
HMO investing is an amazing investment strategy that we believe still has an important role to play in the UK property market, now and long into the future. Investing in HMOs can be hard work - there’ll certainly be sweat and tears along the way, and if you like to get hands on with the renovations then there’s a good chance of some blood as well!
But the rewards can also be phenomenal, whether you’re just looking for a little extra
income for a rainy day fund, or you want to replace a corporate salary and become your
own boss - the potential is there!
What exactly are HMOs?
HMOs (or Houses of Multiple Occupancy if you want to be proper about things), are residential properties where 3 or more unrelated people live together and share some facilities (a kitchen, a bathroom or both).
They are not exclusively houses - Flats can be classed as HMOs as well, as long as they meet the above criteria. They’re not just for students - HMOs cater to all diferent demographics (more on that later)
Depending on where you invest and the size of the property (the size of HMOs is usually determined by the number of occupants) you may need a licence to operate a HMO, you may need to apply for planning permission, or you may not require either.
Are all HMOs created equal?
When looking at the HMO market, we tend to talk about three categories based on their size:
Mini-HMOs - Often referred to simply as a Mini-MO, these are the smallest HMO properties with 3 or 4 individuals sharing facilities.
They form their own category mainly due to licensing requirements - in England & Wales HMO become licensable when there are 5 or more people sharing facilities (with the exception of areas where Additional Licensing has been introduced). As a result, they are the easiest type of HMO to create.
They usually require the least modification to a property, don’t require planning permission (outside of Article 4 Areas), and give investors several options to exit the market should their plans or the market change - selling it as a going-concern, converting it to a single let, or
selling it as a family home.
Due to their size, they’re obviously going to be at the lower end of the profitability scale, but minimum monthly net profits of £500 should be aimed for, and increasing this in excess of £800 is achievable. We aim for £800 - £1000 profit on our Mini-Mo's and achieve this in certain areas.
Despite a lot of investors dismissing these as ‘not-profitable’, we certainly dont agree and wouldn’t turn our nose up at a £500 monthly pay rise in a day job, and look at this size of HMO equally favourably.
Large-HMOs - This next category of HMOs can vary in size depending on who you speak to. It’s widely accepted that 5 occupants is the minimum size for a large HMO as this is the point at which Mandatory Licensing comes into effect, but the upper limit can vary.
For our purposes we keep this category very specific, only referring to 5 and 6 bedroom HMOs, as when you get to 7 or more occupants the Use Class of the property will change and a full planning application will be required to create a HMO of this size.
They’re probably the most common size of HMO that you’ll find today as they’re still easy to create from a typical residential property in most areas of the UK, and maximise profit potential whilst avoid the added complexity that a planning application can introduce.
Due to their popularity, it can be a competitive area of the market to operate in, so focus needs to be put on finding the right property in the right area for your target demographic, and creating a quality product in line with their expectations and desires.
Despite the popularity, profits in excess of £1,000 per month should be achievable, with examples of properties achieving double this not hard to find.
Mega-HMOs - unlike Mini-MOs and Large-HMOs, this is a bit of acatch all category for all HMOs with 7 or more occupants. Our preference however is to restrict them at the upper end to around 10-12 occupants.We find this size of property to be a real sweet spot for both the investor and the tenant.
For the occupants in a Mega-HMO they will most likely be living in a significantly larger period property, or a conversion from a commercial building like a pub or office. As a result, room sizes are typically larger and more space can be given over to communal areas (essentials like kitchens and bathrooms, as well as extras like sociable lounge spaces,
laundry rooms, cinema rooms and so on). In additional to this, we also notice social benefits in these Mega-HMOs with fewer disputes between tenants (for example, in a larger group
one ‘bad-egg’ doesn’t create a negative environment in the same way they would in a smaller house), more planned interaction between then, and longer tenancy durations as a result.
From the investor’s perspective, the step up in size means higher profits again, and in some cases additional positives like Commercial Valuations. Despite the additional work that a planning application will introduce on these projects, monthly profits in excess of £2,000 make them worthwhile.
Are there really that many students in the UK?
