5 Common but Critical Mistakes Landlords Make When Investing in HMOs
HMOs give back fantastic returns on investment that can't be matched by buy-to-lets. But, you'd be wrong in thinking that every HMO is a goldmine. Here we look at 5 critical mistakes that investors tend to make with this type of property and look at how you can make more money with multiple occupancy housing.
Not Knowing the Competition
The first key mistake we see a lot of investors make when it comes to HMOs is that they don't fully understand the local market or what's being offered by the competition. If you know what your competition is doing you can do it better. Offering better quality of service is how you get clients, or in this case tenants.
Often we see investors researching an area to see if there are enough houses on the market to satisfy rental demand (more on this later). Now, whilst this is essential research it is also very important to look into the details. What do the properties on the market actually offer? For instance, how many rooms are en-suite? What condition are the properties in? Are they done to a nice standard? Is the interior design any good or is it just magnolia white throughout? What are the staging photographs like? Are the bedrooms presented undressed with an unmade mattress on a bed frame in the middle of the room?
It is important to understand what the competition is doing with their houses. Then you can start to build a picture as to where you want to fit into the market. It is through examination of the details that you can decide what rent you are going to charge. But, more importantly, you can make sure that your property stands out above the rest. It is by doing this that you will get more tenant viewings, more tenant applications, and tenants that will stay for a longer period of time. All this you will achieve by making sure that you are offering the best possible service for the area.
Picking the Wrong Letting Agent
The second mistake that investors make is picking the wrong letting agent. Not only is it important to pick an agent with HMO experience but you also want one with experience in working with your chosen tenant profile (that is the type of tenant that you are looking to attract). Too many HMO investors pick an estate agent who lacks the necessary set of skills to properly manage the property.
We have recently finished a project in the North West. We spoke to a number of letting agents in that area to try and find one to manage the property. The area was a new one for us so we didn't already have the necessary contacts. So, we spoke to a few agents on the phone and there were two or three that we thought could be suitable. We then arranged to meet them at the property where we wanted to talk through viewings, show them our plans for the property and let them know what we were aiming for.
One of these agents sounded perfect. They had HMO experience in the local area and ticked all the boxes for the questions we asked. However, when we got on-site and started to look at the property with them in detail that is when we realised that they would have been completely the wrong fit.
The reason for this was because our property had been done up for high-end professional tenants (actually, this is the same property in which I'm stood in the video) and this particular agent's background was with local housing allowance tenants.
When they came to look at the property they asked if we were going to put locks on the kitchen cupboards. They told us we were wasting our time with the finish we were applying to the decor, that we were wasting our money on decent furniture. They even went so far as to suggest that we shouldn't supply a TV on the basis that it would get pinched.
They were completely wrong for the project, simply because their experience was with the wrong kind of tenant.
So, the take-home lesson here is that when you speak to agents you want to ask them about their experience with HMOs. But this is not enough. You also want to meet them at the property and really get to know what kind of tenant they are used to working with. It is going into this kind of detail that you will find the right estate agent for the job.
When you meet the agent at the property you want to showcase what you are looking to do and you need to ask them about what they can do.
If it's early on in the search, and say you haven't found a property yet then it is still worth having an in-depth conversation with them about tenant profile to see if they're a fit. This is because, ultimately if they are used to dealing with a different tenant market to the one you are aiming for, then the relationship isn't going to work.
Most agents are not going to change overnight and suddenly become a great fit for professional tenants if their market is normally LHA. The same is, of course, true the other way round.
But I can not stress enough that you make sure you find the right estate agent.
Getting it Wrong on Rental Demand
The third mistake that we see a lot of is investors not checking that there is enough demand for houses and rooms in the area. More specifically we see investors not checking that there are enough applications being put in by would-be tenants for HMO to warrant investment in a particular area.
HMOs are often presented as being fantastic income generators. We hear all the time about their superb rental yield and cash flow. And this is all true. But, if you invest in the wrong area and they don't rent out or they take too long to rent out there will be void periods and you can lose a lot of money.
So, simply buying an HMO, or converting a property into an HMO, does not mean that it is going to deliver. I can't stress enough how important it is to do your research and make sure you know that there are enough people in that local area looking for a room in an HMO.
