What is a HMO and why should you consider it?
What is a HMO and why should you consider it?
A HMO is a house in multiple occupation. This means that one has or one dwelling is then split into smaller dwellings or let out as rooms within a shared house. Other names for HMO’s include shared houses, bedsits and student lets and its important to note that there are various different types of HMO’s that exist in different spaces throughout the UK.
For example, in a student area you might find that you get very student populated HMO’s and in London in some specific postcodes, people choose to live in HMO’s because they are well located. In the more northern area, HMO’s are classed as a more affordable marketplace. So, the type of HMO really can vary depending on the area. Under the normal classification for an HMO you can have up to six people living in one house. This is classed as a C-4 property. If you go above six people, then you change everything, and you become a sui generis HMO.
So overall, a HMO is a house that has been split into different rooms with individual rents. Generally speaking, a HMO will have shared kitchens and shared bathrooms although you can get en-suite HMO’s.
Why might you consider this strategy?
This is a great strategy to consider and there are many reasons why. Firstly, there is a great need for affordable housing in all markets. Now just because its affordable this doesn’t mean that it has to be rubbish and cheap, affordable can be really nice but affordable within its marketplace and HMO’s are a solution to that problem. HMO’s are also popular for people who are living more transient lifestyles which is happening more and more in today’s market.
People tend to move around more today so it provides people with the opportunity to move in and move out because generally HMO’s are quite easy terms as in most cases the landlords will retain the bills. Therefore, the tenant doesn’t have to sort out and organise that side of things. This strategy is also a great one for simplicity, because generally HMO’s come with one affordable bill every single month. So, when it comes to why you might want to do this strategy, its because they are really well sought after as residential properties.
Also, as a strategy, it is fairly easy to access and it is good for first timers in the property business and it’s something that doesn’t take too much energy and you don’t need to know too much technical information particularly if you have six occupants or less.
Another point to mention is that HMO’s provide great returns. Because instead of letting the whole house out to just one family for £500 a month. If you let to six individual people you may be getting £2000 a month. Now although you will have some bills to pay out of this, you are adding the rental value back into the property and through adding rental value back into the property it starts becoming more of an interesting proposal to either investors or even to yourself as for a buy to let.
Who is this strategy for?
This strategy is great for either someone looking to get started in property or take that next step from beyond buy to let. Furthermore, it’s a great strategy for those of you wanting to work in areas of great population where there is a real need for housing. The HMO strategy is fairly easy to implement and turn around within a quick period of time. This strategy also allows for various different exit solutions. For example, it may be that you want to retain the property to benefit from a higher rate of income or maybe you want to sell to an investor.
This strategy is also something that you can consider if you have no funds as long as you can attract the right investment which means you are looking for great yields and great returns. This is also the kind of model that you can operate while working full time, therefore you don’t have to be incredibly time rich to do this model. But something to consider is that the more time you do put into this, the quicker you will get there.
Where should I implement this strategy?
There are various different elements that may impact where you choose to do this model. Although it is a model that you can potentially say you can do anywhere in the UK. You will realise over time that you need to be cautious to the areas where you can effectively employ this model because you need to ensure there is the need for affordable housing. For example, in a small village there is most likely no need for an HMO. This is a strategy that is generally restricted to areas where there is a greater population such as cities and big towns. HMO’s are also most effective when they are near things such as local amenities, shops, and transport links.
You also need to consider who your end user is going to be. Are you going to be renting to students near a university or to nurses and doctors near a hospital? When it comes to this model it takes a lot of due diligence to find the right areas and the places that your HMO will do well.
Something to also consider is that if you are going to be selling your HMO to investors then you need to be even more diligent when choosing the location as these investors will be buying on yield. HMO’s generally get valued commercially, this means that the whole income is taken, and they then base of that income how much the property is worth. Its important to note that if you are looking to add value that the commercial value is much higher than the bricks and mortar value and I mention this because there are areas in the UK where the commercial value is actually lower than the brick and mortar value.
When should I implement this model?
This strategy is partially about the development of the property but then it heavily relies on the management of the property. This can be yourself or through somebody else. If you feel passionate about tenants, then this is a great model for you as it allows you to stand out from the crowd, look after and prioritise your tenants. A great time to implement this strategy may be when you want to expand your knowledge and move from just a buy-to-let space. However, it is also great if you are just starting out in the property space as you can get bigger profits quicker.