The Ultimate HMO Casestudy: Which HMO Strategy Gives The Best Returns?

When it comes to HMO’s (Houses of Multiple Occupation) they’re certainly not all created equal.

Small tweaks in the size, tenant profile and style of your HMO can rapidly increase (or decrease) the cash flowing in to your bank account each and every month.

Table Of Contents

  1. Introduction
  2. The Contenders
  3. The Match Up’s
  4. The Rules
  5. Match 1 – Sourcing
  6. Match 2 – Cash in Bank (rental returns)
  7. Match 3 – Potential for Capital Growth
  8. Match 4 – Ease of Management
  9. Match 5 – Maintenance
  10. Match 6 – Exit Strategy
  11. The Round Up – Winner
  12. Conclusion

Introduction

HMO

In today’s article we’re going to delve deep (I mean really deep) into the reality of HMO’s and match up the different HMO strategies and tenant profiles against each other to see which comes out the worthy winner and which you should be focusing your next HMO property purchase on.

I don’t know why but in my head whilst writing this I have the rocky theme tune on loop…:)

But instead of a one-on-one boxing style matchup we’re going to pitch the most popular house of multiple occupation strategies against each other in one large ‘season’ style round up.

Think of it more like a season… Formula One, Rugby or Football…. it’s who wins over the season and not just one game or race that counts…  it’s certainly not about the sprint, and no property strategy should be.

It’s about the long term.

Think sustainable, scalable and, most importantly, profitable.

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The Contenders

So the teams lining up in this ultimate case study are:

  • Social Housing Tenants
  • Student Tenants
  • Working Tenants
  • LHA (local housing allowance) Tenants
houses of multiple occupation case study

Each of them certainly has their place in the grand scheme of things and the rich tapestry that makes up the UK housing market.

Each will also have their advocates and even strong opponents, but by the end of this article we should be able to see clearly the hard facts of which tenant profile and HMO strategy really is the best solution in the current (and future) UK property climate.

Now if you’re brand new to property or HMOs (houses of multiple occupation) then you may not be fully aware what and why there are different tenant profiles.

So to help you with a very quick rundown and to explain the ‘contenders’ for this article, I’ve given a quick introduction to each below.

Social Housing Tenants Profiles

These are tenants that usually rent their property directly from the local council, a housing association or an organisation.

These organisations have a contract to provide housing on behalf of the government in one way shape or form to particular demographics of tenants (this may range from vulnerable young or older tenants and even asylum seekers).

As a private landlord you will rarely deal directly with these tenants as they deal direct with the organisations above.

However due to a housing shortage, there are companies and housing associations that are very short of housing stock and can’t provide enough property for tenant demand. As such they lease properties directly from private landlords for a period of 3 to 5 years to fulfil their housing needs for their tenants.

Student Tenants

This is fairly self-explanatory; these are tenants that are living in a particular location whilst they are students at the local college or university. Very often their tenancies are around 1 year long during the academic year.

Working Tenants

Again fairly self-explanatory, these are tenants that are working, in receipt of an income and will pay their rent directly themselves from the income they earn.

L.H.A Tenants

This refers to Local Housing Allowance tenants.

These are tenants in receipt of housing benefit (where their rent is paid in part or full by claiming benefits from the government).

Many of these tenants, although in receipt of housing benefit, will rent directly from a private landlord instead of waiting to be housed by the local council, as the council and Housing Associations simply do not have enough properties to house all housing benefit tenants in need.

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The Match Up’s

To put a framework for the case study, I analysed the key areas of all HMOs.

Considering essential questions like….

key hmo investment areas

Q)   What do most investors really care about (or worry about) in their HMO investment?

Q)  What factors do 99.9% of investors base their investment decisions on?

Q)  What areas do the majority of investors actually miss when it comes to analyzing which HMO property to go for?

Q)  And importantly what do you need to get right in your HMO investments so you can sit on a beach with Sangria and watch the cash simply flowing into the bank? J

After 10+ years of experience in property and running HMO’s in all of the above tenant markets, both in my own portfolio and sourcing for clients… these are the most important match-up’s that I’ve found that will make or break your HMO portfolio.

Get these right and your pension plan and passive income goals should be looking very rosey indeed.

So what are the key areas?

