Considering a HMO as an investment

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    Considering a HMO as an investment

    Hey everyone, I've just joined, this is my first post. I'm Paul, I'm 31 and I live in Mid Wales. Under tragic circumstances I will be inheriting some capital sooner than I had imagined. I'm becoming keen on the idea of a HMO as an investment, but being pretty young and new to this field, I am looking for some guidance and advice!

    Already been researching, and I can get a 6 bedroom town house in my nearest University town about an hour away, already set up as a student HMO for around £180k, which seems like a bargain to me. They seem to earn anywhere between £10000 & £18000 a year.

    So... I appreciate I need a HMO license, do I also need a landlords license too?

    As I already have a full time job, I would need to employ an agent. I hear they take around 10-15% of income earned? Do they take care of everything including finding and evicting tenants?

    Do I need a special kind of insurance, if so, how much roughly is it?

    The rent earned I assume would be added to my current income, and taxed as regular income tax?

    During summer term, when the house is vacant, am I allowed to use that time for repairs and maintenance, and am I allowed to live in it short term to save a two hour trip every day?

    Assuming as it would be my second home, I'd pay a higher stamp duty for a 2nd home?

    I would very much appreciate tour help guys, I may add further questions to this topic as I'm constantly thinking of new questions to ask!


    Hi Paul
    Welcome to Landlord Zone.
    The first question is are you a property owner , with or without a mortgage, the next element to note is that lending on HMO’s is normally restricted to applicants who have present experience in having a BtL ,fortunately there are a very small number of lenders who may advance monies where this is indeed the first BtL entry.
    Whilst the property has an HMO License this is not transferable and you will need to make an application and pay the fee.
    Property Insurance for this type of property is different from the run of the mill BtL property Insurance and I would suggest you seek the assistance of a Specialist General Insurance Broker who will research the market, normally their services are free given that they derive a very generous commission from the Insurance Company.
    As I said there are a number of questions which need answering but your aspirations are quite attainable.


      Thanks for the reply. Yes I bought my current house in 2012 and own around 50% of it now. But the HMO I am considering would be bought with cash. I should be getting around the £200k mark, but I already have almost £100k in savings to go towards licensing, insurance, letting agent fees, stamp duties and repairs/maintenance. When I first heard about the rent you can yeild from a HMO, it just sounded a bit too good to be true, I was wondering if there are any hidden costs I don't know about.


        The student market is a specialised sector of the HMO market and can return good yields but you should expect a higher wear rate in the houses and you may need to put in cleaners and a gardner to keep the place liveable with 6 or 7 tenants. Be prepared to offer all inclusive rents and for the gas and electricity to take a hammering at times. You headline 10% return may realistically be nearer to 7.5% after costs. In my area good student houses rarely come on the market so do your research carefully.

        The first issue is why the current owner is selling. What is the EPC rating ? Is it an old house needing to be upgraded? Are there any tenants in the house already for the next academic year? How is the property let - is it to a single group of tenants or let on a room only basis? How near is the property to the University gates?How is the property currently managed - is it by Agent or Owner - does he live locally? What is the competition like for student housing in the area?The Universities are quite active in the student accomodation market these days and let quality accommodation with gyms, concierge service, ensuites etc on a 40 week contract. How does this house fit in the market?

        In some student areas if you 'miss the market' then your house is either empty or filled with single students, foreign students ( which I found to be OK - but no guarantee available) or even non students.

        Choose you agent very carefully as a HMO can demand a good deal of management at times to ensure it is fully tenanted and working well. For example the rubbish needs to be collected regularly ( it's the property manager's responsibility) or else the house quickly becomes untidy and subject to vermin( a real problem in student areas). When I operated a HMO I visited at least once a week to make sure it was running OK. Within a couple of weeks of selling my HMO I received a telephone call from the council telling me the bins were causing a problem - it shows how quickly it can deteriorate if left alone.


          Another thing to research is the amount of new student accommodation being provided by the university itself.

          In my area (a big south coast town) the uni has built lots of new, stylish accommodation to suit all budgets thus cashing in on UK and foreign student money. This model has been so successful that many HMOs are coming to the market go cheap for conversion back to family homes or larger flats for the general market.

          Research needed.

          Freedom at the point of zero............


            An HMO licence is a landlord licence!

            An HMO is a business, not a pure investment. If you haven't got time to manage it yourself,and have no experience of managing rental property, I would say look elsewhere. Letting agents need managing, almost as much as the property itself.

            As you are treating this as an investment, it should form only a small part of a diverse portfolio.


              You all raise good points, thanks for your feedback. Of the 6/7 HMOs currently available, some have been for sale for a year or two, but that isn't necessarily a bad thing, as houses are taking a long time to move on at the moment. They all look in good condition, obviously they're pretty basic given their purpose. Some even have tenants until next year, but like you say, maybe more research is needed to see if the demand is still there. In comparison, other similar sized houses in the area are being offered for about £100k more. Just really unsure how to invest almost £300k and I thought a HMO seemed like a good idea, or at least property, always seems to give a god return.


                HMO's, particularly large/sui generis HMOs require a lot of management and a very good knowledge of the law. I would not recommend this as a first experience for a landlord.


                  I agree with DPT57 ,unfortunately it seems that the high levels of income from such properties often result in eyes misting over for the novice investor and supports the reason why many lenders will not accept applications for HMO Finance from persons/ companies with no experience.


                    Originally posted by Draigflag View Post
                    some have been for sale for a year or two............houses are taking a long time to move on at the moment....... In comparison, other similar sized houses in the area are being offered for about £100k more....... at least property, always seems to give a good return.
                    The capital returns on HMOs are not always straightforward


                      On a similar subject, what are the views on a reasonable yield after higher rate tax for an HMO? I was chatting with a FA and he said that investing in an income or accumulation fund on the stock market would give as good returns with none of the hassle (I guess he would say that though). He pointed out that you can also sell a portion of the stocks to cash in capital whereas you cannot sell part of a property.

                      So it would be interesting to know what you all consider a reasonable yield to be that makes up for the hassle factor of HMOs..


                        I have to admit, HMO is not something that appeals to me. Even less the student market, with Universities now capitalising on this revenue stream. I think the days of students accepting any property are gone.

                        Have you considered Holiday Rentals? obviously depends how 'involved' in the rental you want to be. Might be a better Tax position on both Income and CGT when you sell. Might be easier to sell if you decide property isn't for you.

                        Research is the key.


                          Yes actually, as an alternative, I have considered buying a few smaller properties locally (houses are very cheap here) and having a letting agent fill them up for the summer for me. My parents ran a guest house for 20 years so I do actually have a bit of experience in this field. I live in a tourist hot spot, there's no shortage of people looking for holiday lets. However it is very seasonal, the winters are very quiet. But still, a viable alternative if ever there was one. Thanks guys.


                            You will have to fully furnish them for this market and will need people to do the laundry, cleaning and change over between guests. Holidays lets is a very different market and would need speciallist insurance, probably non-standard btl mortgage if applicable and I think some Councils have a restriction on shorg lets


                              Well as a last resort, I can always stick to plan A, which was to buy 2 or 3 local properties, and rent then out long term. Sure I won't get as much as a holiday let, or a HMO, but it's an almost guaranteed constant income and as there's a shortage of properties to let locally, there will always be someone looking. As mentioned, houses are very cheap here, £75k to £100k can get a basic 2 bed terrace which will bring in £400-£500 a month, way more than any savings account can offer as far as I know. All I'm trying to do is look for a nice steady return on my inheritance without giving up my long term job which I love, and with the least hassle. Is there a "things you need to know" or buyers guide section here for first time landlords?


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