Latest / The Property Unleashed Podcast / Unlocking the Profit Potential of HMOs

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Unlocking the Profit Potential of HMOs · The Property Unleashed Podcast

• 0:00
  Speaker 1: How to get the most out of your property investing assets.
• 0:03
  Speaker 1: Getting the most out of your property investing assets is vital for your property investing success.
• 0:20
  Speaker 1: And how do we do that?
• 0:21
  Speaker 1: Well, we make sure that we use the right types of properties.
• 0:26
  Speaker 1: One of those, of course, is HMOs houses of multiple occupation.
• 0:31
  Speaker 1: Now, how is an HMO different to a normal buy-to-let property?
• 0:35
  Speaker 1: So from the outside, all houses pretty much look the same and what you have is, when people buy a property, they potentially and in the old ways used to just do buy-to-lets with those properties.
• 0:48
  Speaker 1: They would let them out to a family for one rental fee.
• 0:52
  Speaker 1: Houses of multiple occupation mean that you can have different bedrooms in the property.
• 0:56
  Speaker 1: You rent the bedrooms out and people share the communal areas, maybe a communal bathroom as well, and it can be highly profitable for the landlords.
• 1:05
  Speaker 1: Now, what is the benefits of this?
• 1:07
  Speaker 1: Well, if you were to buy a property for around £200,000, you would be putting in a 25% deposit, you would have your fees and everything like that, and you might be making profit-wise gross profit £1,200 from that property in rental income.
• 1:23
  Speaker 1: Now, once you've taken the mortgage off of that property, you've taken the insurance and potentially a management fee, you may only be left with £100, a couple of £100.
• 1:33
  Speaker 1: And, of course, interest rates in 2024 have made it very, very difficult for buy-to-let single-let properties to work and for you to be able to maximize profits.
• 1:44
  Speaker 1: Now, if you were to take that same property and pay £200,000 for it, but you were able to put a little bit more money into it and make it into an HMO, so you are able to go through your HMO specific details, like adding fire doors, making sure that it's got smoke detectors, interlinking smoke detectors it reaches and hits all the requirements that your local council puts out there.
• 2:11
  Speaker 1: You could then let it out on a room by room basis.
• 2:15
  Speaker 1: You could take a three or a four bed property and potentially convert that into a five or six bed property If you've got reception rooms downstairs, so some properties.
• 2:26
  Speaker 1: When you arrive to them they'll have a living room, they'll have a dining room and then they'll have a kitchen, but one of those rooms at least could become another bedroom, but done professionally.
• 2:37
  Speaker 1: We don't just want to be doing it the old fashioned way of taking a reception room and throwing a bed into it.
• 2:42
  Speaker 1: That is no good for anybody.
• 2:44
  Speaker 1: We want to make sure that we are spending a bit of money doing this.
• 2:47
  Speaker 1: And why is it good to do this?
• 2:49
  Speaker 1: Well, it's good to do this to maximize your profits.
• 2:52
  Speaker 1: So if we took the same property, okay, and we bought it and we had six bedrooms all paying us rather than £1,200, one flat rent each and every month, rather than £1,200, one flat rent each and every month, maybe £550 per room, If we have six of those, then we would have a gross profit coming in of £3,300.
• 3:13
  Speaker 1: Now you will have voids, because, well, you will have in with anything, but you will have voids.
• 3:18
  Speaker 1: You will have tenants coming and going, whether you have students, whether you have young professionals, professionals working tenants and go, and whether you have students, whether you have young professionals, professionals working tenants, whether you even have social housing in that aspects as well, at some point you will probably have some voids there.
• 3:34
  Speaker 1: Now, social housing is a bit different if you enter into a contract with them, but we're talking about just renting out to your everyday people on the street, so to speak, so you'd have some voids there.
• 3:39
  Speaker 1: Always factor in that 10% for voids.
• 3:40
  Speaker 1: You would have your mortgage costs as well.
• 3:41
  Speaker 1: So you'd have some voids there.
• 3:42
  Speaker 1: Always factor in that 10% for voids.
• 3:44
  Speaker 1: You would have your mortgage costs as well.
• 3:46
  Speaker 1: So you'd have to work out your mortgage costs.
• 3:48
  Speaker 1: So let's say your mortgage costs here were going to be about £750.
