What Do You Need For HMO Property Investment?
How to create a property portfolio
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HMO property investment has the potential to return much greater rental yield than a single occupancy residence. It also enables you to spread risk. If your tenant moves out of a single occupancy residence, that property will not return any yield until you find a new tenant. Even if two of your 5 residents in an HMO leave, you will still generate some rent from the remainder of your tenants. You should also be aiming for a yield of at least 12% to 15% with an HMO, compared to that of 8% to 10% with a single occupancy property.
While there is great potential in an HMO, there are certain obstacles that you need to overcome, and you will need to possess or appropriate certain skills to ensure that your investment is a success. If you don’t have a head for figures, you can pay a professional HMO investment company, but be aware that this will cut into your profits so account for these additional costs when calculating whether this form of property investment is right for you.
Before you even begin to look for the right property, you need to conduct research to find the right area, and even the right neighbourhood. You need to determine whether there is demand from your target market within a particular location, and you also need to research any legal requirements and local council requirements. While some local councils may allow the conversion of 3 storey properties into 7 tenant HMOs, others will require that you seek permission first.
Do as much research as possible, and ensure that your research is highly targeted. Rental returns not only vary from one town to another, but there can be great disparity between the returns available in different neighbourhoods and even from one end of a road to the other.
Any real estate investment requires capital investment, and you should try to have a sizeable contingency fund available in case of any major problems. Unless you are buying an existing HMO, it is likely that you will need an even greater investment pot for this type of investment. The greatest yields tend to be experienced by those landlords that buy older properties, fix them up, and convert them into an HMO. This refurbishment and conversion process not only requires extra capital, but it can make getting a mortgage on the property more challenging.
Most lenders will not offer a mortgage on the property value until the refurbishment has been completed, but there are alternative funding options available. Bridging loans may be a viable alternative, while some lenders offer specialist products that loan you the money at a higher rate, until the refurbishment is completed, and once the work is done, the loan converts to a mortgage on more favourable rates. Shop around, get an agreement in principle in place before proceeding, and ensure that you choose the option that realistically provides the best capital funding requirements.
Obviously, you need a property in order to get into HMO investment. If you are converting a property you already own, do your research into the target tenants that typically rent in the area, check with your own local council for HMO property requirements, and don’t accept lower rent just because you don’t have to meet mortgage repayments. It may make more sense to sell the existing property, and buy one that is in a more favourable area or neighbourhood.
Alternatively, conduct due diligence, ensure that you thoroughly research all factors involved in HMO investment in a particular region, and then choose the property that best meets your needs. Consider whether you want to buy a rundown property, which gives you the opportunity to create exactly the property you want, or something that is a little closer to the finished item, requiring less investment and time before it is in a rentable state.
Becoming a landlord requires time, unless you use a rental agency to complete all of the work on your property portfolio. If you are a hands-on type investor, then you will need even more time to manage an HMO investment. Not only do you need to take time to research and plan, but you will need a lot of time on an ongoing basis.
One property will require that you find, reference check, and validate 5 tenants. You will need to manage the rental payments, disputes, and even the repairs and problems that those tenants have. You may want to clean communal areas yourself, and assuming that you want to create a portfolio of HMO properties, you will need to do all of this while you conduct more research and find more properties. Doing the work yourself is time consuming, and this is why a lot of people use rental agencies and professional HMO investment companies to assist in their portfolio management.
A Head For Figures
You need a good head for figures, or at least be capable of managing and maintaining an ongoing spreadsheet of your costs and returns. If you don’t manage finances carefully, you will soon find that your 15% rental yield is actually more like 10% and HMO investment is not the profitable venture that you first envisaged.
In general, you need to be incredibly organised. References need to be checked, deposits placed in deposit schemes, and annual safety checks conducted. You need to stay on top of rental arrears that will inevitably crop up, and you need to proactively manage any problems or issues that your tenants might face while in your property.
Thinking Outside The Box
The best investors tend to be those that think outside the box and do things a little differently. If you follow exactly the same investment plan as other landlords in your area, you will have a lot of competition for your rooms, and this will deplete the rental yield that you could potentially generate.
Thinking outside the box means that you will be able to determine whether converting the loft or garage will prove profitable. It will enable you to take a chance by converting the spare room into a second bathroom rather than cramming an extra tenant in, who may or may not end up being unhappy with their room.
Whether you need help with the financial aspect of managing an HMO, you want assistance in finding the best opportunities, or you want a reliable company to manage the refurbishment and conversion of a single occupancy property to a multi-occupancy one, OpenHousePropertyInvestment.co.uk can provide the services that you need to help improve your chances of successful HMO investment.
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