Investing in Towns and Villages
Part of this is, of course, considering the population density of the area or the size town. Now, I know some landlords that self-manage HMO properties, some that use letting agents as well, in small towns and I've seen it work. When we have tried investing in property in smaller towns it hasn't worked so well.
When we have later examined the numbers, this has mainly been the result of void periods (periods of time when the property is either empty or not fully tenanted). These void periods are the result of not being able to find tenants fast enough and also the result of not being able to keep tenants in the property for a long time. In a smaller town or less populated area, both of these things are understandable. There is less demand for property and smaller towns can have more transient tenants as people move elsewhere to find employment.
So, HMO properties in small towns can be very difficult to make cash flow positive. Certainly, you might find that your expected returns are a lot less than you anticipated if you haven't done your research properly.
What we now look for in towns as a basic is for populations of at least 100,000. This number of people, we have found, is enough to sustain a good HMO market. Most satellite towns and villages, however, are not this large and typically an HMO stands a much lower chance of being profitable for its investor.
So, to recap... As I said in point 1, you need to understand what the competition is doing. But, you also need to understand the rental demand that exists in the area you are looking at investing in. This involves thinking about simple things like how many people live in the area around the house. You need to make sure that there are enough of them to make the HMO business work.
Not Knowing the Maximum Rental Price for the Area
Mistake number four is not understanding the ceiling price for rentals in the area in which you are looking. Naturally, you'll always want to try and push those prices up. This is especially true if you're delivering a high-end product. This, with HMOs, means nicely done rooms.
However, even if the rooms are of good quality you still need to know what the ceiling price for the area is.
Let's take an example and say you're investing in an area where top-end HMOs are generating £400 per month per room. If there are one-bedroom apartments going in the same area also for £400 per month then you are going to struggle to raise your rent as your tenants will likely go to live in the apartments. No matter how nice you have done up the rooms the competition in any given area is going to dictate a ceiling price for rent that will be difficult to go beyond.
This is also going to be true as you go up the scale. In a busier or more affluent area with a higher population, your rent on a room might be £500 per month. Again, if there are one-bedroom flats available at £525 per month then £525 is a barrier that you are going to find it difficult to push beyond.
So, if what you are providing is of high quality then you can push up to the barrier but it will be very difficult to push beyond it. If you take an area that has a good few standard HMO rooms available but none of them are en-suite and you offer rooms that are then you can naturally charge more. However, if the price of a standard HMO room is £500 per month and the price of a one-bedroom flat is £600 per month then you can increase the cost of your room by a little but not by so much that you are in competition with one-bedroom flats.
The good news is that when you really look at the figures, small increases in rent really add up over time. Even charging £5 more a week per room really transform your income over a number of years. With this in mind, you really want to be pushing as close to that ceiling price as possible. But, in order to do that you need to know first what that ceiling price actually is.
Picking the Wrong Street
The final mistake that we see investor making over and over again when it comes to purchasing HMOs is buying property on the wrong street.
HMOs are a profitable investment in most major cities and towns but there are exceptions. If you are looking at an area that has a large student base with a university close by or if there is a lot of employment then these things will certainly help your HMO business. However, not all areas, or postcodes, or properties are created equally. Even if you have done your research and the postcode looks good, it is still more than possible to buy a property on the wrong street for use as an HMO. It might be too far from the shops. It might be too noisy at night. There can be many reasons why a particular street might be so undesirable that can kill the long-term potential of the property.
Again it comes down to research. You want to understand the property right down to street level. Speak to the local lettings agents and really get a feel for the local area in detail. Never pick a town and just go for it. Don't go in blind, saying to yourself, Manchester will work, or Salford will work, or Tameside or Warrington. You want to know what locations will work and then what streets and finally when presented with an opportunity to purchase a house, that too.
Putting it All Together
Hopefully, those 5 key tips help to give you some pointers on what to avoid when you're looking at buying your next HMO. I hope if there is one thing I've helped with it is with driving home the message that ultimately it will be detailed research that will get you higher returns and ultimately put more money in your pocket when it comes to your next HMO investment.
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