Multi-Let UK has determined that the gross return in HMO let to young professionals and workers has increased by 18-20% of the last 5 years. What that means is that, on average, every £1,000 invested in this kind of venture since 2011, had grown to about £1,900 last year (2016). This is a huge margin when compared to the average growth of a standard BTL that stands at only 6-8%.
Yes, well-managed HMOs are a huge business and the best potential for return in the real estate market. But just because you have a building and can knock down some of its walls to turn it into an HMO doesn’t necessarily mean that you will see those kinds of returns. You need to be strategic and you need to find the right kind of HMO. Here are tips on how to spot good opportunity to create an HMO that will be profitable.
Look for the right kind of property
From experience, we know that the income from HMOs grow exponentially when you have more rooms in the house. But they cannot just be a bunch of rooms that aren’t well designed or positioned to serve as single, independent residences. When looking for a potential property that could be turned into an HMO, you need to find something that has anywhere above 5 rooms (more than 6 would be ideal).
This should be your guiding light when looking for any type of investment property. Your returns will be greatly affected by the location’s accessibility, the kind of taxes associated with the area, the security and whether or not your target market actually wants to live there.
HMOs are ideal for young professionals who are more concerned with getting to work conveniently as well as students who just need somewhere close to the school but far enough to give them their privacy. Before you go pouring money into a building, look around and see what kind of amenities are available. Is it near a school? Are there industries or companies nearby? Does it have access to excellent transportation and such?
Study the local market
As much as you may be certain that your HMO will attract students and young professionals, you need to study the kind of students as well as professionals that rent there. Are they the posh kind or will they be fussy about certain repairs, amenities and rental ranges? This is a business after all, and you must supply what the market demands in order to attract their business.
Finally, in all this, you need to keep an eye on the ‘reversion cost’. This is something that often catches most HMO landlords by surprise. Yes, as much as you may hope for your retrofitted changes to remain constant, sometimes the market conditions change and you may need to turn your HMO into a whole different type of facility or property before you can sell it or make any money for it. How expensive these changes will be will depend on the kind of modifications you made to the property in the first place in order to turn it into an HMO. Try to make changes that, although effective, will not cost you an arm and a leg to reverse should the market conditions demand it. That is the ‘reversion cost’.