HMOs have without a doubt, emerged into their own investment category. We’re witnessing their popularity grow and outperform the more traditional buy-to-let properties.

It’s for these reasons that Seb Carrelli (fellow Director of NapeX Finance) and myself have decided to explore HMO investment, personally.

Rest assured this decision doesn’t alter our commitment to NapeX Finance; rather, we are recognising the opportunity with HMOs like many others, and are in the position to invest.

It was back in the early 2000’s when HMOs first required licences and planning for the more larger property blocks, or bedsits as they were more commonly known. I’ve been actively engaged in financing HMOs since that time, so we have extensive experience on that side, but from an investors perspective, you could still consider us novices.

We’re fortunate to know and work with many professionals within the HMO sector, and many of which we have spoken to about our plans. I’d like to mention specifically Umesh Kalra of Moneyrow Properties who has been working closely with us on our own HMO investment strategy.

We wanted to share how we’re seeing the market evolve, and what some of our more recent learnings from a HMO investor point of view.

It’s pretty simple really, it comes down to the potential return on the type of property. There are more tenants, and more tenants mean more income, so in a market where maximising return is key, HMOs have proven lucrative.

We’ve helped customers with finance so they can buy, refurbish and convert properties into HMOs, as well as help customers who are looking to buy existing ones and take them over.

From working with a huge variety of HMO landlords, we’re also witnessing significant improvements in the quality and finish of both HMO properties, and what they provide for their tenants. Whether they are students or professional workers, HMOs offer short or long term accommodation which is often now more upscaled, yet still at affordable rates.

Location

As you would expect, the topic of location remains paramount when considering property investments, including HMOs. When looking for the right location our first key considerations now include; is there a demand for HMOs in the area? are there other HMOs already? what would our competition look like from additional rental properties? what local amenities and businesses are nearby? what are the travel and transport links? Is there a more widespread interest to be living in that area?

Collectively the insights from these points help us anticipate the likely return.

Article 4 Directions

These can vary significantly from one council to another, for example Leicester are currently expanding theirs, whereas Derby is just at the stage to of introducing one. Researching the planning regulations and restrictions of the area you are looking at, is key for making informed decisions regarding HMO investments.

If there is an Article 4 in place, or there are plans to put one in, this can have a mixed impact for investors. On one hand, it can introduce additional costs and red tape for those looking to convert properties into HMOs. On the other hand, it ensures that HMOs meet certain standards, which enhances the quality of housing for tenants. Article 4’s help protect the value of your property and if you have your planning in place, this will also help if you refinance or sell off your assets in the future.

Click here for more information on Article 4 Directions.

Outsourcing

Within our strategy we’ve chosen to delegate out various tasks involved with the completion and maintenance of HMOs. We recognise the benefit of using professionals with their own experience in the right areas.

As such, we’ll work with a professional HMO developer to oversee the project management, they’ll also bring in and manage skilled local construction teams they know, who will build-out the unit.

For the ongoing management and upkeep, we understand that wear and tear is inevitable and our preference is to address maintenance needs promptly, rather than allowing them to accumulate and incur greater costs over time. To manage this, and any other tenant related needs, we’ll enlist the expertise of reputable letting agents we know across the UK, who are specifically experienced in HMO management.

Valuations

This depends on the strategy driving your decision to invest in HMOs. For us, our approach is to purchase the property, utilise available funds to convert it into an HMO, and then subsequently refinance and repeat the process.

Investing in HMOs offers the advantage of two valuations: one for the property itself and another for its status as an HMO.

Across the UK and if we think of over a period of a decade, with rates inflation continuing to rise we can expect the valuation of properties to also increase. For those who don’t want to withdraw funds or refinance their HMOs, there is an element of protection as eventually, the valuation of the as a property is likely to catch up with the valuation of the HMO.

High Quality Finishes

Our goal is to provide premium-quality HMOs, so we can attract good tenants. Collaborating with the right architects and planners from the outset helps with that and any future plans.

Together, we will look at room dimensions, the feasibility of incorporating en-suites, and ensuring living spaces meet the comfort standards required by tenants. We also now pay close attention to other aspects of the properties, such as the kitchens, and will be incorporating innovative solutions available to optimise these areas for multiple tenants, keeping their items separate.

When we have completed our initial research we’ll step back over to the broker side to the investment. If we’re looking for a refurbishment and conversion lender, we’ll run it through our own robust financial models to determine exactly how much cash we will need, with some provisions on top, and just like we do with our own clients, we’ll see what our long-term finance options look like.

Are we anticipating to recover all our invested capital after each HMO project? Perhaps not immediately, particularly in the initial stages. However, our refinancing strategy addresses this concern, as does the potential for additional planning and extensions that we may explore.

One aspect we are certain of is that HMO investment is a long-term sector, not the short term and we are prepared for this as we embark on our journey as HMO investors.

If you are interested to know more about financing of HMOs, or HMO investment please contact us.

You can also register to attend our HMO Discovery webinar, where we will be talking through all things HMO related. Details of the webinar (date, time, link etc will be shared shortly).