• 3:52
  Speaker 1: Okay, so you've got that coming off.
• 3:54
  Speaker 1: You've got 10% voids coming off.
• 3:56
  Speaker 1: And let's just say, for the bills, because it's an HMO, we would pay the bills, whereas as a single buy to let you wouldn't pay the bills.
• 4:04
  Speaker 1: Obviously the tenants would pay the bills.
• 4:06
  Speaker 1: Let's say, £900 for your council tax, your gas, your electric, your water, your Wi-Fi, all of those things.
• 4:15
  Speaker 1: Potential cleaners will go in there and clean the communal areas as well.
• 4:18
  Speaker 1: Take that off and then we're not going to manage it as well, because we're professional property investors.
• 4:24
  Speaker 1: We will get a management company coming in, which is another 10% potentially as well.
• 4:28
  Speaker 1: So that could be another £356.
• 4:31
  Speaker 1: That is about £2,006 worth of costs.
• 4:37
  Speaker 1: Going through all of this, we would still be left with a profit of about £960-odd, nearly £1,000 per month from this one property.
• 4:49
  Speaker 1: The buy-to-let property maybe makes us £100, £200 once we've taken off the mortgage, once we've taken off the running costs and everything like the management and, of course, insurance.
• 4:59
  Speaker 1: But with an HMO, even after all the costs, you can still make a thousand pounds or just under a thousand pounds per calendar month.
• 5:08
  Speaker 1: This is why it's a phenomenal strategy to do Okay.
• 5:13
  Speaker 1: Some of the cons of doing HMOs is you will have more churn with people staying, because most people stay on a six-month contract, a six-month AST contract.
• 5:24
  Speaker 1: When you have a single buy-to-let, they normally stay for 12 months, so you will have more people moving around.
• 5:31
  Speaker 1: The reason I actually quite like the fact that we have HMOs and I use HMOs and do HMOs is because you normally won't have unless it's students all of the tenants leave at once.
• 5:44
  Speaker 1: You may have one room empty that you've got to start filling, and then, maybe a couple of months later, somebody else moves on, because if you've got six tenants there and one's moved out and you've got to find a new tenant, you've still got another five tenants that are paying A single let property one tenant in there.
• 6:00
  Speaker 1: Once they're not there, there's nobody there to be paying you any rent, so you could have two months, maybe three months, voids of nothing coming through whatsoever, whereas with an HMO, you've still got tenants in the property paying you month on month rent.
• 6:16
  Speaker 1: Another thing that you need to be mindful of, though, is you will have more wear and tear on the house with five or six people and, of course, hmos can be four bed, five bed, six bed, seven bed.
• 6:27
  Speaker 1: You can go up to 20 beds if you want and beyond, but you will have more people going through the properties.
• 6:33
  Speaker 1: So it's very important to make sure that you make them as robust as possible, make them as comfortable as possible and be at a higher end of the market.
• 6:42
  Speaker 1: So if you're not sure what an HMO looks like, then go and visit spareroomcouk Type in your area, wherever you're based, and then go through the listings, have a little look at the rooms, have a little look at the standards and have a little look at the rents that people are advertising their rooms for as well, and you can start to gauge how much you would be able to make on an HMO.
• 7:08
  Speaker 1: Equally to that, if you go on Open Rent, you go on Zoopla or even Rightmove, you can look at People trying to rent out the whole properties, seeing what the rents are there.
• 7:20
  Speaker 1: But gauge it as to say, if you had a mortgage on the property, how much would you actually make?
• 7:25
  Speaker 1: So they can be very, very profitable in those aspects If you've got a good management company in there as well, managing the tenants, putting them in there, making sure that your tenants are looked after, that they're treated like customers because they are then you are onto a winner.
• 7:41
  Speaker 1: Some people try and manage them themselves as well, which is okay, but I would say when you get to about a handful of HMOs maybe up to about five you will start needing some help.
• 7:52
  Speaker 1: Now you can get help with the potential of virtual assistants, who can do all of the tenant management for you, in the sense of you're advertising your properties and things like that.
• 8:01
  Speaker 1: But if you want to stay and be a savvy investor you've got no intentions of ever wanting to manage the properties yourself then just get a management agent in there and focus on the things that you're good at.