>   Sourcing

>   Cash In Bank (rental returns)

>   Potential For Capital Growth

>   Ease of Management

>   Maintenance

>   Exit Strategy

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The Rules

Like with any match up (and investment) there are always some ground rules and a scoring system to measure success.

Let’s keep this simple and mark them out of …10…

1 – 3   Very Difficult / Poor Performing

4 – 6   Average in all aspects

7 – 8   Good indications

9 – 10  Exceptional

So we know the teams… We know the Matches… We have the scoring system….Let’s Get Started!

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Match 1 – Sourcing

Whether you choose to find (source) the property yourself, work with a property sourcer or buy a ready to go packaged HMO property deal… If your going to build a HMO property portfolio you’ve got to start with finding the properties.

 

Social Housing Tenants

Score – 4/10

This scores at the bottom of the average scale.

Firstly it’s not possible to do in every location, as not all councils or locations will have leasing schemes available.

So if you want to run a Social Housing HMO then you may have to choose your location based around the strategy instead of the other way around.

As an example in the North West where I’m based, we have leasing schemes we can work with in Manchester, Salford and Wigan, but if we wanted to do this in Warrington, then we would currently be very limited.

Combine this with the criteria laid down by the leasing schemes providers on what properties are actually suitable and also pass their location test, and you’ve got a tough score in the ease of sourcing department.

Example:

We work with a social housing provide across the North West to provide Social Housing for Asylum seeker tenants.

The returns are great but we need to view around 10 properties to get 2 or 3 even ‘accepted’, due to their strict criteria on location (down to street level and even position on the street).

This is before we have even got close to a purchase and negotiated on those properties with the sellers.

From experience the sourcing difficulty is higher than other tenant profiles, so if you plan to source your own social housing properties I’d score this one 4/10 for difficulty.

Student Tenants

Score 7/10

Like with social housing, student housing is not suitable in every location, but there are many cities across the UK that have a very strong student market.

Finding properties and locations for this market are easier than the average, so it’s a good indication for sourcing.

Granted, once you have the right city, finding the ‘perfect’ location so that it will rent year after year without hassle is a little trickier than just picking up a vanilla buy to let, but if your criteria for rental returns (& budget) is flexible then you shouldn’t have too much difficulty in sourcing potential deals.

It’s not quite as simple as walking in to an estate agent and having your pick of hundreds to choose from, but there’s still many options in many cities across the UK, so a strong 7/10 on this one for me.

Working Tenants

Score 7/10

This is the market most investors like to focus on.

It’s the mainstream tenant profile for both BTL (buy to let) and HMO’s as it’s is perceived as less risk.

For working tenants the priority is to be near work, friends and amenities.

This tends to mean you will see a focus in certain central areas to particular streets or postcodes as being the most popular for working tenant HMO’s in that location.

Keep near transport links, shops, restaurants and bars and you shouldn’t go far wrong. Head a bit further out of area in to more suburban housing estates or towns with populations less than 100,000 then you will likely start to struggle for a regular supply of tenants and your void periods, risk and more hands on management/tenant finding may start to outweigh the benefits of having a HMO.

LHA (Local Housing Allowance) Tenants

Score 9/10

If your market is LHA, then you’re in luck when it comes to sourcing. This is probably the easiest tenant profile to find properties for.

As it’s the cheapest end of the market pricewise (ie: rent per week per room and property prices) you will find many areas and house styles that work for this market.

It certainly has it’s challenges in other areas (which we’ll look at below) but sourcing isn’t one of them.

This is partially helped with changes to LHA rates and what age people can now claim the full one bedroom rate.

This is now set at 35 years old, which means there is a large portion of the population only able to receive shared room rate housing allowance.

Any single person 34 years or under claiming benefits is now typically forced in to shared accommodation as they can’t afford to pay top ups to fund a one or two bedroom property on their own.

This legislation along with a drop in the actual rates paid in many areas for Local Housing Allowance has skewed the housing supply and demand, so in many towns & cities finding LHA tenants for a HMO should not be an issue (as long as you’re not in a rural village or hamlet location).

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Match 2 – Cash in Bank (rental returns)

cash in the bank rental returnsOne of the most important factors for any investor when considering any investment… is what the returns are going to be.

