The Property Unleashed Podcast

Challenges and Rewards of HMO Investing.

• Mark Fitzgerald • Episode 287

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Unlock the secrets of HMO investing as Mark Fitzgerald shares his expertise on navigating the lucrative yet challenging world of Houses of Multiple Occupation. Promising a wealth of knowledge, Mark takes us through the advantages of this strategy, from cash flow potential to the simplicity of managing pre-existing compliant properties. With HMOs offering room-by-room rental opportunities, the potential for maximizing returns is undeniable. However, Mark doesn't shy away from highlighting the complexities involved, such as the high turnover of tenants and the need for stringent maintenance and compliance.

Join us as Mark offers a comprehensive exploration of the regulatory landscape of HMOs, including the vital importance of obtaining licenses and adhering to rigorous safety protocols. He provides invaluable insights into managing common hurdles, like tenant disputes and increased wear and tear on properties. Whether you're a seasoned investor or just curious about the HMO market, Mark's perspective is essential for understanding both the rewards and responsibilities of this dynamic investment strategy. Listen in for a thorough understanding of how to successfully navigate the HMO sector and make informed investment decisions.

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Speaker 0:

The pros and cons of HMO investing. Hello, my name is Mark Fitzgerald. It's great to have you joining me here today. So HMOs are houses of multiple occupation. They are properties that we let out by the room. So you may have a four or five bed property. You let each and every individual room out and people will share, in some cases, communal bathrooms, or they have en suites, or they will share a communal kitchen and maybe a living room space as well. So why do you use these types of properties? Well, for cash flow. Basically, they are great for cash flow.

Speaker 0:

Now I do rent to rent on these types of deals as well, which is I go for pre-existing properties and I show my students how to do this as well. We go for pre-existing properties that already have a license, that are already set up and compliant, because then it saves us any of those costs when doing it ourselves, and then we manage them and look after them. But as with anything and any strategy out there, there are pros and cons to this. If you're involved or you're interested in serviced accommodation, then a couple of weeks ago we did a serviced accommodation pros and cons because you need to understand. But, as with anything, there can be some downsides, particularly if you don't know what you're doing. But equally to that, there are a lot of pros and a lot of things really going in its favor when you're looking at this. So let's start with the cons.

Speaker 0:

So, on an HMO, you will have a lot of churn. What do I mean by that? Well, you'll have more people coming and going in the property because fundamentally, there could be more people living there. They also, on HMOs unless they're students, tend to only be on six month AST contracts, so they're only in the property, sometimes for six months, and then you have to put somebody else in there, whereas, of course, if you have a buy to let, where you just let the full property, most people will stay for 12 months. Now, students who move into that area are obviously there for the academic year. They're probably more likely to be in there for the 12 months or 11 months, depending on the term time and the contracts that you want to be doing with them. So you'll have an increased use of your property, which could mean more wear and tear on the property, could mean more maintenance costs as well.

Speaker 0:

You also, with HMOs, have a higher regulatory compliance with those properties as well. So the compliancy requirements are higher. If you have a five bed HMO, it will need a license, an HMO license. If you have a seven bed HMO, you may have to go through planning to make it into a commercial property. And, of course, if you have things like Article 4 in your area now, article 4 is what the council set in to stop people being able to get permitted development rights to convert a six bed into an eight bed HMO, or should I say a six bed into a seven bed or above HMO, okay, that means you have to go through full planning to do it, and if it's Article 4, they can make it more difficult or refuse to let you do so. If it's not in an Article 4 area, you can pretty much do this under permitted development, but that's a whole different episode.

Speaker 0:

So there's a lot more requirements that you need HMO licenses. Obviously you need to have a good EPC rating. You also need to have regular fire checks. You might even have to have a fire control panel in there, all integrated into the property. You will have to make sure as you would with any sort of buy-to-let property as well that you have your gas checks, your electric checks and all of those sorts of things done. But you've got to be more on top of it with HMO properties, okay, and you need to be going onto your local council's website, downloading the HMO pack and making sure that you are compliant with everything that needs it there, because all councils can be a little bit different. Okay, with everything that needs it there, because all councils can be a little bit different.

Speaker 0:

Another con could be tenants having disputes between each other, upsetting each other, annoying each other. Silly little things can sometimes set things off. You'll tend to get that more with HMOs than you do other types of properties and things. Now, if you're not managing it yourself, then it's down to the management agent to look after these things. But you need to think of your tenants as customers and, of course, any problems or disputes. You need to make sure that they are sorted very, very quickly. And of course, there's good communication with the tenants as well, because then things don't spiral out of hand.