• 8:12
  Speaker 1: Now you can use different strategies to acquire HMO properties.
• 8:16
  Speaker 1: You don't necessarily just have to buy them.
• 8:18
  Speaker 1: You can do rent to rent rent to HMO, which is a great little strategy to use, which I've used many a times to build up my portfolio, and, of course, you don't have to pay massive deposits.
• 8:28
  Speaker 1: You look for pre-existing HMOs, you take them on and, of course, most of the work's already been done for you.
• 8:35
  Speaker 1: You can look to get creative as well, doing purchase, lease options, which is very much like a rent to rent, which is where you take the property on as if you own it yourself.
• 8:45
  Speaker 1: You pay somebody a lease fee for the property, but on rent to rent, you have to give it back after the five-year term.
• 8:52
  Speaker 1: With a purchase lease option, you would lock in when you are going to buy it.
• 8:56
  Speaker 1: You would lock a price in now and you would buy it in potentially three to five years time as well.
• 9:00
  Speaker 1: So that's a great little tool to use as well.
• 9:03
  Speaker 1: You can get creative, you can use joint ventures, you can do all sorts of different ways and we've got a lot of episodes here which will share with you how to get creative, how to do creative deals as well.
• 9:15
  Speaker 1: But I'm just focusing on why you really want to be looking at HMOs to get yourself going.
• 9:20
  Speaker 1: A lot of people get started in property for cash flow, so they're looking at high cash flowing strategies like HMOs or serviced accommodation, short-term rentals, holiday lets.
• 9:32
  Speaker 1: I would say personally myself, because I do both HMOs is easier than serviced accommodation.
• 9:36
  Speaker 1: Some people like the thought of serviced accommodation because they don like the thought of serviced accommodation because they don't have tenants but they have churn.
• 9:43
  Speaker 1: They have people come in and stay in a few nights here or there and you never really know the cashflow that you're gonna get month on month until you're set up and you're doing it, whereas HMOs I always like because as soon as I've got all my rooms filled my six beds are filled I know exactly what I've got coming through.
• 10:02
  Speaker 1: I know my month-on-month cash flow is.
• 10:03
  Speaker 1: You might say, oh, what happens if somebody stops paying?
• 10:06
  Speaker 1: Well, in that matter, you've got to make sure that you're doing good reference checks or your management company are, and everybody has a personal guarantee.
• 10:15
  Speaker 1: So if they stop paying or they're causing trouble, you can go over to the personal guarantor of theirs and say you've signed to say that they are going to pay their rent or they're going to behave themselves.
• 10:27
  Speaker 1: We will now come after you for any costs incurred.
• 10:31
  Speaker 1: Make sure you set yourself up for success.
• 10:33
  Speaker 1: Everything you do has pros and cons.
• 10:35
  Speaker 1: Everything you do potentially that's high cash flowing will require more work.
• 10:39
  Speaker 1: So appreciate the fact that this isn cash flowing will require more work.
• 10:41
  Speaker 1: So appreciate the fact that this isn't going to be particularly easy.
• 10:44
  Speaker 1: It's not hard to do, but there is more work required than just a vanilla buy to let With the interest rates the way they are, it is very, very difficult in most areas of the UK now to get buy to lets to work.
• 10:56
  Speaker 1: Some areas it still does work very, very well.
• 10:59
  Speaker 1: But you can do HMOs with social housing charities as well, and the social housing charities will take the property on, maybe for a few years.
• 11:09
  Speaker 1: They will put their own people in through the properties, they will look after the properties and that is really a great passive way to have HMO properties and you can be very, very successful in doing so.
• 11:21
  Speaker 1: And the sweet spot to that is you can also feel good about yourself because you're helping potentially vulnerable people or people that wouldn't have anywhere else to live.
• 11:30
  Speaker 1: You are creating homes for people.
• 11:33
  Speaker 1: So that is what it's all about for us.
• 11:35
  Speaker 1: It's about solving problems.
• 11:36
  Speaker 1: In solving problems, we will make money.
• 11:38
  Speaker 1: As investors, we've got to make sure that it's a win-win whenever we're doing a deal.
• 11:42
  Speaker 1: So I hope you've enjoyed this episode and I look forward to you joining me in the next episode very soon.
• 11:48
  Speaker 1: Take care Bye for now.