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Understanding how to invest in HMO’s

Published: 14/01/2017

It is no secret that the best returns available for investors in residential lettings come from Houses In Multiple Occupation (HMO’s).

This is where a traditional family property is let to a group of unrelated sharers, or is let room-by-room to individual unrelated sharers. This maximises the rent that is achievable since there are several people to split the cost, rather than one family.
Why would tenants want to do this?

Why tenants would want to live in a HMO?

• Bills are typically included in the rent, making this a really convenient way to rent
• Rents are much lower than for an entire property making this a highly affordable way to rent
• It’s a fantastic way to meet new people! Most tenants renting in HMO’s are in their 20’s and this age group love to socialise. Not only that Leeds is a magnet for employment for young people. Meeting new people is a priority for those moving to a new city. What better way to do that but to move into a house share?

Why Leeds landlords avoid investing in HMO's

Whilst we have seen investor demand increasing for Leeds HMO’s in recent years to an extent, many choose to stay away from this area. The reasons we hear for this tends to around these concerns:

• Difficulties getting planning permission, particularly in an Article 4 area
• Difficulties getting finance
• Belief there is too much regulation/a misunderstanding of regulation/no time to learn this complex area
• Too much cost to set up the property to be a HMO
• Too management intensive
• Too much wear and tear on the property
• High tenant turnover and or void periods

Whilst these are valid concerns, after years of letting and managing HMO’s as well as investing ourselves, Dwell Leeds have been able to overcome all of these areas through experience and their understanding and knowledge of the market. We have successfully eliminated all of these concerns on many projects and we’re fantastically placed to help others to do the same. This means we are able to achieve some of the highest yields out there for investors in Leeds!

Why are more investors wanting to invest in HMO's in Leeds?

There’s a number of reasons, I’ll explain a few.

  1. The ‘Section 24’ tax changes. The government are taking away the tax break investors and landlords used to get by off setting their mortgage payments against tax. This includes interest, capital repayments, and finance costs. This began to be phased out in 2017-2018 and by 2020-2021 none of these costs will be tax deductable.
  2. Stamp duty hike for investors. From April 2016 the government have increased the rate of SDLT on property purchases by 3% (where the property isn’t being used as your only home and residence, i.e on all rental property).
  3. The rise of property investment training companies. This is big business with day courses selling for around £500 and weekend courses selling for around £1500. The big training companies teach various property investing strategies, including HMO’s as one of their main ones.
  4. High entry price and low returns in the south east and London. High returns and low entry price in the north. Lots and lots of cash is coming from the south are investors head up the M1 to benefit from this!

Because this market remains shrouded in misunderstanding and seeming complexity, many landlords avoid it altogether which makes for a less competitive field for the investors that are “in the know”. The informed investors also understand that the true value in HMO’s comes from outsourcing the “hard work”, time consuming, nitty gritty stuff to a professional agent that really understands this area. This frees up their time and energy so they can focus on the more important things in life. This could be income generating activities such as finding more deals, more time to spend on their career. It also enables them to spend more time on the things they love – family, or hobbies. 

Our Leeds investors leverage our time, systems, knowledge, experience and team. In this way they create fabulous passive incomes for themselves without any hassle. This is the path to wealth creation. 

What are the returns on HMO investing?

This varies but generally they can be around double the return for a HMO than a single let. An average investment on a single let property in Leeds is around 5% net return, whereas the average HMO is close to a 10% net return (after all costs), although they can be higher.

Calculating the return on HMO investing properly 

When looking at your investment numbers you will generally have a spreadsheet that totals up all of your costs, and then all of your income. Basic calculations of income against costs will give you your investment numbers - yield, ROI, cash flow etc. When you compare these to buy to lets your eyes will widen and your heart will start to beat a bit faster. But don’t get too carried away yet. Most people underestimate their costs at this stage...

The greatest margin for error here is your refurb cost. Even if your trusted builder has priced up the job, even his experience can’t tell him what he has yet to find. You will need a contingency figure here. 10% would usually cover it, but 20% would be prudent. The next thing investors are underestimating at the moment here is voids. If your voids contingency looks like just 10%, you may need to think again! 

Does this sound interesting to you?

In a series of upcoming blogs, I’ll address each of the typical concerns to show you how you can understand and master HMO investing.

The next blog will focus on achieving planning permission, which can be the most challenging hurdle. This can be challenging in Leeds since most of Leeds is within an Article 4 area, however, it can be done. If you are not familiar with Article 4, this is a direction imposed by the local authority to restrict the use of HMO’s in a given location.