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Welcome to Day 4 of "HMO Week 2017". It's powered by Platinum Property Partners."HMO Week 2017" continues for the next 4 days, and new and exclusive content will be added daily. The week takes you on a journey - from sourcing an HMO, to getting it set up compliantly, to marketing, to management and all stops inbetween.Today, PPP have provided us with some content to help you decide which size of HMO to go for:
One of the main reasons landlords invest in Houses in Multiple Occupation (HMOs) is to generate more rental income than can be achieved with a single tenancy buy-to-let property.
And while the misconception is that all HMOs have at least six lettable bedrooms, the official line is that any property with a minimum of three unconnected tenants sharing kitchen and bathroom facilities is generally defined as an HMO.
This does mean that there is scope for investors with less working capital to buy a property and rent it as an HMO without doing very much work at all, but what are the pros and cons of investing in smaller HMOs vs larger HMOs?
Advantages of smaller HMOs
In theory, you could buy the same three bedroom house that could be rented to a family on the same tenancy agreement but instead, rent the rooms individually on different tenancy agreements and call it an HMO. The rooms would still be subject to minimum size requirements, but there would be no need to obtain planning permission or a licence unless there is an Article 4 Direction in place in the area.
This kind of property could also be cost-effectively converted into a five or six-bedroom HMO by turning spaces such as integral garages, dining rooms and living rooms into bedrooms, as long as there is still space for a generous communal area and kitchen.
The obvious advantages with smaller HMOs, aside from not usually needing planning permission or a licence, is that refurbishment work would be minimal, faster and cheaper, allowing for the property to be tenanted fairly quickly and start generating an income. They are usually easier to manage too, because fewer tenants also means less potential problems and voids to deal with, maintenance issues, wear and tear and neighbour complaints.
However, the less rooms you have in an HMO, the less rental income you are able to generate. The opportunity to add immediate value through development profits will also be reduced if you’re not, on the whole, making major improvements to the property. HMO Landlord and PP partner, Ed Bembridge, explains why he's a fan of smaller HMOs:Advantages of larger HMOs
On the other hand, larger HMOs undoubtedly generate more income. There is also less competition for suitable properties than there is for the traditional housing stock, such as three and four-bedroom properties. Larger houses with more land or properties such as nursing homes, B&Bs and small hotels are often more suitable and not sought-after by owner-occupiers.
And you need more cash to get started. Not only will the property itself usually come with a bigger price tag, but the refurbishment work required could be significantly more expensive, not least because you need additional bathroom and kitchen facilities, and take months. Planning and licensing applications can be complex and only add to this timeframe.
In addition, instead of four or five tenants to deal with, there could be eight, 10 or even 12 people living in a property, which increases the risk of arguments and personality clashes and means that quarterly checks and general management takes more time.
But while investors might assume that doubling the size of an HMO means doubling the operating costs, that’s not always the case. Broadband infrastructure might cost more, but the monthly bill will be the same, for example. It’s more common that a 12-bedroom HMO will cost 50% more to run than a six-bedroom HMO, but generate double the income, therefore increasing your return on investment.
What’s right for you?
The fact is, there is no right or wrong. Both small and large HMOs work and come with pros and cons. The key when deciding which size of HMO to create is to think about the bigger picture and your long-term goals.
If you’re goal is to achieve a certain level of income, then investors should take into consideration the income potential of individual rooms, not each property. You could generate the same gross rental income with four 10-bedroom HMOs as you could with eight five-bedroom HMOs, and those smaller HMOs would not necessarily cost you half the initial investment to buy and convert.
The time it takes to manage 12 tenants in one property may also not differ significantly to managing six tenants in two properties, especially when travelling to different properties is factored in.
Having said that, the resale potential of larger HMOs is often limited to investors, whereas smaller HMOs can more easily be converted back into family homes. If you’re not intending on holding your HMO investments for the long-term, or want to increase your chances of achieving a quicker sale in an emergency, have smaller properties in your portfolio is a good idea.
Ultimately, it will come down to how much capital you have to start with and what’s available to buy in your investment location, but having a diverse portfolio of HMOs is never a bad thing. Just remember that larger HMOs are not for the faint-hearted or inexperienced investor.
Summary of the week's content:Monday - Launch of HMO Week 2017 with Steve Bolton - discussing popularity of HMOs and trends in the marketTuesday - Sourcing an area suitable for an HMO and finding a suitable property Financing of HMOs - insights and criteria Wednesday - Legal and licensing considerations / refurbing an HMO and optimising the lay-outThursday - Small HMOs vs. "Super HMOs" Friday - Creating harmonious householdsSaturday - Avoiding voids in HMOsSunday - Getting rid of a bad tenant from an HMOThis content has been provided by experienced HMO landlords from the Platinum Property Partners community who have generously shared their knowledge and tips for a happy HMO life!To celebrate HMO Week 2017, PPP have created a fantastic guide - "7 Steps to Successful HMO investment" - which is available for download now:DOWNLOAD THE FREE GUIDE Join us ALL THIS week for a cracking "HMO Week" 2017 - everything you could want to know about HMOs and the stuff you didn't know you needed to know!To learn even more about HMOs, join the HMO Group on Facebook, which is an excellent resource for HMO landlords.SEE ALSO - Insights into HMO mortgagesUP NEXT - Sourcing an HMO location and property DON'T MISS - Planning and legislation for HMOsNOW WATCH:
Vanessa Warwick Landlord and Co-Founder of PropertyTribes.com **If you have got value from Property Tribes, find out how you can support it in remaining a free to use community resource**
the smallest hmo I have is a 6 bed, I think that is the best size to have, as in dealing with issues.
I have a 8 bed HMO which people treat as there own home, it was mostly Polish tenants by choice but now it's half and half but a good mix of people.
I also have a 15 bed HMO, which some people may called Mega, that is the one I've had a lot of issues with, it has 13 ensuites with the other 2 x rooms sharing one bathroom. This one has been a nightmare at times and still is, now and again.
It it only takes 2 or 3 people and it can disturb the whole place, I've had dealing going on, drunks, fights etc. It has taken me over a year to get things to charm done, evicted the trouble makers but there are issues coming up all the time, regarding noise, playing music, slamming doors etc
it is hard to get a good mix of people in the same house.
So I would say, stick to 6 to. 8 people max.
Great content and advice as usual Vanessa.
I've been thinking about investing in additional student HMO's.
However, the impending possibility of Business rates being levied on the owners of this type of property
has made me step back.
If this were to happen, the combination of S24 and other costs associated with type of property would make them totally non viable.
It would be a great shame for the students too, as they would be forced to rent the much more expensive purpose built pods that are currently being built in every University town.
Pods (imho) are not in the ethos of UK students (more likely their parents who are the ones paying!) as they just don't offer value for money. If you can offer the best quality accommodation for that price point I can't see why they shouldn't rent. Most pods seem to be almost double per week what sensible student housing costs.
Business rates + S24 etc. would be a big problem to newer entrants to standard student housing, but long term once they've had to sell up or pay down it will leave less competition. Those pods weekly rents are only going to be going up in the future.
Thanks Vanessa for the videos. All very interesting and confirming some of my thoughts and making me ask questions about others!
Re: Alans 15 bed HMO, this sounds like a total nightmare! 15x differing mentalities/attitudes/lifestyles - would be like watching Eastenders, Corrie, and Hollyoaks combined on a permanent repeat! Now if that isn't earnt income from property I don't know what is.