HMO’s are great at generating cashflow and certainly trump Vanilla Buy To Let’s on rental returns, but not all hmo’s are created equal as we’ll see below.

For this matchup we’ll compare apples to apples with some standard figures below each tenant profile. With each assuming

  • £120k property value
  • Location Salford
  • 4-5 bedrooms

We’ll use Salford as the area, as it’s a location in the North West that has all the HMO tenant profiles were looking at in this casestudy.

As you can see in the screenshot below there are a number of ‘potentials’ that fit the above criteria.

Salford HMO property search zoopla - pic 1

We’ve then further narrowed down the selection to four properties that perfectly match the requirements of what we’re looking at above.

(note: these are not active up and running HMO’s but examples of what can be achieved in today’s market)

Some require full refurbishments, others would just need some small works to bring it up to the required HMO regulations.

The total budget of £120k however should be about right to give us a good comparison for all property options in the casestudy.

As you can see in the heatmap the quality of location and house values vary, as shown with the different colour pockets, so I have purposefully chosen properties in locations that should work for their tenant profile.Salford HMO Heatmap

Social Housing Tenants

Score 9/10

For rental returns and cash in the bank it’s hard to beat social housing tenants.

Typically with HMO’s you have to closely control utility usage (as the landlord often covers these in HMO’s), keep a tight control on void periods and manage rent arrears, in order to achieve anywhere near the planned returns.

The whole process can be time consuming and management intensive to keep a tight ship.

With Social Housing Tenants however, when you lease the property to an organisation or housing association (in our case we usually lease the properties to them for 5 years) you simply hand over the keys and collect your rent payment each month.

If you like to be a ‘hands off’ type investor, then I would recommend to seriously consider these property deals.

Potential Property

Social Housing - Salford HMO

Gross Return on Investment
Total Purchase Costs
(inc. Purchase, refurb, purchasing costs)
£120,000
Rental Income
(4 x bedrooms @ £50pw)
£10,400
Gross Rental Yield: 8.67%

Net Return on Investment
Voids & Arrears
(none as it’s a 5 year lease typically)
£0
Monthly Tenant Management
(no management fees on this)
£0
Tenant Find Fees
(no tenant find fees on this)
£0
Electricity
(social housing provider & tenant covers)
£0
Gas
(social housing provider & tenant covers)
£0
Water
(social housing provider & tenant covers)
£0
Broadband
(social housing provider & tenant covers)
£0
Council Tax
(social housing provider & tenant covers)
£0
Insurance
(landlord covers)
£360
Gas Safety
(social housing provider covers)
£0
Cleaner
(social housing provider & tenant covers)
£0
Maintenance
(social housing provider & tenant covers)
£0
TOTAL RUNNING COSTS £360 pa
Net Rental Income £10,040 pa
Net Rental Yield 8.37%

 

As you can see to start with the Gross Yield looks relatively low compared to most paper figures for HMO’s.

But when you take in to account all of the ‘benefits’ of a social housing lease, you can see that there are essentially no further deductions (unlike all other HMO’s).

This means the NET rental yield is very strong.

Let’s see how this compares to the other HMO’s styles….

Student Tenants

Score 7/10

Student rentals are often promoted as the best tenant investment a landlord can wish for.

Sure the 12 month tenancies and low voids are appealing, but it’s not all rainbows and sunshine.

Getting your property on to the student cycle initially can mean a couple of months of voids whilst you wait for the new academic year to start and tenants to move in. If you buy at the wrong time of year this could mean up to 3-6 months of voids on your first year of trading.

Ways around this can be to buy an existing student let or juggle your purchase to buy in the right cycle of the year (Usually Jan-Mar) to ensure as small a downtime as possible.

Once tenanted however you should be up and running and as long as you purchased in the right location, it should be plainer sailing from here on in.

That first year is tricky to predict and each purchase may end up slightly different, so to keep things simple, we consider the cash in the bank examples below from an up and running student let, with exactly the same starting point as the other HMO’s of a £120k total purchase cost.

