HMO buy-to-let property guide

Pros

• High yields – you can triple the gross revenue in some scenarios
• Easy to construct from house once you have correct planning permission

Cons

• Additional management
• Multiple tenants leads to disputes
• More void periods than a block of flats or standard house
• High tenant turnover
• Need the right planning in place to make it into a HMO
• Wear and tear is quicker
• Need to ensure the local council will allow it to operate as a HMO

Expected Yields

Yields can vary greatly and is a difficult one to predict. In some Northern towns you could see as much as 20%, however in London you may only achieve 6-7%.

So as a middle ground you will be looking at 10-12% Gross. Due to the varying costs and pot luck with your tenants this can sway a couple of percentage in either direction.

The key thing to look out for is the location, as this will make the biggest impact on your income.

Financing

You should be able to obtain a 75% LTV however in the current market you may be able to achieve an 80% LTV. You will want to shop around with brokers as different lenders look upon HMOs differently. Some like the fact that they are high yielding assets, making a mortgage easier to obtain.

Finding tenants

Your tenants will mostly be students and young groups of friends/ working professionals. The management company will take care of this for you.

Typically speaking if you find a good area in the current market you shouldn’t have much issue finding tenants. However, one thing to consider is you are more likely to have void periods both between tenancies and between term-times if your HMO is in a student area.

As you may likely be needing new tenants each year this can increase the risk that you will have large void periods, unlike a block of flats of standard house, where you will have longer term tenants. You may also get tenants moving out individually and others staying which can make it trickier, in this scenario you will have to advertise individual rooms.

Ideal Locations

If you are looking for higher yields, then Northern locations definitely offer greater opportunities. Some areas that we find good are…

• Liverpool
• Leeds
• Manchester
• Sheffield

Essentially these are all towns with Students, post-graduates and young worker on a lower budget that look to HMOs to save money.

London is also a popular location for people to look for HMO living; however, the cost of London property make the yields less viable.

Look at areas where undergraduate retention is high and property prices are low, these can potentially offer you the best deals.

Birmingham can also be popular however like London prices can be high.

We currently offer HMOs as part of our off market portfolio, if you would like more details please click here to contact us now.

Management

Management fees can vary depending on location and tenant profiles. The truth of the matter is tougher towns can lead to tougher and more disruptive tenants. In these cases, it is possible that management fees can be as high as 10-12%.

In a more manageable town and better tenants you may be looking around 5-6%

If you had your own management company or are hands on this is where you may be able to shave significant costs, but your time is also worth considering.

Additional costs

Lots of tenants on a high turnover leads to a lot more wear and tear. Typically you will find appliances, carpets, furniture, paint etc.. have a shorter life span, and these will need replacing.

Fire system in a HMO is also another considering in a HMO, as you are responsible for this you will need to ensure all safety regulations are met. This involves ensuring alarms, detectors, fire blankets and extinguishers are all in working order. Tenants could have become trigger happy with these essential items in some scenarios just adding more costs to you as the landlord.

Extending / adding additional rooms to increase your income

HMOs can really benefit from the ability to chop and change rooms to create additional income from extra tenants. This will however, depend on the planning permissions obtained from the council. If you have done your research and are free to operate as a HMO then it can be a fantastic opportunity that could triple your bottom line.

It is not uncommon to find a 2-bed house which has had both the lounge and loft converted into additional bedrooms, giving you the ability to charge 4 tenants separately for rent.

Some other examples would be in the Georgian Quarters in Liverpool where basements of old townhouse mansions form the era of Liverpool’s elite upper class in the 18-19^th century have had basements turned into 4 or even 5 bedrooms in addition to the rooms above. However, opportunities like this are now impossible to come by, but shows the possibility.

Exit Strategy

Your exit strategy is going to be most likely to another investor. It is possible to sell to a fund but is rarer than a standard investor looking for a high yield

Although it is a house you are unlikely to sell to an end-user since a lot of work would be required to turn it back into a house. Additionally, if it is a HMO the neighbourhood will more likely be groups of students or young professionals, which may make the area less desirable to families and anyone looking to settle permanently in the area.