We alluded earlier to the common misconception that HMOs are only for students. The fact is that the number of demographics who view shared-living as a desirable solution is growing, and within those demographics the number of individuals considering this option is also growing - in a lot of cases that number is growing rapidly!
Let’s take a look at some of the most common demographics targeted by HMO investors:
Students - Without doubt these are one of the biggest markets within the world of HMO investing. Most UK students will move into University halls in their first year, before making a move with a group of friends into a shared house for their 2nd and 3rd years. Low end properties reminiscent of ‘The Young Ones’ still exist, but thankfully these are becoming the exception rather than the rule. With expectations set early now by new-build student halls, this demographic expect comfortable, modern accommodation, with all the bells and whistles.
The market is competitive but easy to find (just look for the nearest university), and with student numbers continuing to rise there will be a steady demand here for years to come.
Young Professionals - The ‘other’ HMO demographic is quickly catching up with the student market, driven in large part by newly graduated students moving to a new city for work and seeking out a way of living that they’re already used to. The benefits include convenience (all bills included, fully furnished, felxible terms) and an instant social circle.
This is the market we focus most of our efforts on, and unlike the student market it can work virtually anywhere in the UK where there’s a reasonable sized town.
Graduates are great, but our definition of ‘young professional’ includes anyone in full time employment, usually between the ages of 21-30, of which there are plenty!
Local Housing Allowance - Often a scary term to new landlords, local housing allowance tenants are in receipt of housing benefits, meaning their local authority contributes some or all of the rent they pay.
Despite the negative connotations, this is an active market with all single claimants under 35 only qualifying for the ‘shared accommodation rate’. The rents will be lower, but so is the investment required and often these tenants will stay significantly longer than other demographics.
Charities & Local Authorities - If you like the idea of providing accommodation to vulnerable people or those requiring income support, but you don’t want the additional effort often required when renting to these demographics, then often you will find local charities or even your local authority are willing to rent entire HMO properties from you for a fixed term (5 years is common) whilst guaranteeing the rent and the condition that they return the property to you in at the end of the term.
This can be a great way of giving yourself some assurances about your income and expenditure, removing the challenges associated with managing an HMO, and introducing an element of ‘giving back’ by providing accommodation for an often underserved sector of the market.
Other Demographics - Aside from these most common markets, there is growing demand from virtually every sector and finding an in demand niche in your area can be a great alternative to competing with the masses.
Some simple options include:
Rooms for couples - not normally a good idea to introduce into a house of single occupancy rooms, couples can struggle to find rooms, but a house designed with couples in mind can work very well.
Monday to Friday Professionals - typically slightly older than young professionals, there are large numbers of ‘Monday-Friday commuters’ who live in one part of the country and travel to another during the week for work. Rather than the expense of a hotel or the solitude of a
one bedroom apartment, rooms in an HMO are a popular alternative. Divorcees - not a situation we want to hope for, but we commonly get requests from divorcees who have to leave their family home, have a limited budget but want to remain close to their children. This will usually be a shorter term solution whilst permanent arrangements are made, but there’s certainly demand. Retirees - this is another market we get a lot of interest from but can’t accommodate in our existing houses. Usually single, they’re looking for an alternative to living alone whilst keeping their independence.
One important belief we have is that houses should be tailored to a target demographic. Each will have different needs and preferences, and it’s preferable for tenants to live with others in a similar situation to them. This creates a great opportunity to provide bespoke living for your target market, whether it’s a specific age group, requirement (e.g. adapted living), or belief system (e.g. all female houses).
Some Common Questions & Misconceptions
Now that you’ve got a better idea of what exactly an HMO is and the type of housemates you might want to focus on, we thought we should answer some of the other questions we get asked all the time.
Why would anyone want to live in an HMO?
The traditional view of HMOs is that they’re the only option for people who can’t aford to buy or rent on their own. We wanted to start with this question as it’s so important that you understand the value that HMOs provide, rather than thinking of them as a last resort.
That may be the case for some demographics in certain circumstances, but is certainly not part of our customer’s decision process. The 3 main reasons we see people looking to stay in one of our houses are as follows:
Convenience - this is a huge factor for most of our housemates. Often they are moving to an area for the first time and a) don’t know exactly where they want to live, b) don’t know how long they’re staying, or c) don’t know who they want to live with.