Potential Property

Student - Salford HMO

Gross Return on Investment
Total Purchase Costs
(inc. Purchase, refurb, purchasing costs)
£120,000
Rental Income
(4 x bedrooms @ £75pw)
£15,600
Gross Rental Yield: 13%

Net Return on Investment
Voids & Arrears
(lets assume it’s a very popular let)
£0
Monthly Tenant Management
(based on 12% per month + vat)
£2,246 pa
Tenant Find Fees
(based on £150 per tenant per year)
£600 pa
Electricity
(based on £40 per month)
£480 pa
Gas
(based on £60 per month )
£720 pa
Water
(based on £40 per month)
£480 pa
Broadband
(based on £40 per month)
£480 pa
Council Tax
(currently students exempt from CT)
£0
Insurance
(landlord covers)
£360 pa
Gas Safety
(based on £70 per year)
£70 pa
Cleaner
(based on £60 per month)
£720 pa
Maintenance
(based on £100 per month – furniture and decoration wear and tear)
£1,200 pa
TOTAL RUNNING COSTS £7,356 pa
Net Rental Income £8,244 pa
Net Rental Yield 6.87%

 

What starts off with a great Gross yield of 13% (which is how you would see many Student HMO deals presented), when you see the reality of the outgoings, the figures quickly come down to only around 6.87% NET

Now sure there are some caveats to this.

  • You could buy the property for cheaper for example (but would it then be in the right area and actually let?)
  • You can reduce some of your expenditure by self managing (but are you then running it like a real business as you’d be working for free)
  • Or you can try and get the tenants to pay the utilities (but when all other competition properties are including it, you would likely struggle to rent and find suitable tenants this way).
  • Finally you can focus on areas with higher gross yields or maybe an extra bedroom so you have 5 beds. Definitely feasible, but it will limit the potential available stock? and you might find your property price will increase significantly as soon as you target the larger properties. Each area is different, based on local supply & demand.

However these caveats apply to all of the tenant strategies though, so to compare apples for apples, the figures above are very realistic for the returns on many student lets of this type.

Professional Tenants

Score 6/10

Unlike student lets, with professional tenants there will be a few more streets and locations opened up for you around town, so you should be able to buy at slightly better prices and also achieve a small (on paper) increase in rent from the professional market as your competition, location and tenant needs are different.

Potential Property

Working - Salford HMO

Gross Return on Investment
Total Purchase Costs
(inc. Purchase, refurb, purchasing costs)
£120,000
Rental Income
(4 x bedrooms @ £80pw)
£16,640
Gross Rental Yield: 13.87%

Net Return on Investment
Voids & Arrears
(lets assume it’s a very popular let)
£1,386 pa
Monthly Tenant Management
(based on 12% per month + vat)
£2,196 pa
Tenant Find Fees
(based on £150 per tenant per year)
£600 pa
Electricity
(based on £40 per month)
£480 pa
Gas
(based on £60 per month )
£720 pa
Water
(based on £40 per month)
£480 pa
Broadband
(based on £40 per month)
£480 pa
Council Tax £1,200 pa
Insurance
(landlord covers)
£360 pa
Gas Safety
(based on £70 per year)
£70 pa
Cleaner
(based on £60 per month)
£720 pa
Maintenance
(based on £100 per month – furniture and decoration wear and tear)
£1,200 pa
TOTAL RUNNING COSTS £9,892 pa
Net Rental Income £6,748 pa
Net Rental Yield 5.62%

 

Like with student lets, the gross yield in working tenant HMO’s gets eroded with all the running costs.

At only 5.62% NET, many vanilla buy to lets could even beat that so its it worth the hassle?

I would say yes definitely, but if you’re considering professional let HMO’s then you need to be focusing on 5+ bed properties or work on reducing the purchasing cost so your gross yield can be above 15%.

This may mean buying in different areas or different parts of town, so you need to make sure the tenant demand is still there if you change location

This will give you a healthier starting point and make having a HMO worth it.

So far, as you can see though the Social Housing model is strongly out performing it’s competition for cash in the bank.

Next up LHA’s…

Local Housing Allowance Tenants

Score 5/10

Remember the LHA market is heavily guided by what the shared room allowance is for the area.

So where you might get £80pw from professional tenants, achieving the same from LHA tenants will be very difficult.

The trade of here is that you can go to cheaper parts of town, so for your £120k property you may be able to get a 5 bed house to work, but the location may mean it’s only going to be suitable for LHA tenants.

