In this blog, I'm going to talk through the five biggest HMO mistakes in property investment and how to avoid the HMO property investing pitfalls. I've had HMO’s for 23 years. Back in 2003, I started teaching people about investing in property. I didn't really have many Houses of Multiple Occupancy. I only had one HMO. It was only after a couple of years, I looked back over the last 10 years of my investing, and I realised that my very first HMO property had been the most profitable and least hassle. This was a student HMO which was rented to three students at Birmingham University.
Students are just one type of tenant, they would move in, and be there for a year or sometimes two years.Their mom and dad would pay the rent so there were never any rent arrears. It was also a good quality property with very low maintenance, so it seriously was hardly any hassle.
I then thought to myself "Why on earth am I not doing more of this?". So in 2005, I started buying more properties, and turned them into HMOs. I realised it was such a great strategy.Yes, it doesn't work for everybody. I wish it was the perfect, the one and only strategy but it's not. But it is a great strategy when you use it correctly. So what I want to do is go through the five biggest HMO mistakes in investment property, so you can avoid these mistakes and common pitfalls people make.
The Lack of Understanding or Knowledge About HMO’s
So here's the very first mistake and it's a slightly obvious one really. But the first mistake is not actually getting involved and learning about HMOs. I think it's partly because people don't really understand them. There's lots of myths about HMOs. People will get very confused. They think it's harder than it is, they think they have to do Single Lets first and then move on to HMO’s. Or maybe they think they've got to manage the properties themselves. Now, all those points might be quite valid, some people do start with Single Lets then move on to HMOs’. Whilst I see the benefit of doing that, because HMOs are a more advanced strategy, you are still getting such a small return from a Single Let compared to an HMO. Why not learn how to do it properly and start investing in HMO’s.
If you don't want to manage properties yourself, that's fine. I don't manage my properties myself. I pay other people to do it for me. This is because I want to have my time free to do things like this. I love training, teaching and educating people. If I then spent my time managing my properties, it would be a full-time job. I don't want to do that. I get other people to do it for me. So the first big mistake is a lack of understanding, lack of knowledge, and thinking you can't do HMO’s.
Hopefully, by the time you've finished reading this blog, I will have demonstrated that actually you should definitely be considering HMO’s as part of your portfolio.
Linking to that, the reason people don't do HMO’s, is because they think they need lots of money to do it. If you're going to buy a house and do a full refurb, yes, that does require lots of money. But first of all, it doesn't have to be your money. It could be a Joint Venture, or it could be a Private Loan. But there are also strategies where you can benefit from HMO cashflow without actually owning the property. So you could do rent to rent HMO. You could do a Purchase Lease Option HMO. We don't own the property but we've got the right to buy it in the future. So educating yourself and understanding just what's possible is the first mistake that people make because they just don't do it.
Not Understanding HMO Licensing and Planning
The second big mistake people make when it comes to HMOs and property investing is they don't understand HMO licencing and planning. Now, this is quite a big topic, which is why I've got a separate video and blog about this. But let me just give you a little bit of an overview here because this is a big block to people, moving forward. I see people making expensive HMO mistakes because they don't understand it. So I want to help you with this right now. First of all, you've got to understand that planning and licencing are totally separate. Very often people get the two mixed and confused.
Let's talk about licencing first. So licencing is, if you have a property with five or more unrelated tenants, you absolutely have to have a mandatory licence. It used to be the case if it was on three or more floors and five people. In 2018, they got rid of the floor requirements. So if you have five or more unrelated people living in a property, you absolutely need to get a licence for that property. What does that mean? Well you need to approach the local council. They'll have an application form probably on their website, or you can contact the HMO Licensing Department. You need to give a floor plan of the property. There are certain requirements.
For example, the rooms have to be a minimum size. So a single room has to be 6.51 square metres and a double room has to be at least 10.22 square metres. But, and this is very important, different councils have interpreted the rules and guidelines in a different way. So some councils might say, the minimum room size in a licenced HMO needs to be 10 square metres. So it's important for you to contact your local council, the HMO Licensing Department, and understand exactly what their requirements are so you're completely clear on what needs a licence and what doesn't. Some councils say for three or more people, they need to have a licence.
Let's just touch on planning briefly. Planning is important but it's completely unrelated to licencing. You might get a property that needs a licence or doesn't need licence, or one that needs planning or doesn't need planning. So they are different things. The first thing to understand is, if you have a bigger HMO, are you seven or more tenants? That's not really seen as a normal property anymore. It's got its own planning class called Sui Generis. If you have a property for seven or more tenants, you need to have planning permission for Sui Generis. Now if it's a small HMO, six or less people, in most parts of the country you can take a normal house which is a C3 planning classification and turn it into a C4. This is a HMO for up to six people under what's called Permitted Development Rights. You don't need to get Planning Permission. That is, as long as it's not an Article 4 area.
