I was watching this Rick Otton video the other day where he talks about HMOs. He asks why are we in it and what do we want to get out of it. The premise of the video is that the primary motivation for investing is always to make profit. After all, a good investment is judged based on its rate of return.
This is where I feel many people miss the mark when investing in HMOs. In many cases, the building becomes the focus, not how the building will actually yield a good return on investment. Understanding your primary goal is important when deciding whether or not you get into HMOs.
HMOs in a changing market place
Just like Uber has completely revolutionised the taxi business, Airbnb has done the same for housing in general. There was a time when serviced apartments were a preserve of the rich and those ‘in the know’. This time is long gone. Today, there are people making up to £300 a week for a room that would typically make about £100 a week thanks to Airbnb.
It is these sorts of results that have led to the polarising debate on whether serviced apartments are much better off for investors than HMOs. The truth of the matter is that this all depends on a few things:
- How great your particular property is in reality.
- How well you can market it.
- How much traffic you can get.
These three reasons determine whether or not you property investment will be worthwhile, be it a serviced apartment or an HMO. So, should you turn your serviced apartment into an HMO? Let’s look at some of the pros and cons of this line of thought.
Pros of HMO:
- Higher income: Because you are multiplying one house into several, HMOs tend to bring in higher yields.
- Better cash flow: You will get rental income from several renters within the same building.
- Better resale value: You will find better returns should you ever sell an established HMO.
Cons of HMO:
- Management time and costs are high: HMOs are difficult and often expensive to run especially when it comes to repairs and dispute management.
- Licensing can be a nightmare: Depending on your local government the licensing of an HMO can be a real nightmare.
Pros of serviced apartments:
- Fixed rental income.
- Low vacancy rate if you get clients who want long term leases.
- No letting fees necessary.
- Some tenants may take on long term leases which are excellent for your cash flow.
- No management fees necessary.
Cons of serviced apartments:
- You hardly have enough time to do a background check on your tenants, which is very risky as far as security is concerned.
- Most tenants want short term leases thus negatively affecting your cash flow. ‘
- Poor reviews may sink your business.
- Some tenants can be very demanding and unreasonable.
Comparing the two side by side may not be the most efficient of methods to determine which among them is the best option. So, it is best to go back to the basics and determine what really matters. Profits.
In your particular situation, which one of these options makes the most financial sense? Typically speaking, HMOs have been outperforming serviced apartments in this sector for quite some time now. Based on that fact alone, maybe you should turn your serviced apartment into an HMO.
However, if your particular situation dictates that a serviced apartment makes more financial sense, then that is what you should go with until that fact changes. Like we said before, it all depends on your specific situation.