An HMO allows them to move into a fully furnished house (right down to the crockery and cutlery in the kitchen) with no more than a suitcase of their clothes. Their rent is all inclusive, meaning that they don’t need to wait for 3 weeks for a WiFi connection to be set up, or sign up to an 18 month contract for Sky TV. They can move in extremely quickly (sometimes within 24 hours of viewing) and also move out a lot easier than moving into a single-let (our tenancy term is 6 months). Sociability - it turns out that living on your own isn’t all that fun, particularly if you’re new to an area and haven’t established a friendship group yet.
The idea of renting a small house or 1 bedroom apartment is really off putting for a lot of our target demographic as the reality is they’d have very little interaction from arriving home in the evening to leaving for work the next morning.
Living in an HMO gives them instant companionship, and whilst we don’t pretend that every housemate will meet their BFF whilst living in one of our houses, at least they have someone to talk to whilst they prepare dinner or watch TV.
Quality - The reason we hear a lot is that our houses offer a much higher standard of accommodation than they would be able to afford if they rented on their own.
Note that we’re not saying our houses are always a cheaper option, as that’s not the case, but in terms of value for money we’re hard to beat.
Our average room price is around £500-£550 per month. You could rent a 1 bedroom apartment for that, or get close to a small house as well, but as our rents are all inclusive (meaning things like utilities, WiFi, and even a cleaner are included) we’re usually cheaper.
Not only that though, the typical 1 bedroom apartment or small house at the bottom of the market is an unloved magnolia box with no furniture and no character. Each of our houses offers a high-end, design focussed product to our housemates, in addition to being better value!
Isn’t the market already saturated?
We can’t deny that there is a growing number of HMOs across most areas of the UK, but that’s only one side of the story. At the same time (like we mentioned before), the number of people who are looking at this as a viable way to live is increasing rapidly as well. In a lot of cases, the number of new ‘customers’ is increasing quicker than the number of new ‘suppliers’. The other thing that we consider is that not all competition is created equally. A lot of the market is outdated and unloved (or even if newly renovated, it’s often done to a poor standard) causing no real concern to the investors who are creating a quality product, designed with their target demographic in mind.
Ultimately competition exists in every market, and how we deal with that competition dictates our success (or lack of ). We continue to invest heavily in expanding our HMO portfolio and will continue to for the foreseeable future.
Are they expensive to invest in? I’m not sure if I can aord it…
There’s no getting away from the fact that HMOs are a relatively cash intensive investment option. As a minimum we’re probably looking at a minimum requirement of £50,000 to get started.
To some of you that will seem like an insurmountable obstacle, and to others you’ll be in a position to invest significantly more than that. Let’s explain how we get to that number though.
With a few exceptions, the minimum you’ll need to spend in most areas of the UK to buy a reasonably sized 2-3 bedroom house suitable for converting into an HMO is £100,000. Obviously it could be a lot more than this in some areas, but the point is you could find a property at this price level. With a 25% deposit required to buy it as an investor, you’ll need £25,000.
Converting the house into an HMO has a few essential steps as well. In addition to some cosmetic improvement, you’ll likely need to reconfigure the layout to suit HMO living (perhaps split a room in two, or combine two rooms into one; create an additional bathroom etc), and comply with things like re safety requirements. By the time you add in legal fees, mortgage fees etc, you’ll be lucky to have change from your remaining £25,000.
Of course it can be done cheaper than this - Rent to Rent for instance could enable you to ‘control’ property without owning it, and renovations can be done on a budget. But to own your own property that will stand the test of time (and stand up to the competition), we
suggest £50,000 as a minimum. If you’re not in a position where you’ve got this amount of cash sitting in the bank (and let’s be honest, who is?!) it doesn’t mean it’s game over.
HMOs can provide a massive boost. Our net profit on our smallest house is £600 per month. That’s a 20% pay rise on the average UK salary! Our average net profit is in excess of £1,000 per month though, and our biggest houses generate over £2,000 net profit per month. So yes, the rewards are definitely worth it.
Whether you want to build a portfolio of HMOs and become a full time investor, or your goals are along different lines, HMOs can help you get there.
Comentarios