Unlocking the Profit Potential of HMOs

Now , how is an HMO different to a normal buy-to-let property ? So from the outside , all houses pretty much look the same and what you have is , when people buy a property , they potentially and in the old ways used to just do buy-to-lets with those properties . They would let them out to a family for one rental fee .

Houses of multiple occupation mean that you can have different bedrooms in the property . You rent the bedrooms out and people share the communal areas , maybe a communal bathroom as well , and it can be highly profitable for the landlords . Now , what is the benefits of this ?

Well , if you were to buy a property for around £200,000 , you would be putting in a 25% deposit , you would have your fees and everything like that , and you might be making profit-wise gross profit £1,200 from that property in rental income .

Now , once you've taken the mortgage off of that property , you've taken the insurance and potentially a management fee , you may only be left with £100 , a couple of £100 . And , of course , interest rates in 2024 have made it very , very difficult for buy-to-let single-let properties to work and for you to be able to maximize profits .

Now , if you were to take that same property and pay £200,000 for it , but you were able to put a little bit more money into it and make it into an HMO , so you are able to go through your HMO specific details , like adding fire doors , making sure that it's got smoke detectors , interlinking smoke detectors it reaches and hits all the requirements that your local

council puts out there . You could then let it out on a room by room basis . You could take a three or a four bed property and potentially convert that into a five or six bed property If you've got reception rooms downstairs , so some properties .

When you arrive to them they'll have a living room , they'll have a dining room and then they'll have a kitchen , but one of those rooms at least could become another bedroom , but done professionally . We don't just want to be doing it the old fashioned way of taking a reception room and throwing a bed into it . That is no good for anybody .

We want to make sure that we are spending a bit of money doing this . And why is it good to do this ? Well , it's good to do this to maximize your profits .

So if we took the same property , okay , and we bought it and we had six bedrooms all paying us rather than £1,200 , one flat rent each and every month , rather than £1,200 , one flat rent each and every month , maybe £550 per room , If we have six of those , then we would have a gross profit coming in of £3,300 .

Now you will have voids , because , well , you will have in with anything , but you will have voids .

You will have tenants coming and going , whether you have students , whether you have young professionals , professionals working tenants and go , and whether you have students , whether you have young professionals , professionals working tenants , whether you even have social housing in that aspects as well , at some point you will probably have some voids there .

Now , social housing is a bit different if you enter into a contract with them , but we're talking about just renting out to your everyday people on the street , so to speak , so you'd have some voids there . Always factor in that 10% for voids . You would have your mortgage costs as well . So you'd have some voids there . Always factor in that 10% for voids .

You would have your mortgage costs as well . So you'd have to work out your mortgage costs . So let's say your mortgage costs here were going to be about £750 . Okay , so you've got that coming off . You've got 10% voids coming off .

And let's just say , for the bills , because it's an HMO , we would pay the bills , whereas as a single buy to let you wouldn't pay the bills . Obviously the tenants would pay the bills . Let's say , £900 for your council tax , your gas , your electric , your water , your Wi-Fi , all of those things .

Potential cleaners will go in there and clean the communal areas as well . Take that off and then we're not going to manage it as well , because we're professional property investors . We will get a management company coming in , which is another 10% potentially as well . So that could be another £356 . That is about £2,006 worth of costs .

Going through all of this , we would still be left with a profit of about £960-odd , nearly £1,000 per month from this one property . The buy-to-let property maybe makes us £100 , £200 once we've taken off the mortgage , once we've taken off the running costs and everything like the management and , of course , insurance .

But with an HMO , even after all the costs , you can still make a thousand pounds or just under a thousand pounds per calendar month . This is why it's a phenomenal strategy to do Okay . Some of the cons of doing HMOs is you will have more churn with people staying , because most people stay on a six-month contract , a six-month AST contract .

When you have a single buy-to-let , they normally stay for 12 months , so you will have more people moving around . The reason I actually quite like the fact that we have HMOs and I use HMOs and do HMOs is because you normally won't have unless it's students all of the tenants leave at once .

You may have one room empty that you've got to start filling , and then , maybe a couple of months later , somebody else moves on , because if you've got six tenants there and one's moved out and you've got to find a new tenant , you've still got another five tenants that are paying A single let property one tenant in there .

Once they're not there , there's nobody there to be paying you any rent , so you could have two months , maybe three months , voids of nothing coming through whatsoever , whereas with an HMO , you've still got tenants in the property paying you month on month rent .