Article 4 is where the local council have removed the Permitted Development Rights. That means, in an Article 4 area where the council don't really want more HMO’s. If you want to have a normal house, a C3 planning into a HMO C4, in an Article 4 area you would need to apply for planning permission. Now more likely than not the planning permission is going to be rejected because they don't want more HMO’s. But if it meets the criteria in terms of planning perspective, that's normally less than 20% within a certain radius of the property, you might still get planning permission on appeal. So don't think if there's an Article 4 area, you can't get HMO planning permission. You might be able to if it meets the criteria.
The other thing about Article 4 is that people think if you buy an existing HMO from a landlord in an Article 4 area, it's automatic planning. That's not the case. You would need to apply for what's called a Certificate of Lawfulness, to show that that property has been used as an HMO before Article 4 came in, and has been used continuously as an HMO. Then once you've got the Certificate of Lawfulness, you can buy the property. If you don't have that, you need to get planning and there's a chance it could get refused.
So it is really important when buying an HMO you understand about licencing and planning which are totally separate. Otherwise you can get yourself into a bit of a mess.
“If you think about it, you’re renting this property out, you’ve got to make sure that enough people in the area want that type of property.”
Ignoring the HMO Supply and Demand
The next biggest mistake people make with HMO’s when it comes to property investing is not checking if there's enough supply and demand in the area. If you think about it, you're renting this property out, you’ve got to make sure that enough people in the area want that type of property. It's important to check this, because in many areas there is an oversupply of HMOs. Let me say that very clearly. There is an oversupply of HMO’s. But that kind of links to my next point, which is the next big mistake people make.
Average HMO Property Developments
Having very average HMO’s is the next mistake on my list. There is an oversupply but most of them are very standard stock. Make sure that your HMO’s are better than the average available in the market. Ideally much better. That means you're able to charge more rent for the property and also you'll have less void periods.
If you have an average HMO, you're competing with everyone else. What most landlords do is they just lower the price. That's a mistake with HMO Property because you might attract the wrong type of tenant.
There are always discerning tenants who will pay more rent if the property is good. So by making sure it looks good and it's very functional to use, you might have people who want to stay there for a long time because they've got everything they need. They don't want to move out. It’s then going to minimise your churn of tenants.
Be sure to check the demand and supply in the area. You can do that online by going to websites like spareroom.co.uk. And number four, making sure you don't have average HMOs.
Mixing Different Types of Tenants
The fifth big mistake that people make with HMO property is they mix different types of tenant. There are four types of tenants you can get in an HMO property. The first type, and most people think this is what HMOs are all about, is students. So people who are studying at university, they've moved away from home, from mum and dad. They often live in a hall of residence or university flats in the first year. Second or third year, they often move into a house with some of their friends. So it is an HMO. That’s the main, probably the first type of HMO tenants. There are some real benefits of that type of tenant. They often come as a group, they often sign one contract. So although technically they're an HMO, they're one jointly liable and severable contract. That means if one of their friends moves out, they all have to pay the rent. Very often mum and dad actually pay the rent for you, which is pretty good.
The second type of tenant in an HMO is a young professional. Someone who's been to university. They've got a good job as a doctor, an engineer, an accountant, a solicitor, whatever. They're earning a good salary. They quite like the idea of living in a house with other people rather than living on their own, which is more expensive. If they’ve moved to a city where you don't know people, it can be a bit lonely as well. So they get an instant social life doing that.
Then the third type of tenant is just working people. They work in shops, factories, offices, and they don't want to live with mum and dad anymore.They can make great tenants. Then the fourth type of tenant which I don't have in my HMOs, but I do for my Single Lets are people who are on benefits. They are receiving local housing authority benefits. In an HMO, there can be quite a lot of work. So a lot of HMOs, they pass those properties to charities. The charity does a Rent to Rent with them. So they get a really good rent, they have no hassle, they've got no management fees. Often the charity pays all the bills. It can work very, very well. But hard work if you do it on your own.
So those are really a summary of the five biggest HMO mistakes in property investment. Number one, not doing it in the first place generally due to a lack of knowledge and understanding. Number two, not understanding about licencing and planning. Number three, not checking supply and demand in the area. Number four, having very average HMO’s. You're just competing with everyone else there. Number five, mixing the tenant types. There's no good having four young student nurses living in a house with a 45 year old man who's working down in some office. Might be great for the man to live with the nurses, not so good for the nurses really. So make sure you stick to one tenant type in each of your properties. You can have different properties with different tenants in. This would be in different locations because students have to be very close to the university. Young professionals want good transport links, local facilities and amenities. If you're renting to people on benefits, it isn’t as important about the location. But obviously HMOs need to be done in an urban area, big town or city. It's not something you'd do in the countryside.
So I hope that really helps explain some of the myths about HMOs and help you avoid some of the big mistakes.
If you want to learn more about Houses of Multiple Occupation and how you can really profit using them, I've got some extra online training that I like to give you access to. All you have to do is, click in the link below the blog, to register your place. This training will give you far more detail and save you a lot of time getting your next HMO Property. Remember to invest with knowledge, invest with skill.
FREE HMO Training
If you would like to learn more about building a HMO portfolio with other people’s time, money and experience then join Simon Zutshi for some online training, all about how you can buy a house and rent it by the room to make £1,000+ monthly profit per property.
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