Potential Property

LHA - Salford HMO

Gross Return on Investment
Total Purchase Costs
(inc. Purchase, refurb, purchasing costs)
£120,000
Rental Income
(5 x bedrooms @ £65pw)
£16,900
Gross Rental Yield: 14.08%

Net Return on Investment
Voids & Arrears
(1 x month is typical… although the risk of arrears can be higher)
£1,408
Monthly Tenant Management
(based on 12% per month + vat)
£2,230 pa
Tenant Find Fees
(based on £150 per tenant per year)
£600 pa
Electricity
(based on £50 per month)
£600 pa
Gas
(based on £60 per month )
£720 pa
Water
(based on £40 per month)
£480 pa
Broadband
(based on £40 per month)
£480 pa
Council Tax
(based on £100 per month)
£1,200
Insurance
(landlord covers)
£360 pa
Gas Safety
(based on £70 per year)
£70 pa
Cleaner
(based on £60 per month)
£720 pa
Maintenance
(based on £125 per month – furniture and decoration wear and tear)
£1,500 pa
TOTAL RUNNING COSTS £10,368 pa
Net Rental Income £6,532 pa
Net Rental Yield 5.44%

 

The reality of these figures can go one of two ways.

A small increase in your room rents if you can get top ups over and above the local housing allowance rate and you can see a healthy increase in your NET figures/cash in the bank.

But LHA tenants are at risk of higher arrears.

Managing their money some can find difficult and it can be tough to get direct payment from the council unless the tenant is thought ‘vulnerable’, so arrears can easily rack up, crushing your cashflow and predicted figures.

Not a market for the faint hearted and many landlords that operate in this market tend to go for houses in the £60-100k price range to give them returns that are worthwhile.

The stand out on these comparisons (apples for apples) figures though, is Social Housing without a doubt.

If cash in the bank is your target then I would seriously consider the Social Housing strategy, either sourcing yourself or buying ready-made property deals.

 

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Match 3 – Potential for Capital Growth

If you’re in property for the long term then I’m sure Capital Growth is on your hit list. Rightly so too.

Property capital growth

The difficulty with capital growth is it’s hard to predict when it will happen and by how much.

However if you buy the right property, in the right location.

Then capital growth will take care of its self.

With this in mind for this match up, we’ll consider how these HMO strategies have historically and are currently performing in locations for growth.

Social Housing Tenants

Score – 7/10

HMO’s that are used to house Social Housing Tenants actually perform very well for Capital Growth.

This is due to the location restrictions that are often placed on the initial sourcing requirements for these properties.

The Housing Associations and organisations that lease these properties require them to be in diverse, populated areas, with a mix of tenanted and owner occupied properties in the location.

They often won’t take these properties on in heavy, typical LHA locations or in the depths of an ex-council estate.

This force these HMO’s in to some stable and good locations for growth as the mix of home owner occupied properties surrounding them ensure regular buyer demand and keep the prices increasing in times of property growth.

Student Tenants

Score – 7/10

When it comes to HMO’s, student properties tend to be in the tightest of geographic locations. These areas often become student hubs with property after property on the street rented to the student market and owned by landlords.

This environment creates it’s own supply and demand, with very few homeowner occupiers.

In a normal market it’s often homeowners that push up property prices as they buy on emotion and not yield or value.

However in an area where buying in the best street really makes a difference to the performance of your student let, demand for property remains high.

All of this in balance keeps capital growth in student locations relatively steady.

When compared to the average growth for an area it is often inline.

As investors will always buy in these areas if the fundamentals are right and students numbers are steadily growing.

However as investors are still focused on yield, it’s rare that the capital growth for these properties will ever outstrip a homeowner location.

Professional Tenants

Score – 8/10

This HMO market often performs the best in terms of overall price growth.

Many of the same elements that attract home-owner occupiers attract professional HMO tenants.

This forces investors to buy in good locations if they want their professional HMO to perform and rent easily.

When an area experiences natural growth and more homeowners move in and force prices up, this often reduces the level of investors and rented property in the location as the yield drops, so investors left holding HMO’s in key areas will not only benefit from growth but also from increased tenant demand.

Local Housing Allowance Tenants

Score – 4/10

This HMO market often performs the worst in terms of overall price growth.

