WHAT ARE HMOS AND WHY INVEST IN THEM?

We have been investing in HMOs in the wonderful city of Bristol since 2016 and in 2020 we opened an HMO letting agency. We did this because, we couldn’t find the service that we were looking for, in the current market. Everything was a compromise and, we didn’t believe that we should be paying good money and having to make compromises in the level of service that we received – that just didn’t compute for us. So, this was how our lettings agency, KPA Property Management was born; because we knew that if we felt this way, then there would be lots of landlords and investors who thought that way too and, as they say, the rest is history!

There are a few things that we get asked A LOT and, the one that we get asked repeatedly is, “what actually is an HMO?” So, let’s have a look at what they are and, why landlords and investors choose them as a property business model.

WHAT IS AN HMO?

HMO stands for a House in Multiple Occupation. The legal definition of an HMO is a house rented by 3 or more people from 2 or more households (I will overlook houses with lodgers for this article). A household is defined as either a family or a couple (married, unmarried, civil partnership).

3 tenants - A couple + 1 friend… HMO

4 tenants – 2 couples… HMO

5 tenants – Friends living together at Uni… HMO

HMOs can be rented in different ways too. Some are rented by the room (on single room contracts) whereas others are rented to an entire group (on a standard house contract with multiple tenants). Different rental methods have different implications for the landlord, for example, if you rent by the room you will need to pay council tax and it is very common that you will offer bills all rolled into the price.

WHO WOULD LIVE IN AN HMO?

Anybody! Although who might live in your HMO will depend on the type of property you are creating and the area it is in. Some HMOs are extremely high end (often labelled co-living) and positioned as a lifestyle choice for working professionals; other HMOs are “student digs” and are lived in by university students; others might be aimed at contractors/blue collar workers in the local area and of course, you have social housing properties rented to council tenants or social housing companies.

WHERE WOULD YOU HAVE AN HMO?

Near big employers, city centres and universities are great places for HMOs, as a quick and dirty metric you can look at the number of people who are looking in an area/postcode on Spareroom.co.uk to get a feel for demand, although this is not a perfect science it can be a good start.

Who would want to live in your HMO is a critical part of analysing a deal, but that is for another time!

Like all property models, there are places where HMOs work best and places where they don’t. It will usually come down to tenant demand, population density and local amenities. If there is sufficient demand and good transport links, an HMO will usually work.

WHY INVEST IN HMOS?

HMOs are one of the higher cash flowing property models, which make them attractive to investors. In fact, one HMO can yield as much as several single or family lets.

By taking a 3/4 bed family house, refurbing it and renting it to 5/6 individuals you can create more rental income from a single building. If you get it right, your HMO can return £1000£2000 net per month and be relatively stress or hassle free.

However, as with all the high cash flow models, they come with increased risk, increased costs and if you manage them yourself, they require more time than a standard family let.

When executed correctly, HMOs are a brilliant property model creating great returns and maximising a portfolio. When done badly, they can land you with £10,000s of fines, council investigations, armed police raids, personal threats, and very costly voids/arrears!

IN SUMMARY:

Rental yields for HMOs can be impressive and significantly higher than other property models. Demand is high in certain areas, with City rents being beyond the reach of many and tenants new to an area choosing co-living, as a way to make new friends and renting well into their thirties and beyond.

With this in mind, it’s easy to see why Property Investors choose HMOs, as there is a plentiful market for them, and they achieve good returns.

However, HMOs are stringently regulated and compliance heavy and they are certainly not easy money. Many Landlords find it hard to keep up to date with ever changing compliance and are constantly concerned about falling foul of regulations and getting into hot water with their local authority. If you are going to invest in them, then do your homework, have robust systems, choose your tenants carefully, fully reference them and manage the property diligently, from the outset and throughout.

We are extremely familiar with all aspects of HMOs, they are our bread and butter and if we can help in any way, then just give us a shout!