FINDING AND FUNDING AN HMO

One of the biggest challenges most investors face is a lack of quality deals, so it is important to know what you are looking for when it comes to investing in HMOs and where you should be looking for it. Once you know this, you can then decide if it is going to be a good investment… or not!

LET’S START WITH WHERE TO LOOK:

It’s important to note that there are always exceptions to the rule – we have some very profitable HMOs in areas that we were advised wouldn’t work. Remember that each area is different, and we highly suggest spending time meeting & learning from HMO investors in your area as to what works and what doesn’t.

When looking for HMOs, it is important to focus on what type of HMO you are looking to create, as different areas suit different Tenant Types. Some obvious examples include putting a student HMO a long way away from a university or a working professional HMO in a tiny village with little employment.

With this in mind, we then go back to property fundamentals and appropriately balance the seesaw of:

• Tenant Demand

• Local amenities

• Local employers

• Transport Links

• HMO Feasibility

• Property Prices

• Property Layouts/Characteristics

• HMO Saturation in the area

In our experience, while none of the above should be neglected, tenant demand is the most important factor. If you are going to have large voids with your HMO, it is not going to be a good investment.

There are different ways to test this: speak with local agents and talk through similar properties that they manage; look on Spareroom at rooms wanted vs rooms available in the desired area; speak with other investors and ask how they are finding the market; join & track the local Rooms/Houses for rent Facebook Groups in your area and track properties on Rightmove/Zoopla to see when they are posted and when they become let agreed over several months. There are lots of creative ways to test demand and the list above is not exhaustive!

WHAT ARE YOU LOOKING FOR?

Once you know where you are going to look, the next step is what type of properties in that area will make good HMOs.

The key factors here are going to be:

• The number of rooms you can create

• The layout of the building as it is

• Can you extend into the loft

• Can you extend out the back or on the side

• Waste pipes & soil stacks that are already in place

A new HMO investor may wish to stay below the Sui Generis Planning threshold and go for a 4-6 person HMO, as planning permission provides another layer of risk. Generally, 6 person HMOs are more profitable than 4 person ones.

When looking at number of rooms remember that although the minimum size of a room is 6.51sqm, this is very small. So, we would suggest making sure all rooms are doubles and ideally over 8sqm as a minimum. Whether to go for all en-suite rooms is another topic all together – often with divided opinion. Our thoughts are that this is market and area dependent. Communal spaces are also very important, do not neglect them, as tenants who feel part of a community will be happier and increasing your tenant retention.

When you know where you are looking and what you are looking for, you can create your “cookie-cutter” – aiming to find a property type, in a certain area, that you know works, so you can rinse and repeat.

FINANCE & FUNDING:

After you’ve bought and refurbed your HMO, you are going to want to re-finance it.

Traditional financing of an HMO is very similar to a standard buy to let, you are valuing the property based upon its bricks & mortar value and are able to re-mortgage after you have added value through renovation, to release some/all of your invested capital. This is the classic BRR model.

What makes HMOs different to standard BTLs is that with the larger properties (7+ person HMOs) you can value them commercially via a yield multiplier on the income they create. A select group of lenders will also allow you to do this with smaller HMOs but you have to jump through many hoops to achieve this.

This is what makes HMO investments very appealing because you can value them beyond their bricks valuation, leveraging them higher and releasing more capital after re-finance.

It’s important to add here, that anytime you increase leverage, you increase risk, especially when going above the bricks’ value, so this is not something to jump into without careful consideration and detailed analysis.

To learn your area’s yield multiplier, you need to speak with a commercial surveyor and to understand what lending is available to you, you need a good mortgage broker – both are vital parts of the jigsaw if this is the route you would like to take.

Now you know where you are looking, what type of property to look for and your options upon re-finance you should be able to start looking for HMOs. When it comes to sourcing methods, more is always better than less: agents, networking, HMO database, auctions, flyers, direct to vendor campaigns etc. etc. the more shots you take at goal the higher your chance of scoring!