Why are up-and-running HMOs becoming more and more popular for investors?
You’ll find 10 key reasons hidden in this article…
There’s a certain property ‘crowd’ that only buy property when they can add value, when they can refinance most, or all, of their money out, or when they feel that the property is Bee-Emm-Vee enough…
These buyers don’t buy up-and-running HMOs.
They are happy to trade time for higher yields, offset risk for greater equity and more stress and challenges for better ROIs.
There is another buyer type that’s just as active and shrewd – and, you’ve guessed it, these buyers are happy to pay for quality properties with demonstrable income and success.
For years, they’ve been buying off-plan new builds for fixed yield returns, sinking in cash they’d earned from ‘outside property’, or they’d buy the odd time-share, holiday home, local BTL or mixed-use building. All low risk, modest yields and as ‘arm’s length’ as it can be.
And now, more than ever, they are buying HMOs - spurred on by the allure of higher returns and cash flow, and probably thanks to the odd seminar, event or course aimed at ‘selling the HMO dream’ even more to them.
These buyers, often cash buyers from the South of England or overseas, are the PERFECT buyer type for up-and-running HMOs.
Where a developer sees opportunity, these buyers see risk. When a ‘property person’ spots a chance to learn and immerse themselves in the world of property, these buyers are too busy delivering life-saving care to their patients or running the business outside of property that made them successful in the first place.
“Just find me a quality, sustainable HMO that I can have limited involvement with but be confident that it will run smoothly and provide a great return”
There’s always been enough of this buyer type to sustain a healthy HMO resale market and provide existing HMO landlords an exit or HMO developers the chance to do HMO flips – jeez, The Property Advantage was set up to be the leaders in the niche!
But now, in 2022, let me explain why this buyer market is increasing and up-and-running HMOs are getting more and more popular (before you get too excited, we’re not seeing HMO resale prices increase as a result but we are seeing greater numbers of quality buyers that can PERFORM and if you’ve tried to sell an up-and-running HMO, you’ll know how important that is).
Yesterday, a rare thing happened to me. I was asked to value an ‘add value’ project. This is rare because we specialise in selling tenanted HMOs (and blocks and portfolios FYI!) but we do occasionally get projects or refurb opportunities from our network of landlords.
Think of a developer who has got planning for an HMO conversion but lost their funding, or an investor who bought a property for conversion only for them to spot another development elsewhere…
So, I was assessing this property – which had planning for a 7-bed HMO and which required extensive works to create the finished product.
The fact that it had planning was a huge bonus as Covid planning delays is the 1st reason why up-and-running HMOs are getting more popular but it was the increasing level of risk with the build and conversion that made me the most nervous.
(2nd) Increasing material costs (spiralling some might say), (3rd) builders becoming harder to get hold of, (4th) project lengths getting longer due to pandemic delays, site delays or (5th) council/surveyor delays…
These issues are proving hard to navigate even for local developers and investors or experienced operators, imagine how daunting they seem to a busy, time-poor investor in London investing ‘ooop North’ or to a trusting buyer in Hong Kong relying on zooms with their experienced (sic) sourcer…
Daunting indeed.
The next issue that was raised on my assessment of the property was the optimism the current custodian had over the final rents. Yes, we know that deal packagers (or developers preparing packs for their refinance) cook the books sometimes over ‘predicted rents’ but now really is not the time for carefree analysis of room rates.
(6th) An up-and-running HMO gives you actual rental, historical occupancy and banked income…bums on seats which takes away one more perceived risk for those who are attracted to buying tenanted HMOs.
In the case of the property in question, I felt rents were 15% too optimistic for sustainable occupancy. It doesn’t mater what the rents are on day one, it matters when the rent was after year one, year two etc..
Unless you are pushing the first intake of rents up just for the commercial refinance?
Another current issue that drives more people towards buying off-the-shelf, the known rather than unknown…
Lenders and valuers for HMOs are cautious, unpredictable and often harsh – and here’s the 7th reason.
If you’ve ploughed in 12-18 months’ worth of time and stress, hundreds and thousands of pounds into builders and developing, presiding over delays, issues, stresses and mistakes with budgets increasing by the minute the one thing that will save it all is the lenient surveyor arriving upon completion and signing off another ‘BRRRRRRRRR’ deal… (JV relationship saved, phew!)
“What do you mean you’ve only valued it at £245,000!! I’ve spent more than that on mistakes (sorry, materials)…”
An up-and-running HMO allows the buyer to assess the actual income, the actual running costs, visit the finished project, learn about the demand, interview the managing agent, budget for their cash outlay and their lending options.
The balance has tipped in favour of ready-made for many investors now – even those who considered developing in recent years.
Physical viewings to understand what they are investing in is such a confidence builder (8th) – you can’t beat the level of comfort a prospective buyer gets when they’ve completed their remote due diligence, watched the video viewing, scrolled the pictures and analysed the numbers only for all of this to be rubber stamped on their actual viewing.
“It is as good as we said to you, Sir…”
Buying ready made HMOs also gives a buyer the chance to gobble up assets inside Article 4 areas (9th) – often the best areas for tenant demand (not often, nearly always goddamit).
Developers have been fleeing Article 4 in search of underdeveloped secret locations that still allow them to BRRR the crap out of dated Victorian terraces but are they really the best areas for HMOs?
Article 4 gets brought in for a reason. It’s a developers worse enemy but an up-and-running buyer’s best friend.
The more Article 4 areas there are, the more popular the up-and-running HMOs will be for resale inside the catchment area.
Finally, the HMO world is so bloody complicated for an outsider…
“Should I develop a boutique HMO with an industrial finish? What colour is currently on trend?”
“Does anyone know a trusted sourcer as I am in a legal dispute with my previous one?”
“Any recommendations of a builder who understands HMO conversions?”
“Do I need all en-suite rooms?”
“Can anyone advise on fire regs and sound insulation?”
(10th) If the HMO is already built, tenanted, running successfully and compliant then that’s one hell of a task list ticked off!
Extensive buyer due diligence should still be in place in case you are just about to buy one of those crap, unlicensed HMOs in Wolverhampton upon reading this – STOP!
Delve into the details still, the planning, certification, building regs, license, room sizes, occupancy, managing agent, running costs…
View the property, buy from a trusted agent, speak to the landlord, other trusted investors…
Well done for reaching the end. I’m sorry for this one.