviously the planning and regulatory risks, there was lots of back and forth, lots of submission of plans. So first of all, they spent a lot more money on getting the planning than they anticipated. Secondly, it took a lot more time, which cost them a lot more because they had holding costs. There was then relationship friction with the planning department and also their lenders. Really, really kind of really difficult stuff. And this escalated because that certainty just wasn't there.

And this delay, these assumptions were just not built into the model. There were no mitigation tactics. Now, in my opinion, a number of things weren't done that should have been done. There should have been much greater confidence on the planning before the deal was even exchanged on. A lot of research, a lot of work, a lot of evidence based decision making should have been done to inform the plan. But it wasn't. It was done very much on a wing and a prayer. Buy the deal. Let's get planning. Employ someone to do that.

And then, hey ho, there was a huge problem because getting the planning that they wanted was and turned out to be basically impossible. Ultimately, what they settled on just to get it through planning was something that looked very different to their original model. So when they actually completed and exited the deal, it looked very, very different on the spreadsheet. And in honesty, it's a deal that they wouldn't have done. Had they have done all of the work, had they have done much greater degree of preparation and planning. They wouldn't have got into that deal in the first place. And that for me is one of the biggest mistakes you can possibly make. It is part of a mitigation strategy though, and it just wasn't done. 

I'm going to give you an example about a contractor drift. This has happened to me on several occasions. It is even as an experienced investor, very difficult to manage. But if you've got a loose scope and this example is not me, again, this is a more inexperienced investor that I was working with and helped out to this problem. But they went into a project with a very loose scope.

Andy Graham (19:30.008)

no contract in place with the contractor and they just ended up with variation after variation after variation. So things that the contractor said were not originally agreed, kept coming up and you get one of these at a time and it seems reasonable. Yes. Okay. Yes. Okay. Yeah. And before you know it, you're racking up tens of thousands of pounds in additional variations, completely blowing the budget. Now, as this starts to become a problem and as this particular investor started to realize,

Obviously they started to question the contractor. So that caused a big problem with that relationship. Contractor walking off site, contractor refusing to work. It caused delays because there was a lot of time spent laboring over decisions. When the contracts realized they couldn't just put variations through without them getting questioned. The investor wanted time to go through it, to really understand it, to scrutinize everything. 

So it took longer to get to an outcome. And this just escalated and it became a financial problem became a time problem. It ultimately impacted the entire outcome of the deal. They had to cut corners. So the spec was impacted at the end. So the actual end product wasn't quite what they want and hoped because the budget quite simply wasn't there. And in my opinion, all of this could have been avoided had they have planned better, had they've had a mitigation strategy in place, such as simply

having written contracts in place, having a JCT agreement, I've talked about this on the show before. Stage payments to manage measured works have a process of administering a contract with a builder. Have a defined variation process that would be within there. Having a very clear contingency plan that they had built into the model. They had no contingency. All of this stuff could have been done, but it wasn't. And by the time it happened, of course, it's far too late. This sort of stuff should be done much earlier on in the project. 

So look, I'm not going to labor on every single potential risk that you and I as property investors might face, but I think I've done the job of pointing out that there are a lot and they are interconnected and it can be very easy for these problems to arise and they can become very big problems very, very quickly. So the real question is what can we do about it?

Andy Graham (21:51.824)

Now at some point before you commit, before you exchange, before you agree your funding, before contracts are appointed, you should be doing and building what's called a risk register. And that risk register is quite simply a structured document and it forces you to identify and assess all of these risks and all of your exposure properly. You quite literally put it down on paper, turn it into a spreadsheet and it's a working document because as the project evolves, certain risks might heighten or reduce. And that's normal.

And I want to remind you at this point that our job is not to remove risk entirely. Our job is to identify risk. Our job is to make decisions based on that risk and our job is to mitigate and reduce risk as far as we possibly can. But our job is not to remove risk entirely. It's almost always impossible to do. So in its simplest form, a risk register includes a few things. It includes the specific risks, the category of that risk. 

So let's just use the four examples like we're new today, but financial planning, execution, relationship, the likelihood of those risks. I like to use a traffic light system. So green, amber and red, red being this is a big risk. This is not proceedable until we do something about this. Amber proceed with caution. Green, we've mitigated this as far as possible. We understand the risk and it's an acceptable risk. The impact, if it materializes and that impact should be a tangible impact. What might that look like? 

Cost, time, lost relationship, write down what it could actually do to your business, to you personally, physically speaking. And then you need to put the mitigation controls that you've already got in place. So what are you already doing to mitigate that risk? 

