Starting out investing on HMOs....
We’ve been chatting to numerous experienced HMO investors, landlords and developers about their early years of investing in HMOs.
What mistakes did they make, what would they do differently, and what did they learn?
The Property Advantage is one of the leading sales brokers in the UK within the HMO space – specialising in facilitating the sale of quality, tenanted HMOs between selling landlords and new investors.
Many of these buyers are new to HMOs, and we wanted to poll our more experienced clients about their HMO journey - bumps, bruises, successes and dramas included – with the intention of creating some concise and valuable advice for our newer, and potentially more vulnerable, investors.
The first question we posed to our group was,
“What was the hardest thing about buying your first HMO?”
Caroline Pattinson, from Chester Homeshare, went straight into the balancing act she faced when starting her investment journey whilst being in full-time employment…
“Buying it & financing it in secret, as - working as a bank manager - I wasn’t supposed to have “external business interests!”
Quit your J.O.B (‘just over broke’, I think they call it) and “Sack your boss” is risky business in the early days it seems…
“Finding the right property in the right location” was the reply from Paul Owen, from Myhouse Agents in Manchester.
Similar comments from Paul Eklid from Bradford “Hardest thing was finding a property that could be adapted relatively easily, in the right area at the right price for right clientele…”
As a new investor looking for your first HMO (already set up or as a development), picking your location MUST be one of the most difficult processes to go through.
So many buyers of up-and-running HMOs are investing remotely – you might be reading this in London, Hong Kong or Sweden – how do you choose between Sheffield, Leeds, Bristol, Manchester or Brighton?
Aaargh!
And not only that, how do you then choose the right property, in the right part of town, at the right price?
Our advice is to speak to local landlords and local experts – seek advice from those who are not financially incentivised to promote a certain property or location.
“ (my) First HMO was more of an impulse decision rather than due to proper due diligence. I wanted to get into action quickly. It has worked out well but in hindsight, would not purchase again in this area.” Quoted Ahmed Al-Husseiny, an HMO investor from London
We definitely see a lot of this going on!
As soon as a ‘newbie’ hears about the attractive yields and the amazing ‘passive’ income HMOs can offer, they are in such a hurry to get going that due diligence and taking stock seem to take a back seat.
Ahmed came out fortunately from his rushed purchase but still had a few anxious moments and steep learning curves as a result…
Slow down, take your time and do your research.
We were so impressed by James Rogers of Prospero Finance initial HMO purchase!
“Listening to other people’s limiting beliefs regarding end value, achievable rents and location. When I did my own research in this case, I found that these opinions were to be incorrect. I found I could not only achieve far more in terms of rental income/upon refinancing, but I could actually break the ceiling prices for the area which I did do.”
Research and due diligence (and the confidence to implement it) can bring amazing results.
It’s worth noting that James invests in an area that he knows VERY well and, despite being new to HMOs at the time, he had an in-depth knowledge of his ‘patch’ but this added to his quality research and patience at the time, meant he had a high-performing HMO from his first deal.
Go, James!
Let’s go back to 1996 (that’s last century, guys. Spice Girls era!) for Wendy Whittaker-Large from Best Nest for her first HMO!
Not one for today’s market but her story makes an interesting read!
Wendy had to take an HMO business plan to her high-street bank as there was no BTL/HMO lending available at the time – a ready-made student-shared house with authorising lending from the branch manager purchased via a cobbled together (anxiously) business plan by Wendy. What a time to be alive.
So many more questions, Wendy! What was the LTV, rate, do you still have the HMO…?
“How did you narrow down your search and execute your due diligence in the early days and does that process differ now?”
The replies to this question were very interesting and they demonstrated the growth and knowledge each investor had gained over the years…
Starting again with Caroline Pattinson, “Early days was very simply the best house in the best street I could afford locally, renting by the room, within stumbling distance of city centre!
Now it’s about deeply understanding room demand, type and current customer behaviour, what accommodation options are open to them at different price points, the economic & regulatory/legal position. Much less interesting!”
What can you learn from Caroline’s more recent processes to make sure your early HMO purchases benefit from the same robust appraisals?
“Much less interesting,” says Caroline…
If you’ve made it this far into the article, you’ll probably be the type of person who finds Caroline’s advice rather interesting!
How do you get access to room demand info and customer behaviour BEFORE you own a property in your area?
Speak to local landlords, go to local networking events and absorb as much information from local experts as you can – you’d be surprised how friendly fellow landlords can be.
Ahmed is on a similar level to Caroline,
“At the time, I depended on a sourcing agent. Did some due diligence but was not extensive. My process now is completely different. I look at potential employers/transportation links / etc. I research what rooms are renting for, and how long they are taking to rent out. I speak to managing agents on the ground to get their perspective on the area and property, and to decide which managing agent to work with.”
Take out these golden nuggets of advice, guys…
“Chose any area I knew well and already had a good demand for HMO. I wouldn’t deviate from my due diligence process.” Says Paul Owen.
“Deviate from due diligence…”
Why have I picked out this line?
We see so many new investors, usually ones who are keen to spend their newly found JV investment, deviate from their initial strict criteria to fast-track the deployment of funds.
I suppose what I’m saying is, staying as strict will reduce mistakes.
James Rogers has stayed strict…
“My DD was thorough from day one and has continued to be. It’s important to be competent and not take unnecessary risk. The early projects are the most important so knowledge surrounding all aspects of your projects and processes must be implemented and understood from the start.”
Time was an issue for Wendy in the early days due to having a young family, she looked locally (Crewe and Stoke) and spotted the value there, especially when creating multi-tenanted houses, and knew the higher margins available gave her room to ‘learn on the job’.
Her early due diligence was more about zoning in one or two hotbeds for investment.
Now for the BIG question…
Are there any key mistakes that you’ve learned along the way?
“Mistakes - very many over 25 years of doing HMOs. The worst one by far was trusting a builder to do a 3 bed - 7 en-suite bed conversion in 2020, who ripped me off for £££tens of thousands whilst leaving my project totally in the lurch. Worse experience than over 1000 tenants put together.”
Caroline has felt the punch in the face that many have over incompetent builders.
We specialise in selling tenanted HMOs but many of our clients also develop and buy C3 houses to create HMOs.
Please, please, please do your thorough research on your chosen builder and mitigate as much as you can for them going AWOL, bankrupt or being dishonest. I’ve been caught in this trap myself (on both sides of the fence) and still have many scars now.
Paul Owen, “where do I start…the biggest for me is setting tenant expectations from the outset by providing them all the property/ tenancy information at the outset of a tenancy.. including contact details or relevant peeps.”
Ahmed “Absolutely! a) do my own due diligence and do not depend on sourcing agents. b) keep a buffer for the refurb budget because there are always surprises or takes longer than expected. c) a good managing agent is worth their weight in gold.”
James “Listening to other investors regurgitated comments that are solely based on other’s opinions. If your research indicates that you’re investing in a sustainable area that ticks most boxes then you must have confidence in your decision-making process. Ultimately it is down to you.”
“I’ve made all the mistakes in the book”, says Wendy, “trusting builders, tenants, staff, and budgets too easily”
“I’m an eternal optimist, Richard”, says Wendy “taking risks expecting only a happy ending!"
What is apparent with all these amazing answers is that Wendy, Paul, Ahmed, James and Caroline are still here today, investing, developing, growing!
What can we conclude from their combined decades of HMO experience?
Take your time, but also trust your due diligence.
Research everything – tenant demand, employment, room rates, trends, property prices, BUILDERS, streets, locations…
Surround yourself with a trustworthy team and learn from other people’s mistakes (by reading articles like this!)