One of our directors has written an article for a specialist industry publication giving advice on investing in HMOs.
First published in Today’s Landlord
How to make the most of your HMO investment
Yields from HMOs (Home Multiple Occupancy) outperformed standard buy-to-let (BTL) investments by 40% in the four years to 2014, according to recent figures released by Platinum Property Partners…
It is therefore not surprising that the demand for HMOs has increased as the high ROI continues to attract property investors.
Karl Griggs, One of our Directors, advises landlords on what to keep in mind when purchasing property for use as an HMO:
1) Be aware of the local council legislation
The requirements for HMOs vary for each council, so be sure to know what the legislation is in the area in which you are looking to purchase.
As part of this, landlords should be aware of any Article 4 Directions in the area. Article 4 Directions are a means by which a local planning authority can bring within planning control certain types of development, or changes of use, which would normally be permitted development (not requiring an application for planning permission).
The effect of an Article 4 Direction is that a planning application is required to be made for the change of use of a building from a dwelling house (Planning Use Class C3) to a small HMO (Planning Use Class C4) in the designated area. In other words, the conversion of dwelling houses into HMOs is no longer permitted development and you will need planning permission, which can cause delays to conversion projects and therefore cashflow.
2) Quality over quantity
Landlords need to have a long term view of their investment, as it is about growth in value as well as on-going rental yield. It is wise to make the investment in high quality rooms, which will attract high quality tenants and therefore generate higher rental yields. However, there is no way to do this on the cheap. Some landlords spend the same amount of money refurbishing the property to provide high quality rooms as they do on purchasing the property.
Putting a lock on every room does not make the property an HMO. It is worth converting the property so that it is HMO-specific. If you refurbish the property so that it can only be sold on as an HMO (as opposed to landlords who convert the property with minimum investment, meaning that the property can be sold on as a 1-family home), this will generate better business value. However, all refurbishments must take into consideration local council rules.
3) Choosing your tenants
Make sure that you keep the number of tenants manageable and be aware of the needs of different tenant types. For example, DSS tenants may need to be managed differently and more closely than professional tenants. Landlords should also be aware of the implications of letting to students, as student lets take a lot of time to manage and you need to make enough money during term time to cover costs for the rest of the year.
If you provide poor quality housing, this will attract poor quality tenants. The turnover rate in this class of tenants tends to be higher, and you may experience more issues as a landlord. As a result, your reputation as a landlord may become tarnished and this could affect your licence within the council.
4) Location, location, location
Landlords need to have a clear target market in mind for their properties, and choosing the right location is important to ensure high occupancy levels. Some landlords will only purchase in specific locations around transport links to target particular commuter groups. Other prime locations include near universities for students or near airports for professional travellers or airline staff.
5) Be aware of the finance options
As HMOs are a very specialist asset class, lenders do not usually lend to inexperienced landlords. Landlords considering investing in HMOs should have a few properties on their portfolio, or currently be an HMO landlord, although there are options for inexperienced new HMO landlords.
All in all, in order to generate high business value from your HMO, you should make sure you do your market research, obtain the correct licensing and invest in creating a quality HMO. In turn, your property will attract high quality tenants and will continue to generate high returns for years to come.
By Karl Griggs, Director of Commercial Processing Centre (CPC)
Contact us if you would like advice on investing in HMOs or are looking for property finance.