So let's talk about planning for a second. Well, if you're an expert on planning, I'm certainly not. And I suspect unless you're a planning consultant, you’re not, I would recommend you do a few things. First and foremost, you employ a planning consultant to manage your planning application for you to give you the best possible advice. I'd recommend that you get a feasibility study done at the outset before you exchange on a deal. So that might be done either by your planning consultant or by an architect, someone who can actually look at your deal. Can you do what you're proposing in terms of the floor space? Can you optimize it in the way that you think slash hope? Have other deals been done like this? Is there an article four direction in place? If so, where do you sit within that policy? What's the density threshold?

Andy Graham (24:16.58)

What applications have been approved, submitted, declined? All of this information should be done at the beginning and you can employ experts to help you do it. Now, even if you don't employ experts and you decide not to, which I think is a bad idea, by the way, you can still do it yourself and that is still the mitigation tactic. You're not going to able to reduce the risk as far as if you employ someone who does this day in, day out and it's their profession, but you get the point, right? You then need a contingency plan. So don't confuse a mitigation strategy, mitigation controls with a contingency plan. 

The contingency plan is what you will do if despite all your mitigation tactics, this still goes wrong. Let's use an example of planning again. What if you don't get the seventh bed and actually you end up with a sixth bed? Does the deal still work? Can you still get out of the deal? Have you had those conversations with all of the parties involved?

What's the risk of that happening? How devastating would it be? Or actually, would you be able to swallow it? Would it be tolerable? Would it just be a bit disappointing, but perfectly fine? Might you need a bit more money left in the deal if actually it's not going to be worth as much. These sorts of things, do you need to put some more capital in on day one or have some at least ring fence just in case this happens? What if planning takes longer? Do you need to have those conversations? Do you need to extend your private loans for more than 12 months, maybe to 18 or 24 months, or at least have the ability to extend them? All of these sorts of things are contingency measures. Don't try and put contingency measures in place after the fact, it's already happened, because it's just quite simply too late. You're already going to be feeling the very tangible physical problems of this sort of stuff, costing you more money, damaged relationships, all of these very difficult things that we want to avoid at all costs. 

So hopefully I've done the job today of just bringing risk to your attention. I do want you to really understand that we buy risk. I said it earlier, we buy risk. That's our job. We buy risk and we turn that into profitable opportunities, but we have to be very careful. We have to be very sensible. We have to be very strategic about it and we should think about every single facet. We should pour over the detail. Your primary objective is to make as much money at the same time as reducing your risk as far as possible. But remember, you're not going to remove the risk entirely.

Andy Graham (26:37.882)

Look, it isn't optional in property guys. It is completely embedded into the model. That's why we do it. And if you don't manage your exposure, it will without question destroy your business. And it could, and this will sound like I'm scaremongering, but it could destroy you personally. It is high risk investing in property. Things can go wrong. And remember there are things completely outside of your control that can go wrong. We haven't talked about this stuff, but property crashes and complete changes in the industry, they can happen. You still do need to have contingencies in place for this sort of stuff, but you could be very unfortunate and get caught in the process of something like that at the very worst possible moment. That is how a lot of developers go under, not necessarily because they've done anything wrong, because the timing was just really, really, really poor and they didn't have adequate contingencies in place. 

Now look, please remember that it is very rarely one catastrophic event that unravels a property business. It is almost always one or more of these things that I've talked to you about in today's episode. They deteriorate because the exposure just wasn't identified early on and it wasn't reduced at the outset. There was no stress testing, there was no capital buffer, there was no written agreements, there was no documented risk registry, all of this stuff we talked about quite simply wasn't done. And one of these risks leads to another, leads to another, leads to another and before you know it,

The deal could be underwater. Understanding and interpreting and managing risk properly allows you to build a durable business, a future-proofed business. And my advice would always be settle for making a little bit less, but make sure that you're able to do the deal and get out of it. That is always the single most important thing. 

If today's episode has resonated with you, please share it with someone who is about to commit to a deal. Just anyone that you know is looking at a deal, but maybe doesn't have the experience, please, please share this episode with them because this sort of advice could save them tens if not hundreds of thousands of pounds. A lot of people are buying deals, not taking this stuff into consideration, finding that some of these problems occur and then struggling to get out of the deals and it's costing them huge amounts of money and it doesn't need to happen. 

Now if you want to build this level of structure and discipline into your business and you want to work with me directly to help you do that, that is exactly what my accelerator program is all about. We've got a

Andy Graham (29:01.048)

small intimate group coaching program, but also my very private one-to-one and bespoke coaching program. If you want to explore that, have a conversation with me, see whether or not it might be the right thing for you and whether I can actually help you just head to the show notes. Now there's a link there. You can check that link out and you can book a free strategy call with me. And if you have enjoyed today's episode, if you're a regular listener and you find it useful, even if you've just discovered the show for the very first time, but you found today's episode valuable, please leave a very quick review. 

It'll take no more than about 10 or 20 seconds and it helps us continue to spread the message about all the great work that you guys out there in our community are doing and it helps us continue to reach a bigger and bigger audience. That's it guys. Thank you so much 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.