Speaker 0:

A lot of the time there can be a limited appeal to some investors when it comes to HMOs, so they think, well, I'm going to go and do holiday lets because then I don't have tenants, I haven't got to worry if they don't pay. I haven't got to do this and do that. But of course, serviced accommodation, whilst great, also has its own problems as well. Everything does. But of course we're here to overcome those. So what happens if a tenant doesn't pay their rent? Well, predominantly, you've got another three or four or five, maybe more, tenants that are paying rents.

Speaker 0:

So it's good in that sense that you're not going to actually be out of pocket. If you have a buy to let with one person in and they stop paying, that's it until you either get them out or resolve the problem. But also, you've just got to make sure that you're doing the right checks on people, or your management agent is that you've got guarantors on whoever's staying there. So if they don't pay, you can go to the guarantor and chase them up for the money and things like that. So whilst that's a con, it can still be a pro as well. And of course, you've just got to be mindful of the fact that, as with wear and tear, you will have more maintenance needs when it comes to these sorts of properties. So as long as you account that into your budget and you have, a little bit of the money that you're making goes into a pot for maintenance issues, you should be fine. And, of course, if you get the right sort of property, you attract the right sort of tenants. They'll look after the property for you as well.

Speaker 0:

So some of the pros. Now let's get down to some of the pros. You can get a higher rental yields with an HMO than you can with just a standard vanilla buy to let Okay, because you've got maybe five, six, seven rents coming through. You will earn more from that property than you would if it just had a family living in it. So for cash flow purposes, these can be great little cash machines, if you like, of properties to be able to put money in your back pocket.

Speaker 0:

There is constant demand in nearly all urban areas for high-end living, for living at the end of the day. This can work for social housing, this can work for factory workers, this can work for high-end co-living, all of those sorts of things as well. But there's constant demand. So just see what the demand is for your area. What you don't want to do is a high-end HMO in an area that's never going to attract high-end people, because you'll be wasting your money. You'd be better off doing a middle of the range HMO that suits the needs of the people and the budgets for the people that are there as well.

Speaker 0:

So another pro that you can think about as well is utilities, because predominantly on HMOs, the landlord or the person owning the property or the rent to renter, in my case pays the utility bills. Now you have to be careful because obviously when people aren't or don't think that they're paying for something, then potentially they're more inclined to leave things on and to not play by the rules. But what else you can do is if you have students there, you can have a lead tenant and you can have them responsible for the bills and, of course, if you have control of those yourself as well, it does make life a lot easier. So it can be a pro, it can be a con, but as long as it's set up properly and you regulate it and make sure that you're taking meter readings at the right time and things and people know that they've got to turn things off behind them you can have lights that turn off automatically in hallways and things like that. You can make sure that you keep the cost down as much as possible.

Speaker 0:

Another thing is a potential for tenants who want to stay a long term. I've got tenants that have been in my properties now over three years three years and they've enjoyed it there. In fact, one of them even moved out, moved in with his missus, but kept his room and kept paying for it just in case he ever needed to come back, and he did so it's just as well that he kept the room so you can have long term tenants in there. As I say, just because they're signing six months ASTs, which could be a con, because there's lots of movement and things.

Speaker 0:

Some people find it very, very comfortable and nice to live with other people. It can be a lonely world out there and if you're used to living in a house with other people and things, then to have a place on your own can be a little bit scary, can be a little bit frightening for some people. So to know that there's other people that are living there, that, if you know worst case scenario is they could turn to somebody else in that property to help them out, then it can make it a very, very nice place to live. So, as with anything, there's always pros, there's always cons, but you need to just make sure that you're aware of what you're doing and you know what you're doing.

Speaker 0:

So when it comes to HMOs, I've found those to be quite good, to be quite honest, with you working very, very well, very, very profitable in our business. They really have helped me to grow a property business that completely changed my life, changed my world, got me out of my day job, has given me more time, freedom, and they are for a lot of my students as well. So if you need any help with that, if you're thinking of getting into HMOs and you're not sure where to start, check out thepropertyunleashedcom for free tools and resources. We have guides in there, we have some free training and things, and, of course, we do have paid training, coaching and support as well, to make sure that you don't trip over any of the pitfalls that are out there. So make sure that you keep checking out our episodes and I look forward to you joining me very soon. Take care and bye for now.