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Property and holiday accommodation with wheelchair access

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HMO investment has proven an increasingly popular means of investing in real estate. Buyers convert single occupancy properties into Houses of Multiple Occupancy, increasing annual rental yield and minimising the risk of tenant voids and spreading the risk associated with letting property.

There are obstacles to investing in HMO property, however, and it does require a lot more management and time than renting out a single property to a single tenant, or even to the same number of tenants in individual properties. While HMO investment does have great potential, you should ensure that you have the resources, time, and the knowledge to take it on effectively and efficiently. The following tips can help you make HMO investment profitable, and help you decide whether this form of property investment is right for you.

1 – Choose The Right Location In The Right Location

Choosing the right town, city, or region is only the first step in finding the ideal HMO property investment. Finding the right town, only to invest in an undesirable area of that town, can be extremely frustrating. Generally speaking, rooms will rent, but if you want to ensure that you maximise your returns, you need to make sure that you choose the right neighbourhood, in the right location, considering your target market.

2 – Check Your Council Requirements

Although there are some general rules that apply to HMO properties, you do need to check with the relevant local council. Some councils may require that you have permission to convert a 3 storey building into an HMO, while many will require that you have permission to convert a property into 7 HMO units. Even room sizes can be covered by local council rules, and you don’t want to fall foul of these legalities. If in doubt, check it out.

3 – Try To Find Properties With 2 Floors

As a general rule, you should aim to buy a property that will allow for the greatest number of tenants on the fewest floors, although there are caveats to this rule. Assuming that you meet all other requirements and prerequisites, you should be allowed to convert a 2 storey property into an HMO, but you are likely to require permission to do the same with a 3 storey property.

4 – More Than 6 Tenants Is Likely To Require Permission

Similarly, creating an HMO with 5 or even 6 separate tenants should not require council permission in most areas but this may not be the case in all regions. You don’t necessarily need to be put off by conversions that would require permission, but be aware that these requirements do exist and don’t try to sidestep them. Even if you aren’t afraid to meet council requirements for conversion permissions, too many tenants in a single property can become a major headache to manage.

5 – Involve Lenders As Soon As Possible

If you are going to need a mortgage on the property that you purchase, and you will also need help financing the conversion, then get lenders involve as soon as possible during the planning process. Get an offer in principle; this will help remove some of the headache. Ensure that the offer is in writing, but do be aware that if you need to borrow the money to make refurbishments, then this will be more challenging than finding a buy-to-let mortgage for a home.

6 – Consider All Sources To Find The Ideal Property

Estate agents are the usual port of call for potential landlords. You can ask local agents to keep an eye out for prospective properties, and you can usually find a good selection of homes in the catchment area of the estate agent. Don’t be afraid to use other sources, as well, though. Newspapers and local property magazines, real estate networks, and HMO investment companies like OpenHousePropertyInvestment.co.uk can provide you with access to properties that you wouldn’t find in estate agent windows.

7 – Don’t Mix Tenant Types

HMOs typically attract students, professionals, and even small families. However, all of these groups have very different requirements. Combining different types of tenant into a single HMO property can lead to dispute and disparity so try to avoid this where possible.

8 – Get A Cleaner For Communal Areas

Generally, many tenants will avoid cleaning communal areas. Even if you have one tenant that diligently cleans the kitchen and bathroom, it can lead to dispute and resentment that escalates and bubbles up into tenant disputes. Having a cleaner for the communal areas not only ensures that rooms like the kitchen and bathroom are kept in good condition, you can use the cleaners to check smoke alarms and even let you know of any tenants that might be causing unnecessary mess.

9 – Small Improvements Can Yield Magnified Improvements

A refurbishment that yields a 5% improvement in single occupancy rental yield would yield greater profits from an HMO. If a property offers £500 as a single occupancy, you could expect to receive £600 as a multi-occupancy property. That might only equate to a £5 a month improvement but several £5 improvements soon add up over the space of a year, 5 years, or more.

10 – Aim For 12% Or Higher Yield

Take gross rental income and divide by the cost of refurbishment plus the purchase price. This gives you your rental yield as a percentage. Single occupancy rentals typically have around 8%, with 10% considered a good return. HMOs attract a 12% yield, with 15% being considered an achievable rental yield goal. When calculating whether a property would make a worthwhile HMO investment, aim for a 12% yield.

11 – Extend Or Convert If It’s Viable

While it might require a considerable initial capital investment, extending a property can add two or more rooms to a property, adding as much as 40% to your rental returns. Converting a garage, loft, or conservatory could also prove a viable means of adding extra space and enabling you to maximise the yield on a property. Don’t assume that an extra room is worth the investment, however; always do the maths to ensure that you will make a return on your extension and conversion investment.

12 – Turn The Small Room Into An Additional Bathroom

Many councils set a minimum size for habitable HMO bedroom space. If you have a small room that does not fit within these dimensions, and you are unable to move a stud wall, then consider turning it into an additional bathroom. 5 bedrooms and 1 bathroom would be considered a lot less appealing than 4 bedrooms with 2 bathrooms.

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