Having set up my first HMO property in 1998, I am a firm believer that HMO's are the very best cash generating property strategy. However, there are a lot of myths and false beliefs around HMO’s. Most people don’t really understand HMO strategies, which is a shame because of how much cash flow that can be generated.
One of the myths is that you need to have a lot of money to be able to invest in HMO’s. If you’re buying a HMO – I would agree, you may require a good chunk of cash. This is because, as well as the 25% deposit, and all the buying costs, you will probably need to spend some money to make sure the property meets all of the safety requirements.
However, in this article, I am going to Introduce you to a great strategy called Rent to Rent HMO. This will allow you to benefit from the cash flow of HMOs without having to put in a large deposit, or even get a mortgage.
What is a Rent to Rent HMO?
Rent to Rent is where you rent a property from another landlord, then with their full knowledge and agreement. You then rent the property out to tenants for more than you pay the landlord. Rent to Rent HMO, is where you find a landlord, who has a property that is already set up as a HMO, which for some reason they are happy to rent to you. This means you don't have to spend a lot of money setting it up. There could be many reasons as to why the landlord does not want that property anymore. They might have experienced bad tenants, or a bad letting agent. They could be a remote landlord, which means it is a real hassle for them to look after their HMO property. Their life circumastances may have changed, whereby they don’t really want to be managing their HMO property.
Most people who have HMO's often manage the property themselves, because not many letting agents will manage HMO's. There are now more and more letting agents who do understand HMO’s, and can manage them, but often landlords get to a point where they’re tired or just thinking about retiring. They don’t want the hassle anymore and this is where you can step in. You can help these landlords and you can also make some great money yourself.
How Does the Rent to Rent HMO Strategy Work?
Rent to Rent HMO, is where you find someone who owns a HMO property. It could be a HMO that is not fully let out, or it could be a student HMO which no longer has student tenants lined up. The students could have failed their exams, or their group has broken up before the beginning of the academic term. This means the landlord is worried they might not have tenants for another year. But this is also because they only see it as a student HMO.
"A Rent to Rent HMO is a great way to find properties that are a bit unloved..."
The Student HMO might be in a great location that could be repurposed and used for young professionals, or normal working tenants. You could take the property, which is currently empty, having no income and maybe pay the landlord half the income he’d normally get. This would be enough to cover his mortgage and make some profit. You then rent it out at the full price to the other tenants. You’re then making the difference between what you could rent it out at, and what you pay the landlord. This can be a very profitable strategy.
Maybe someone has got a property that's a little bit tired and is struggling to find tenants. You could step in with a very light refurb and make it a desirable and rentable HMO property. You then rent out all the rooms. But you do need to understand HMO’s, because you are technically running one. Even though you don’t need to get a mortgage or put a big deposit in.
How Much Should You Offer the Landlord?
I would only do a Rent to Rent HMO which could make at least a £100 profit per month, per room. So, for a five-bedroom property, you want to make at least £500. Here's how you work out how much you could afford to pay the owner.
You need to look at what’s the gross rental income. If it’s a 5-bedroom HMO that brings in £450 per room, the gross rent would be £2,250 per month. Let’s say the profit you want is £500 per month. (This is £100 per room). You take the £500 off, that comes to £1750.
With a HMO property, you, as the operator of that HMO, will pay all of the bills. That’s the gas, electric, internet, council tax, TV licence, everything. The way we estimate the monthly bills on a HMO property would be £100 per room. So for a five-bedroom property, it would be £500 per month. You then take the £500 off the £1,750, which comes to £1,250. That's The most you could pay the landlord. To summarise, in the example, if you wanted to make £500 profit and cover all the bills at £500, the most you could pay the landlord would be £1,250. If you were able to negotiate a lower monthly fee, you would of course make more money.
By working backwards like this, you could work out what you can pay the owner. If the property is all fully tenanted and no problems, the landlord is probably not going to want to do a Rent to Rent HMO. You're looking for those landlords who are tired or retiring, that don't want the hassle anymore.
"You're looking for those landlords with problems, who are tired or retiring, that don't want the hassle anymore."
How Much Work is Involved With Rent to Rent?
In regard to Rent to Rent HMO, you've got to understand, it is an active strategy. You're not passive because you're doing the work. You're putting the tenants into the HMO property. You have to make sure there is a strong rental demand, so you can fill those rooms. If you have an empty room, or two, that's all your profit wiped out. So, it's a great strategy, but you do need to know what you're doing in HMO's. You also have to make sure you’re doing this in an area with high demand for that type of accommodation.
You don’t want to spend too much money on the property. I'd want to make sure that any money I put in, I get back from cash flow within the first year. So you've got to get a 100% Return on Investment (ROI), because you generally only have the property for 3 - 5 years. You then hand it back to the landlord. Now, if it works really well, it might be that the landlord wants to extend the term for you. But you don't know if that's going to happen or not. So make sure you get all your money back in the very first year.
Sometimes the reason why HMO property is not fully rented is because the condition may not be very good. If there's a lot of work to be done to the HMO property, you can negotiate with the landlord to do the work. It might be empty because it's got a really bad kitchen and no one really wants to live there. So they get the kitchen done. You can take it on and give them the guaranteed rent. Sometimes they might not have the money to fix the problem themselves, such as a bad kitchen. In this situation, you could then agree the rent you’re going to pay, and offer to put a new kitchen into the property for them. You will then be adding value to their property, which is pretty good for them.
Whatever it costs to fix the kitchen, which you pay for, you can take off the rent for the first few months. In other words, you don’t need to pay them any income in the first few months. This is because it’s getting back the money you spent on their new kitchen. They initially weren’t getting any rental income anyway and they’ve got a brand new kitchen. They are now much better off.
A Rent to Rent HMO is therefore a great way to profit from properties that are a bit unloved and making them more desirable. As always with a HMO property you’ve got to make sure it is in a location that people want to live in. You also need to have good room sizes. So again, you need to know a lot about HMO property to do this properly, but it is a really good strategy for quick cash flow. Once you get the keys from the landlord, you could be generating income within a few weeks. This is why so many of our Property Mastermind students use Rent to Rent HMO as a quick cash flow generating strategy.
Once you know how to find the HMO landlords, and what to say to them, it could be an incredibly quick source of income for you. You might also want to agree a couple of weeks or maybe a month’s rent-free period. This will give you a bit of time to get some income coming in before you have to pay the landlord.
Always remember, you're looking for landlords that have got a problem. They’re going to want to have a solution that's going to work for you and for them. Everything is open to negotiation.
I hope this brief introduction to Rent to Rent HMO has been useful.
"Once you know how to find the landlords and what to say to them, it could be an incredibly quick source of income for you."
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