How to Triple Your Rental Profits Using HMO Property

One of the main challenges that stops a lot of people getting into property or even doing more properties is thinking they need a lot of money to invest in a HMO. Well, it really depends. If you're buying a house and spending a load of money converting it, yeah, that can be a lot of money. It's a strategy that works very, very well in expensive parts of the world.

For example, one of my clients, Jennifer Wiltshire, lives in Kingston in London. She didn't want to go and do properties up north. She wanted to own properties in her local area. That's where she knew, that was her comfort zone, so she found properties that were probate properties. These kinds of properties needed lots of work doing to them. She'd buy them for about 650 to 700,000 pounds, and then completely stripped them back to bricks. She'd spend a couple of hundred thousand pounds doing those up. You might think, why on earth would she do that? Well, the properties are now worth well over a million.

She was going to refinance, taking most of the money out, but realised one of these properties is a seven-bed HMO that's making a thousand pounds per room per month. So 7,000 pounds of income. Her costs, her mortgage and all the bills, about three and a half thousand. This one property is making her three and a half thousand pound profit per month.

You may even think that’s a fluke, but now she has three of these properties that make three and a half thousand pound each. So no matter where you are, HMOs work, but you might need to tweak the strategy.

The key to adding value is that you spend money wisely. The value you add should be more than the money you have to spend. 

You might say, well, that's great, Simon, but I don't have that kind of money. Here's the point. You need to stop thinking about your own resources. Once you find really good, profitable deals, and I believe HMOs are some of the most profitable, if you don't have the money, you could borrow the money from someone else. They put the money in, and it's going to have lots of profit in the deal to give them a really good return on their money.

That might be a loan where they get a certain amount of interest. It might be a joint venture where they get some of the profit share. We've had people who've been completely new to property who've had no prior experience that don't have much money. But because they've learned how to find really good deals, they've been able to go to other people who are more experienced than them, show them the deal. The more experienced people come forward and agree it is a good deal, and they’re then happy to put the cash in.

So it all comes down to knowing what makes a good deal, knowing how to find those deals, and how to position them, as well. If you’ve got your own money, of course use that first, but if you don't have a lot of money, you can use other people's money.

If you're buying an existing HMO, rather than buying one where you've got to get it all set up, maybe just a very light cosmetic refurb is all that property needs. Many of the landlords who are selling their properties, they might have owned them for 10, 20, 15 years or so, and not have done that much work to it. So over time, the standard comes down, the rents they get comes down. They want to give up, and they don't particularly want to spend a lot of money doing their property up. But relatively speaking, the amount you spend on a light refurb is pretty small. You can actually take a tired property, one that's already set up as an HMO, and for a relatively small amount of money, give it a new lease of life. Have some great feature walls, lighting, good furniture, and suddenly what was a tired property is now a far more desirable property.

If you don't actually want to buy or can't buy, there are several strategies you can use, such as Rent-to-Rent. Whereby you take a property from a landlord, you get it looking great, you know how to properly advertise and get tenants in. The rent you pay the landlord is less than you can achieve, so you make a margin on the difference.

Another great strategy is a Purchase Lease Option. It's very similar to Rent-to-Rent, but you get the right to buy the property in the next three to five years if you want. So not only do you get cash flow, you benefit from long-term capital growth. I would suggest if you're getting into HMOs for the first time, doing a rent-to-rent or PLO is a good idea on an existing HMO. It allows you to kind of put your foot in the water, test out to see if you actually like to do HMOs before committing to actually buying a property. So actually, it can be done in a really good way.

I’m aware people get concerned about how time consuming managing a HMO becomes, especially in comparison to a Single Let. I agree, one HMO is going to take more time than one Single Let property, but I don't think it's a fair comparison.

One HMO might make five times as much money as one Single Let. So really, for a fair comparison, you should compare five single lets, which might be in different towns. In comparison to one HMO in one location. I believe that one HMO definitely is less work than five single let properties, and that's a like-to-like comparison. So actually, although a HMO is a bit more work, doing lots of single lets is even more work.

When it comes to buying a property, well, it's the same amount of time and effort, whether you use it as a Single Let or whether you use it as an HMO. So if you're going to put the time and effort in to find a property, why not make sure you're getting the maximum return on your time, which is achievable with a HMO far more than a single let property.

The final point I want to share here is that when it comes to it, you don't have to do the work yourself. I've not returned to one of my HMOs for maybe five or six years because I have someone else manage it for me. They even managed the whole refurb job. I didn't have to do anything. I don't manage it. Even though I pay someone else to do it for me, and I lose some of the income because of that, it allows me to do what I want with my spare time.

One of the challenges is that many letting agents, normal, traditional letting agents, don't understand HMOs. In fact, if you went into them and asked them if there is a demand in the area for HMOs, they'll probably say no, because they don't have people coming into them asking them for single rooms. They get people looking for houses and apartments, et cetera. So going to a normal letting agent would be a mistake. The good news is there are increasing numbers of HMO specialist letting agents all over the UK. Many of them have actually come from our training. They've invested in themselves, they've taken action and they've quickly built up a portfolio. As they've struggled to find other people to manage, they've set up a management agency that specialises in HMOs, to manage their properties and also to manage other people's properties. You can find these people at pin Meetings and other networking events, who can actually manage it for you, which means you don't have to spend your time doing it.

Some people may ask about licensing or planning. Well, I don't want to go into too much detail about these, but they are very important when it comes to HMOs. You might have a property that needs planning, but doesn't need licensing, or one that needs licensing and doesn't need planning. Most people get awfully confused, and because they don't really understand it, they think it's too hard and don't bother. But actually once you understand it, it's very straightforward.

Once you understand the rules, you can make sure you adhere to the rules. And because most people are put off, it's actually a huge opportunity. In fact, I think 85% of properties, rental properties in the UK, are single let properties. The majority of landlords just do single lets. It's only a small proportion that are actually HMOs, and that's why it's often seen as a more advanced strategy. But again, it's just people who've taken the time to educate themselves. It's also amazing how many existing landlords do not understand about licensing and do not understand about planning, and actually they've got properties where they've got problems with those. That's often why they want to sell them. But with a bit of specialist knowledge, we can come in and we can solve those problems.