Remember for these matchup’s we have to consider certain truths, many of the LHA HMO’s are in areas of lower value as investors try to benefit from the highest yields (otherwise they would simply focus on the other HMO profiles).

Low value areas naturally have less growth than high or medium value areas through simple supply and demand.

When very little owner occupation occurs and the housing stock is owned primarily by landlords and housing associations then growth is naturally minimal.

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Match 4 – Ease of Management

One thing that puts many investors off HMO’s is the perceived level of management.

It’s true that generally they are more work than vanilla buy to lets, but thankfully not all HMO’s are created equal, so let’s see which profile comes out on top.

 

Social Housing Tenants

Score – 10/10

I was toying whether to give this one a 9 or 10 out of 10. Both are fantastic results and surely a 10/10 is only deserved in exceptional circumstances.

Well this is an exceptional circumstance.

This is the real beauty of this tenant profile when compared to any other HMO (or even any tenant) profile.

As the property is leased for a period of 3 or 5 years you simply hand over the keys to the organisation leasing the property and then collect the rent.

Simple. Efficient. True Hands Free.

Unlike with a letting agent where you are still called upon to make decisions on tenancy applications, maintenance issues and tenant issues, this is all dealt with during the full lease term by the head organisation leasing the property.

If hands-free is your aim then this is your strategy.

Student Tenants

Score – 7/10

When we did the cashflow figures for these strategies we factored in that all of them would be managed in some way with a letting agent.

With that in mind, ease of management should be a given as your not actively self managing the properties.

However its hard to rate them too highly as there will always be more happening in HMO’s (more tenants for a start) than when you compare them to straight forward vanilla buy to lets or the hands free social housing model above.

As the landlord, even with a letting agent in play, you’ll still likely get called upon to make decisions and will be involved in some way throughout the tenancy.

The difference is how much and to what level.

With students on longer AST’s and very often with healthy deposits and even parents as Guarantors, this market looks after itself pretty well with a letting agent in place, so ease of management is pretty good.

Working Tenants

Score – 6/10

Same assumptions as above, you have a letting agent in place.

But professional tenants are usually on 6 month AST’s and the potential for arrears and hands on tenant management are increased slightly as you often don’t have the same guarantor safety net.

This isn’t always the case but when compared to student lets the risks are slightly higher and management required potentially higher so I would score this one just below.

Local Housing Allowance Tenants

Score – 3/10

I don’t care what anyone says…

My personal experience (and that or many of my clients & colleagues) is that Local Housing Allowance tenants in HMO’s are probably the most management intensive tenant profile you will find.

It’s a tough market…

Even with a letting agent in place, the work for the agent is increased and the number of decisions they need answers on from you as the landlord is also increased.

This is a tough market and a hands off strategy this isn’t.

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Match 5 – Maintenance

property maintenanceThis is a hidden cost many investors and landlords ignore on their initial figures and due diligence on considering a property.

But it can mean the difference between a cash positive portfolio and a cash negative portfolio if not kept in line.

 

Social Housing Tenants

Score – 9/10

Again a very strong contender for 10/10, but no property is completely maintenance free.

As a landlord you will have maintenance costs as the fabric and finishings of the building age.

But in terms of tenant profile and it’s affect on maintenance this one is pretty damn good.

If you select the right Social Housing Agreement then they can come with maintenance covered and you don’t have to provide the property furnished.

For some of the properties we have under social housing contracts, they are covered for maintenance of up to £2,000 per item and £5,000 total cost per year.

This covers most things and insurance generally covers the rest, so for a landlord it’s very easy to budget with very little if anything coming out of your pocket for maintenance throughout the term of the lease.

Student Tenants

Score – 5/10

As many of these houses are provided furnished, Fair wear and tear on furnishings and decorative finishing’s throughout the property with a student tenant profile are higher than the average.

This increases your overall maintenance budget when compared to buy to let and with tenancies changing every year you may need to re-decorate regularly if you want to keep the property to it’s highest standard.

Professional Tenants

Score – 6/10

Similar to Student tenants, fair wear and tear on furnishings needs to be considered.

If you have a run of tenants and they stay in the property a while then your budget can be stretched for decoration till the next tenant changeover, but were looking at averages here, which is why in the cash flow examples above we considered similar maintenance budgets for both student and professionals.

