As many of you know we have invested heavily into this property strategy since 2017, so I thought it would be worth touching on why we choose this path over other strategies.
Before you read this article it may be worth looking at the past HMO blog’s https://tungstenmg.com/blog/category/hmos/ to recap the wider HMO topic. As a definition from gov.uk ‘A house in multiple occupation (HMO) is a property rented out by at least 3 people who are not from 1 ‘household’ (for example a family) but share facilities like the bathroom and kitchen. It’s sometimes called a ‘house share’. In Medway we have 5 HMO’s of various sizes and in different locations which although relatively close have very different tenants and very different house atmospheres.
The main reason why we adopted the HMO concept was that we wanted to get cash rich fast. We were new to property so wanted to generate a high cash flow so that could reinvest this onto further projects – which we did. Our average HMO room rents for £550 pcm and we have on average 5 rooms per house. This is an income of £2750. For this example, we have 1 room rent paid to the mortgage and 1 room rent paid to bills, so our cash flow is £1650 pcm. If you compare this to other properties of a similar size the rental income is around £1200 pcm. For an additional £450 pcm it may not get you excited but keep reading.
Another element to consider is that you have many people paying their own rent who are independent of one another. Therefore if one tenants circumstance change your cash flow will still be positive as you would be very unlucky to have several tenants in one HMO all default on their rent. But if you have a single BTL and they default on their rent then you are liable to cover the mortgage, and are you able to do so? We have rental payment protection which like most insurances you hope you never need, but at the moment I do have one tenant in a HMO who is 2 months in arrears and we are going via our insurance company to help retrieve the unpaid rent.
From a yield perspective, the yield percentage can be better for a HMO than a single let. The yield on these types of properties can be higher as the difference between money spent and rental income is greater than a BTL. For example, if you buy a house for £400k and let it for £1800 per calendar month there is a yield of 5.4% but a HMO with monthly rent of 6 x £130 per week has a yield of 10.4%.
Another financial reason to invest in a HMO is that the property can be valued with a commercial view and not just bricks and mortar valuation. The valuer can consider the rental income and yield. This can be a great factor to consider when you calculate your exit plans with a HMO opportunity, but please note that the exact valuation is based on the person who actually comes out on the day - its not an exact science.
But with all these great reasons there are some drawbacks with HMOs. There is a larger outlay for the build process and for us in Kent it is around £100-120k as we install en-suites in all rooms as our design is driven by the market, plus larger kitchens, appliances and furniture. You have to cover the costs for the household bills and as the bills rise you may not be able to rise rents at the same rate as you may price yourself out of the market. You are also responsible for the appliances, you may need a HMO license and you have to deal with multiple tenants all living together rather than one tenant or a family.
For Tungsten Management Group the HMO model as been the base for our business and learning and if I can be of any help please do get in touch.
