In this blog, I'm going to bust the five main myths about HMO's, Houses of Multiple Occupation. Why is this important? Well, I believe HMO's are a fantastic strategy, but if you don't really understand HMO's or of you're put off by some of these myths, you're going to miss out on what is probably one of the best investment strategies, certainly one of the quickest ways of replacing your income.
Now I got my first HMO in 1998. I bought the property in '95, I was living there, rented out some rooms to my friends. It was in the student area next to Birmingham University known as Selly Oak. I wanted to move slightly closer to my work at Cadbury's in Bournville. So instead of selling my first house, I decided to keep that, I turned into a student HMO for three students and I moved into my new house closer to work. Now I bought a few more properties that were all single lets. By 2001, I had enough income coming in to cover my living expenses. I hadn't entirely replaced my salary but I had enough to leave my full-time job.
By 2003, I'd completely replaced my former salary at Cadbury's. Now it was only in 2005 when I've been investing for 10 years, I looked back over my property investing and I realised that that one student HMO I had, had created more income for me than any of my other properties and it had been less hassle as well. Now, students are only one type of tenant in an HMO but it worked incredibly well for me. And I thought, why on earth am I not doing more of that? It just goes to show, even if someone's been investing for a while and I'd replace my income, I kind of thought I knew what I was talking about, we can always learn more if we have an open mind. In fact, the most successful people I know have very open minds, they recognise they don't know it all, they can always learn more. That's a great reason for reading these kind of blogs.
So anyway, I looked back and I thought, "This is great." So I started to buy more HMO's and more houses to convert into HMO's from 2005. This has been the strategy that many of my students have used to very quickly replace their income. It took me eight years to replace mine using HMO's. Some of my students have done it in as little as five months. So what are the big five myths that might stop you from using this very powerful strategy?
‘An Oversupply of HMO’s’
Well, the first one is, that there is an oversupply of HMO's everywhere and so you should not do HMO's. I hear that all the time. Now, I think it's actually a half truth. I think that, yes, in many areas there is an oversupply of HMO's. Does that mean you shouldn't do them? Well, it depends. If you're going to have a very average HMO which is what most landlords do, and if we want to see what I mean, you could go onto a website called SpareRoom, it's www.spareroom.co.uk. That's the main website where most of the landlords advertise their rooms for rent. You can type in your postcode and see what properties are available in your area right now for rent. And you'll see that the average HMO is very boring, very standard. They've got Magnolia walls, they've got not such great, not matching furniture, and it's a pretty poor standard. I'm not talking about you doing HMO's like that, I'm talking about you doing really good high-end HMO's. They cost a little bit more to set up but they're far more appealing to tenants. You get a higher rent and a much lower void period. So I believe there is an oversupply of standard stock. You don't want to have an average HMO, but if you have a better than average HMO you should be able to fill it much quicker than other people.
Also, you don't need to compete on price. Everyone else has got the same stock, they just drop their price down. That's not such a good thing because you might attract the wrong kind of tenants. So, just be aware of that. Things like student HMO's around universities, there's often a lot of accommodation because there's new purpose-built blocks. Well, again, the post-built blocks, they're quite new and shiny and some students like them but they're pretty expensive to live in. And also, you can't have parties and students want to have parties, right? So, actually students prefer living in houses. They've got to be very close to the university, want that convenience. And also, they've got to be in great condition. So it's the properties that are slightly further out, not such condition, they're the ones that remain empty. So, location is very important when you're doing your HMO investing.
‘HMO’s Are A Lot More Work Than Single Lets’
” So it’s very important you check with your local council, but not every HMO needs a licence. That’s a really important point to understand. A caveat to that, I believe even if you have an HMO that doesn’t need a licence, you should adhere to the safety guidelines. You have an ethical, moral and legal responsibility to make sure you look after the safety of your tenants.”
