A house in multiple occupation, or HMO, can be a very high yielding property investment .... in the right circumstances. However, to achieve high yields it’s essential to select your potential HMO property carefully. In this article we’ll look at how to select your next HMO property and at some tools that can help you select the best possible properties.
There are three important things you need to consider when selecting your next HMO property: The area, the type of property, and whether it is viable financially.
How to select the best area for a HMO
Is it the right type of area for a HMO?
Remember that HMOs won’t necessarily work in all areas.
HMO accommodation frequently appeals to tenants on lower incomes as well as younger demographics. Factors such as good public transport links and walking distance to local amenities are often important to them.
HMO tenants do not usually have school age children, so school catchment areas are not usually a priority. HMO tenants may be students, however, so proximity to university may be important.
Is there demand for more HMO accommodation?
If there are already HMOs in the area it may well suggest there is a need for them. But also check current supply and demand levels.
Local letting agents can often tell you about demand levels for this type of accommodation, even though they may not let it themselves. Local classified advertising sites and room share or flat share sites can be used to find out what HMO accommodation is already available, and what room rents are being charged.
What is the local planning policy on HMOs?
Some local authorities have Article 4 directions in place meaning that planning permission is needed to create a new HMO in some or all of their area. If so, they will usual specify certain criteria by which planning will or will not be granted.
What HMO licences will be needed?
Most HMOs require a licence although it will depend on the size, nature and location of your HMO. Some local areas have additional licensing schemes or even selective licensing schemes under which all rental properties need to be licensed.
The conditions under which a HMO licence may be granted include conditions which apply nationally as well as conditions applied by each local council to HMO licensing schemes in their own area.
PaTMa Property Prospector can provide a wide range of information to help you assess if the area is suitable for a HMO. It can link you to information on Article 4 directions and HMO licensing requirements in every local authority area. It can provide information on the local area including crime rates, accessibility to transport and other amenities that may be a consideration for tenants.
Property Prospector can even provide information about local planning applications, allowing you to see what other new accommodation, including HMO properties, is being planned.
How to select the best property for a HMO
Does it ‘work’ as a HMO?
Not every property will work as a HMO. Check that the space available and layout will work as shared accommodation.
Consider how you can make the best use of the space to maximise your return. For example, you may be able to maximise your return by buying a three bed, two reception room house and turning it into a HMO with four bedrooms and a communal living room.
Are the room sizes adequate?
Local authority licensing requirements stipulate minimum room sizes for rooms used as bedrooms. Check if the property you have in mind will comply. Bear in mind that properties above the minimum size and better located/better appointed rooms may be more lettable and earn more rent too.
Is there enough communal space?
Local authority licensing requirements stipulate the bathrooms, WCs, kitchens and other communal space that must be provided relative to the occupancy of your HMO. Again bear in mind that properties with better communal space, or amenities such as ensuite facilities, may be more lettable and so earn more rent.
Is the property suitable for conversion to a HMO?
Consider factors such as independent access to the letting rooms, adequate natural light and means of escape from fire as required by HMO licensing conditions.
PaTMa Property Prospector can help you search for a suitable property by location, size and budget. It can also provide information on local property prices (and even identify recently reduced property) to help you find the best value property.
How to analyse the financials behind a HMO investment
HMOs will generally provide a much higher letting yield than properties let to a single tenant. However, the establishment costs and running costs are higher too. So it is particularly important to analyse the financials behind each potential HMO purchase and forecast your total investment and likely returns.
When analysing a prospective HMO investment consider:
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The initial purchase price.
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Purchase costs and fees, including legal fees, Stamp Duty and any planning application costs.
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Repair and renovation costs. These include both general repairs and renovation that might be needed plus the unique costs of converting a property to a HMO. For example: Extra bathrooms and kitchens. Fire alarm, smoke alarm and emergency lighting systems. Fire doors and other fire safety measures. Furnishing costs.
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HMO licence costs, including initial application and ongoing costs. Also consider costs for supporting documents for a HMO licence application, such as an EPC, fire risk assessment and gas/electrical safety certificates.
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Likely total investment required. This will enable you to ascertain the deposit and mortgage required and assess mortgage affordability.
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Estimates for likely weekly room rents achievable.
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Estimates for likely running costs payable by the landlord. These will include utility costs, Council Tax and management costs.
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The likely annual yield and annual/longer term profit.
PaTMa Property Prospector can help you analyse the financials behind your next HMO property. It can help you obtain estimates of costs, collate all the figures and analyse several potential HMO properties back to back to find the best performing HMO investments.
PaTMa Property Manager can help you manage your HMO. It can help you prepare tenancies, manage documents including rental agreements and safety certificates and manage and simplify maintenance. It can help you manage, collect and monitor rent and also monitor the financial performance of your HMO.
You can find out more about PaTMa property software and take a free trial here.