Local Housing Allowance Tenants

Score – 5/10

Granted you don’t have to go to the same cost of expensive furnishings in an LHA property as you may in a high end student or professional HMO, but from personal experience our maintenance budget is always higher in these properties.

More so due to sporadic tenant damage that occurs in this market (and lower deposits that could cover it) you need to consider this extra cost on top of keeping up decorative finishing’s.

Again I know many landlords who don’t have these extra maintenance costs and who operate in this tenant market.

But often it’s because they don’t do regular decorative maintenance and they assume the tenants will still rent as they have limited options.

I believe that’s a risky game as your property is only likely going to go one way then.

If you don’t maintain and look after your own property, how can you expect a tenant to show pride in their home and look after it too.

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Match 6 – Exit Strategy

Another often over looked element when investing in property, but it’s so important it’s one of the first thing’s I actually talk to clients about when their considering investment properties.

This will look different for each investor, and HMO’s due to their very nature are going to be more limited on exits.

If you choose to sell, then your market will be other investors.

If you choose to re-finance then finance options maybe limited due to the commercial nature of HMOs.

So in this matchup were going to look at which tenant profile is the easiest to exit if you needed to, with a level playing field by assuming for each tenant option your exit strategy is…. to sell and to sell with the tenants in situ.

 

Social Housing Tenants

Score – 7/10

So we’ve established your potential exit is selling the property and selling with tenants in situ. With this in mind your buyers market will be solely investors.

Because of this Social Housing actually holds up pretty well for exit.

With investor buyers considering the same elements we’ve looked at above, focusing on returns, growth, location etc… social housing delivers on all of these accounts.

As well, as it is being leased for a number of years, it becomes very appealing for a buyer.

The length of the lease left would be a consideration for a buyer, but so would the length left on a tenants AST’s in a standard HMO, so I haven’t seen this as a stumbling block.

With the above in mind I’d score it a solid 7.

Student Tenants

Score – 8/10

Comparing the student market to social housing, the benefits are similar, although arguably (and as demonstrated above) the performance of social housing leases outweigh student lets.

Yet on exit I’ve scored Student tenants slightly higher.

Why?

For the sole reason of demand. Currently social housing is a newer market in the UK property scene and as such student housing is more commonly talked about and has a larger following of investor buyers.

So the maintstream buyer demand is higher currently for student lets.

I can personally see this changing in the not to distant future but currently, I’d pip student lets as slightly higher in the exit scoring.

(Note: there is one big caveat to this… for this casestudy were looking at student ‘houses’ not a new investment that has recently hit the market of ‘student pods’ these are very difficult to re-sell and I personally avoid these student pods).

Working Tenants

Score – 8/10

Very similar to student lets in this respect.

The overall benefits of social housing leases I believe outweigh the professional market, but due to current mainstream buyer demand, professional HMO’s score the same as student properties on the exit scale.

Local Housing Allowance Tenants

Score – 3/10

This is a tough market there’s no doubt about it when it comes to HMO’s.

It may seem like reading the above I’ve given the LHA HMO tenant profile a hard ride, but it’s purely based on what I am seeing in the current market and my own personal experience over the last 10 years of investing in property.

I’ve owned, managed and been hands on with LHA Houses of multiple occupation and they are a tough market.

The benefits with this HMO Strategy lie solely in the yield, buying in cheaper locations and being very hands on with the management to ensure the real returns get anywhere close to the on paper returns.

Because of this the potential for exit is very tough too.

The buyer pool for this HMO market is very limited and most of these properties we see being sold via auctions or specialist deal packagers when the time comes to exit.

Due to the limited re-sale potential this one rolls in at just 3/10.

Back to table of contents


The Round Up

ultimate hmo winner 2015 social housingSo now the matches and the season is over… which HMO tenant profile comes out the ultimate winner.

The Winner:      Social Housing H.M.O’s

Ultimate HMO tenant profile winner table

Back to table of contents


Conclusion

This case study has been developed based on my own personal experience of sourcing, purchasing, selling, owning and managing properties including Vanilla Buy to Let’s and Houses of Multiple Occupation over the last 10+ years.

Combined with input and experience from a number of large and small HMO investors that I have mentored as clients and worked with as colleagues.