‘All Properties Need A HMO Licence’
‘All HMO’s Need Planning Permission’
Myth number four is that all HMO's need planning permission. Again, that is not correct. People often confuse licensing and planning. So, forget about licencing, let's just talk about planning for a moment. Now, if you have a large HMO, by large I mean seven or more people, it's not really seen as a normal residential property. In fact, it's got his own planning classification called sui generis. Sui generis is for a larger HMO, seven or more people. And you absolutely would need to get planning permission for that. And most parts of the country in England, if you have a normal house like a three bed, you could turn it into a up to six bed HMO. And there are different planning classes. A normal residential might be a C3, an HMO is a C4. You can change a C3 to C4 under what's called permitted development. Now, in some areas they've introduced what's called Article 4. This is very important with relation to planning. If the council's introduced Article 4, what it means is they have withdrawn the permitted development rights. What that means for you is if you find a normal house in an Article 4 area and you wanted to turn it into an HMO you would need to get planning permission to do that. Now, the council will probably automatically reject the planning permission application because the reason they've introduced Article 4 in the first place is because they don't want to have more HMO's. They think there were too many HMO's in the area. However, if it meets the planning criteria, and normally that's there are no other HMO's or there's no more than 10 or 20% HMO's within a certain radius, if it meets that criteria, you might well be able to appeal and get planning permission on the appeal. So don't think if it's an Article 4 area, you cannot do HMO's. You just need to check the concentration of HMO's in the area.
The other thing you can do is, you can buy an existing HMO from a landlord in an Article 4 area, maybe they are retiring. And as long as it was an HMO before Article 4 came in and as long as it's been used continuously as an HMO, you'd get what's called a Certificate of Lawfulness. And that means then you don't need to get planning permission. And that's very important because when you buy an HMO then obviously whoever you're getting a mortgage with will want to make sure if there's a licence needed, the licence is in place, if there's planning permission needed, they want to make sure that's in place as well. So it's really important to understand these things but don't let them put you off investing in HMO's.
Finally, the fifth myth that I hear all the time is you need a lot of money to do HMO's. Well, it kind of depends. If you're buying a house and you want to completely strip it back to bricks and renovate it, that might cost you anywhere between 12 to 15,000 pounds per room. So let's say you had a five bed HMO you wanted to create, you're going to take it back to bricks, you're going to put a new plaster wall, all the new plumbing, electrics, et cetera. It will cost you probably between 60 and 75,000 pounds. If you go very high end, you might spend 20,000 pounds a room and it might cost you 100,000 pounds for a five bed HMO. So that's a lot of money and people think, "I don't have that money to spend." Well, here's the thing. If you are buying a property and adding value to it, you might be able to refinance it and take some or all of that money out. So you can use the same money to do one property, add value, refinance, then to another one. It's what we call BRRR. Buy, refurbish, refinance, and then rent. And it's a great way of building your portfolio quickly. However, even if you don't have any money there are still some strategies with which you can do HMO's. For example, there's rent-to-rent HMO. This is where you find someone who's got a property, maybe they're an existing landlord and maybe they're to rent their property out. Maybe they're located elsewhere. They're remote landlords, they've not had a very good letting agent who's not really known what to do. You can step in, you can fix the problem. You pay a guaranteed rent to the owner and then you rent it out and you make sure you fill the property. You're making a margin on the difference between what you charge your tenants and what you pay to the landlord. Now, the best way to do this is buy an existing HMO that's already set up, it will adhere to all the requirements and so you don't have to spend a lot of money setting the property up. It can be a great strategy. The only problem is, you've got to give the property back to the owner in typically three to five years and you lose that income stream.
So very similar to Rent-to-Rent is another strategy called Purchase Lease Option. This is where you do an HMO on a Purchase Lease Option. Similar to rent-to-rent HMO in that you get to rent the property from the owner, you don't own it, you pay them a fixed amount each month, you rent it out for more money, you make a profit. But with a Purchase Lease Option, you also have the right to buy the property in the future. What that means is you benefit from cashflow now and potential long-term equity growth. You don't have to buy it if we don't want to but you've got the right to or you can assign it onto someone else. So again, when you know what you're doing, you know how to find good deals, you don't necessarily have to use a lot of your own money to do HMO's.
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