Another thing that you need to be mindful of , though , is you will have more wear and tear on the house with five or six people and , of course , hmos can be four bed , five bed , six bed , seven bed . You can go up to 20 beds if you want and beyond , but you will have more people going through the properties .

So it's very important to make sure that you make them as robust as possible , make them as comfortable as possible and be at a higher end of the market .

So if you're not sure what an HMO looks like , then go and visit spareroomcouk Type in your area , wherever you're based , and then go through the listings , have a little look at the rooms , have a little look at the standards and have a little look at the rents that people are advertising their rooms for as well , and you can start to gauge how much you would

be able to make on an HMO . Equally to that , if you go on Open Rent , you go on Zoopla or even Rightmove , you can look at People trying to rent out the whole properties , seeing what the rents are there . But gauge it as to say , if you had a mortgage on the property , how much would you actually make ?

So they can be very , very profitable in those aspects If you've got a good management company in there as well , managing the tenants , putting them in there , making sure that your tenants are looked after , that they're treated like customers because they are then you are onto a winner .

Some people try and manage them themselves as well , which is okay , but I would say when you get to about a handful of HMOs maybe up to about five you will start needing some help .

Now you can get help with the potential of virtual assistants , who can do all of the tenant management for you , in the sense of you're advertising your properties and things like that .

But if you want to stay and be a savvy investor you've got no intentions of ever wanting to manage the properties yourself then just get a management agent in there and focus on the things that you're good at . Now you can use different strategies to acquire HMO properties . You don't necessarily just have to buy them .

You can do rent to rent rent to HMO , which is a great little strategy to use , which I've used many a times to build up my portfolio , and , of course , you don't have to pay massive deposits . You look for pre-existing HMOs , you take them on and , of course , most of the work's already been done for you .

You can look to get creative as well , doing purchase , lease options , which is very much like a rent to rent , which is where you take the property on as if you own it yourself . You pay somebody a lease fee for the property , but on rent to rent , you have to give it back after the five-year term .

With a purchase lease option , you would lock in when you are going to buy it . You would lock a price in now and you would buy it in potentially three to five years time as well . So that's a great little tool to use as well .

You can get creative , you can use joint ventures , you can do all sorts of different ways and we've got a lot of episodes here which will share with you how to get creative , how to do creative deals as well . But I'm just focusing on why you really want to be looking at HMOs to get yourself going .

A lot of people get started in property for cash flow , so they're looking at high cash flowing strategies like HMOs or serviced accommodation , short-term rentals , holiday lets . I would say personally myself , because I do both HMOs is easier than serviced accommodation .

Some people like the thought of serviced accommodation because they don like the thought of serviced accommodation because they don't have tenants but they have churn .

They have people come in and stay in a few nights here or there and you never really know the cashflow that you're gonna get month on month until you're set up and you're doing it , whereas HMOs I always like because as soon as I've got all my rooms filled my six beds are filled I know exactly what I've got coming through .

I know my month-on-month cash flow is . You might say , oh , what happens if somebody stops paying ? Well , in that matter , you've got to make sure that you're doing good reference checks or your management company are , and everybody has a personal guarantee .

So if they stop paying or they're causing trouble , you can go over to the personal guarantor of theirs and say you've signed to say that they are going to pay their rent or they're going to behave themselves . We will now come after you for any costs incurred . Make sure you set yourself up for success . Everything you do has pros and cons .

Everything you do potentially that's high cash flowing will require more work . So appreciate the fact that this isn cash flowing will require more work . So appreciate the fact that this isn't going to be particularly easy .

It's not hard to do , but there is more work required than just a vanilla buy to let With the interest rates the way they are , it is very , very difficult in most areas of the UK now to get buy to lets to work . Some areas it still does work very , very well .

But you can do HMOs with social housing charities as well , and the social housing charities will take the property on , maybe for a few years . They will put their own people in through the properties , they will look after the properties and that is really a great passive way to have HMO properties and you can be very , very successful in doing so .

And the sweet spot to that is you can also feel good about yourself because you're helping potentially vulnerable people or people that wouldn't have anywhere else to live . You are creating homes for people . So that is what it's all about for us . It's about solving problems . In solving problems , we will make money .

As investors , we've got to make sure that it's a win-win whenever we're doing a deal . So I hope you've enjoyed this episode and I look forward to you joining me in the next episode very soon . Take care Bye for now .