How to build a high yielding HMO portfolio

Added on June 10th, 2016 in Property News

Daniel Hill, managing director of Multi-Let UK, explains how you could build and manage a profitable HMO portfolio.

Recent research fromMortgages for Business reveals that landlords are increasingly favouring Houses in Multiple Occupation (HMO) and more ‘complex property types’ due to the often higher yields available. 

The research reports that 28% of landlords it surveyed are considering purchasing an HMO, up from 10% six months ago. Investors looking to purchase vanilla property – conventional houses and flats which fit mainstream buy-to-let lending criteria – has fallen from 83% to 79% in the last six months.

HMOs are highly attractive to investors, especially in UK cities with a high population of students and young professionals. Typically, the average rent for a house share room in the Midlands or the North is between £325 and £500 per month. Whilst the market conditions in many areas are becoming more developed and competitive, a HMO property with the correct scheme and management can deliver landlords and investors an average gross yield of 10-13%. These yields are much higher than standard single let rental property, which are achieving average yields of between 4-8%.

HMO properties can generate this significant increase in revenue because they are rented out to individuals, on a room by room basis. HMOs often provide between four and ten rooms, rented to individual tenants. Rent will typically include the internet, general utility bills and Council Tax. Whilst the individual bedrooms are rented as private for exclusive use, most HMOs have communal areas, including kitchen diners and lounges.

A three-bedroomed, single let property may typically achieve a gross rent of £650 per calendar month (pcm) for a family.  It is usual that, once converted, the gross rent on the same property will exceed £2,000 pcm as HMO.  This represents a significantprofit opportunity for buy-to-let investors who have the required expertise to generate sustainable returns in an increasingly competitive market.

However, while the rewards may be rich, building and managing an HMO portfolio is very challenging, with complex legal compliance requirements, mandatory and additional licensing, building regulations and an increased governance over the HMO sector. Despite this,in many areas around the UKthere are HMO landlords providing poor quality accommodation which fails to meet the statutory requirements, putting tenants’ wellbeing and potentially lives at risk. 

Increasingly we are seeing HMO landlords appearing in the news for breaching legal requirements and risking the safety of the tenants who live there.  As a landlord of a fast-growing property portfolio of HMOs and multi-lets, Iunderstandhow demanding the ever changing regulation, legislation, new license requirements and rapidly changing market conditions can be.  It can be very demanding, time-consuming and stressful to undertake this journey alone. 

In a typical day, an HMO or multi-let landlord could be dealing with difficult tenants; chasing overdue rent; juggling finances; ensuring compliance with HMO legislation; redecorating a property; or evicting tenants for non-payment of rent.

So what are the secrets of creating a high yielding HMO portfolio?

Tips on building a profitable HMO portfolio

+ Buy the right property: Look for at least five rooms–ideally 6 plus. Profits grow expedientiallywith this number of rooms

+Location, Location, Location: It’s vital that you buy in the correct location, not just the town or city, this is even down to selecting the right road

+ Look for a high density of young professionals and students in town/city centres with good transport links

+ Don’t over or underspend: Ensure you keep to a budget when you are refurbing and make sure your accommodation is scoped specifically with the local market conditions and demands in mind.

+ Know your market: Match your development to the local market profile and conditions.  Make sure you have done thorough research and have local expertise on your side

+ Abide by the law: Ensure you understand the various regulation and legislative requirements and you uphold them

+ Use reputable trades people: Your refurbishment will go much more smoothly and you will meet your deadlines if you use professional builders etc. A stitch in time saves nine in line, you do not want to be returning to the property to complete basic maintenance post refurbishment.

+ Future proofing the portfolio in the build – Although they can be significantly more expensive, use materials and suppliers with the highest durability, warrantee, and correct function for the task.

+ Maintenance costs: Minimise them were you can.  For example, high durability carpets, lifetime warranty on door handles, strategic selection in bathroom finishes, kitchen specification and even light bulbs.

+ Reversion costs – What is this?  Please can you expand? Be cautious of developing too much of a purpose-built scheme that has a significant reversion cost, should the market conditions change and core function of operation for the property shift.

Top tips on managing an HMO portfolio

+ Select the right tenants – ensure you carry out thorough reference checks and secure guarantors and deposits

+ Don’t mix groups: Keep your HMO solely for either students, young professionals, housing benefit tenants etc

+ Maximise the rent achievable without compromising the facilities provided: Ensure you provide high quality accommodation, with at least five rooms in the property, plus living and dining areas

+ Maintenance: Keep on top this – HMOs can require more upkeep to maintain a competitive finish because of the higher tenant turnover and there are more call-outs due to the volume of tenants

+ Customer service: Provide tenants with a high quality, 24/7 service.  Treat them as ‘clients’ and they will not only stay longer but also recommend you to friends and family

 + Bills: It is advisable to retain ownership and  control over heating, electricity, water, internet  and TV and recover it through the monthly  rental income.  Consider using a cleaner for the  main living areas, absorbing the cost into the  rent

+ Reduce operating costs: Shop around to find the cheapest utilities – electric and gas, as well as broadband

+ HMO legislation and regulation: Keep on top of it and be careful to comply with the law and updates to it at all times

+ Management Regulations: These are special building control and health and safety regulations which apply to all HMOs.  If a landlord fails to comply with these regulations, he/she can be prosecuted by the Local Authority and fined in the Magistrates Court.  If you are not sure what the regulations cover, check them out online and speak to the required authorised body. The government’s LACORS document is an indicative report that offers some direction.

+ Be proactive: Comprehensive monthly inspections will enable to you to record your legal requirements and identify any maintenance work that needs to be carried out.

+ Licensing: Mandatory licensing is requiredif a property houses five or more unrelated occupiers,on three or more floors. However a property of only three or more households still requires C4 building regulation. Many local authorities have applied for additional licensing, which means that all HMOs in these areas need to be licensed. If you are unsure, consult your local authority on this.

+ Gas, electrics and fire safety: Ensure that you conduct all the mandatory checks, have certification of work carried out and that your property meets all the safety regulations. 

+ Work with experts: Managing an HMO portfolio is both a specialised expertise and a full-time job.  So if you want to reduce the stress and time spent looking after your properties, consider using a specialist management firm that can give you control and freedom, along with a high level of return for your investments

Daniel Hill specialises in managing and operating HMO portfolios through his company Multi-Let UK which provide services specifically developed to support landlords.

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