I’ve tried to be un-biased, honest and realistic in my assessment of the HMO market and the scores are based on comparing HMO’s against each other… not against other property strategies like Flips, Vanilla buy to let’s, lease options etc….

The aim of this Ultimate Case study is to find which HMO tenant profile is best and to help you when it comes to choosing your next HMO property investment deal.

By breaking it down into key categories I hope you can use them to select what criteria is most important to you, your aims and your personal preferences.

Based purely on the scoring – Social Housing comes out the worthy winner.

Personally for me… this is the market I will be investing in over the coming years with my priorities focused on…

>   Cash in Bank (rental returns)

cash in the bank rental returnsThis way I can weather any market changes more easily, whether interest rates rise, prices drop or the housing market gets hit by a curve ball of legislation, this market gives me the best cash in bank returns from any of the rental strategies I have tried and continue to look at.

>   Ease of Management

I like simple. I like scaleable. I like to sleep at night comfortably and spend my days doing what I want to do, not managing tenants. This wins every time for me.

>   Maintenance

Every year I analyze my personal property portfolio. Without a doubt one of the biggest outgoings is maintenance and it’s so often forgotten when investors do their initial due diligence and consider their figures.

Reducing maintenance costs is an on-going battle for any portfolio landlord, and for me this strategy wins that war and passes that test with an A* every time.

As for the other categories…

>   Sourcing

I can live with sourcing being a little more difficult. Partially because I’m in a good position (in that’s what we do day in day out in our business) but also because it’s an easy problem to solve.

If we (me or you) are looking for our next property, but let’s say we didn’t have the time to find the property, find a social housing lease provider and get it refurbished, then it’s easy to buy ready to go HMO deals whenever you need, like these properties we have available right now.

>   Growth

hmo capital growthAs it scores strong in this category and the locations are good, I’m confident of growth and the exit is solid too.

So personally Social Housing is the clear winner for me when it comes to HMO’s.

Over To You

Now it’s over to you, which HMO tenant profile do you prefer? And will you be focusing on over the next 12 months?

Let me know in the comments below….

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8 Responses to “The Ultimate HMO Casestudy: Which HMO Strategy Gives The Best Returns?”

    • Robert Jones says:

      Hi William,

      At the end of 5 years (and usually a little before that end date) it would typically be a discussion with the lease provider to see if they wished to extend and if so to then agree on the terms and rents.

      From what we are seeing the majority of lease providers are looking for long term solutions so extension is preferred for many, but even if that didn’t happen then (depending on the lease provider and the terms of the lease) the property would usually be handed back to you vacant possession in the same condition it was originally taken on at the start of the lease

      Hope that helps

  1. Joe says:

    Hi Robert
    we were seroiusly considering Manchester for a Buy to let Student property, so started doing a search to see how viable this was and came across your website.
    This is certainly an eye opener as a first time invester.
    I never considered Socail Housing sounds like a good bet.
    Can you possibly shed a liitle more light on how tight in terms of locations we should aim for in terms of both Student , and Social lets. which towns are best suited.
    Do You have any freehold Houses for sale or can recommend.
    Kind Regards.
    joe.

    • Robert Jones says:

      Hi Joe thank you for your message and happy to help,

      What I would say is start with some key fundamentals like

      > Preferred location
      > Price range
      > Rental yield

      That you want to target and then fit the strategy around that.

      This will help you get started and if your looking for finance for example that will impact which strategies your thinking of doing too as some lenders will have certain criteria that you need to achieve that won’t work for every single strategy,

      For ready to go deals we have these available on the website too, so once you know your preference on the 3 property buying criteria above then take a look at https://www.propertyinvestmentsuk.co.uk/live-property-deals/ and there should be some ready to go cashflowing property deals that fit for your criteria,

      As we cover a range of strategies from Student lets through to HMO’s, Vanilla buy to let and even corporate let property deals.

      Hope that helps 🙂

      Rob

  2. wim strydom says:

    HI Rob,I am busy with a Richdad course in south Africa and saw your add it look like the same thing,If possible could you assist me in finding my first property in the UK
    Regards Wim

  3. Danny Chan says:

    Dear Rob :
    You’re quite convincing and would like to have further understandings as to what best suit my investment portfolio.
    Looking forward to see how our cooperation can move ahead and to know your fees, if any.

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