WHAT IS AN HMO?
HMO stands for House in Multiple Occupation.
Put simply it is renting a property out on a room by room basis.
Most people will be familiar with student let properties operating as HMO’s but there are successful HMO property strategies for all different sectors of the rental property market.
From LHA HMO’s (tenants in receipt of local housing allowance) through to high end professional markets catering to a discerning professional market.
HMO’s are increasingly popular not only as housing becomes more expensive but also as individuals realise they can live in large executive houses in a social environment with like-minded people.
HMO’s are EXTREMELY popular with investors as the rental profits can be between 2 and 5 times greater than the returns offered by ordinary single let properties.
In YPN we regularly feature projects that deliver in excess of £1,000 net profit per month and investors even own SUPER HMO’s which can deliver net profits in excess of £100,000 per year.
Traditionally HMO’s were more cash intensive than single let investing but with more and more investors doing “joint ventures” with other investors and with the advent of creative strategies such as lease options and rent-to-rent it’s possible to get into HMO investing without the need for huge cash funds.
Check out these two articles featuring two HMO investors as a sample of the regular articles we feature every month in YPN.
The HMO MEGA-Business!
How to Build a True Asset-Based Business
Since he started investing in property in 2006, prolific investor, landlord and mentor Nick Fox has built up an impressive portfolio consisting of well over 200 properties. Around half of these are HMO’s and he has created a comprehensive property business that incorporates acquisitions, lettings and management. The whole operation is finally able to run smoothly without him though getting to this point has not been without challenge.
Before turning to property, Nick had a string of businesses behind him that ranged from market stalls to companies employing a lot of staff so he was well versed in the principles of business. Up to 2006 however, all of his ventures had been reliant on his personal input and he found himself working ridiculously long days. Though financially rewarding, he wanted a change and was ready for a new way of working – to create a ‘true asset-based business’ that did not take up all of his time. Given his previous experience, he took an entrepreneurial approach to property, conducting thorough research into cycles, statistics and the economy to identify the best model and potential both geographically and demographically. That research ultimately led him to the HMO model that now forms his primary focus.
His background enabled him to ‘hit the ground running’ when it came to establishing and managing the business side of his property venture, but past experience rarely safeguards against new challenges and he encountered a few new ones. We were delighted to find out more about his property journey – one that has been a hell of a ride over the past nine years!
YPN: What was ‘life before property’ for you?
NF: I have never had a ‘proper job’ – I have been self-employed and run businesses since I was 18 (I’m 46 now). In 2006, I realised all my enterprises had given me a decent living but no capital. I was the business each time and if I left, it would shut. Even with lots of staff, I was always the main sales driver.
I was doing a minimum of 12-hour days, six days a week. It was hard work, time consuming and stressful. The financial rewards were good but there comes a point where you want more time. By 2006 kids had come along so life had become more about family than simply working hard.
YPN: Tell us about your business.
Nick (NF): I am a property owner and landlord. I started in 2006 and built the business from zero units to a portfolio of over 200 properties, split about 50/50 between single lets and HMO’s.
YPN: Creating passive income appeals to many for that reason, but it’s never truly passive – perhaps we should say ‘less labour-intensive income’?
NF: That’s exactly what I was looking for – a vehicle or model to generate the same level of income from fewer hours per day/week/month/year than I was doing at the time.
YPN: What made you think property could deliver that?
NF: Briefly backtracking, I had got married in 2001 … then divorced in 2002. Sorting everything out took a few years and when it came to the financial split, there was a reasonable chunk of money to be shared. That had come from the capital in owning a house, not the day-to-day income. I thought: if one house created that much capital, why not buy more? How many would it take to replace my 7-7 job?
That set me off: I focused on rental income and capital growth and devised a 10-year plan.
YPN: Do you think people’s lifestyles get better as they earn more? Few set aside capital to invest in asset ownership.
NF: Asset ownership is the only way to achieve real wealth; if those assets produce income then so much the better. What you say is very true – as incomes grow, lifestyles often jump in line so people never get ahead of themselves.
YPN: Did you have a strategy when you started, or experiment and learn as you went along?
NF: I learned as I went along. Had I known about mentoring or learning from others who had trodden that path before, that’s what I would have done; but I didn’t, so made lots of mistakes buying the wrong properties. The first five were all studios or small 1-bedroom flats because estate agents told me these were what investors bought. As I gained experience and saw results in income and capital appreciation, I changed my model and tweaked it over the years.
YPN: Did you intend to create a full time business right away or was it a profitable side-line?
NF: Definitely a side-line. I wanted an income stream that did not come from the computer software industry (where I operated at the time) and a means of creating equity. Property held the potential for both.
YPN: How has your initial 10-year plan changed over the years?
NF: The 2006-16 plan was based on equity gain. I had researched property data since records began, looking at equity rises where I lived and elsewhere around the country to find the right place to build a portfolio. That research indicated that prices doubled every seven to ten years.
What I didn’t realise, and don’t think anyone else did either, was the great storm that was coming in 2007. The 10-year plan has extended to fifteen years, but we have come through and got bigger and better as interest rates have fallen.
YPN: Where do you operate?
NF: I started buying in Milton Keynes where I lived at the time. I knew the area from my other businesses and had a good feel for the town. I concentrated on that area until 2008 when I moved to St Albans, and now focus on Hertfordshire, Bedfordshire and Buckinghamshire.
YPN: You started with small flats, which are perceived as lower risk. Did you consciously take that approach?
NF: I was very risk averse at that point because I didn’t know what I was doing, so the lower the price point the better.
YPN: How has your perspective changed over the years? What do you look for in a deal now?
NF: In 2006, I aimed for between 5% and 10% ROI. Now my bare minimum is 15%. That comes from knowing the right type of properties and tenants, knowing the area better, what jobs are being created and where the demand is going to be.
Yield can be a subjective term. I look for a return on the investment money: if I put in £100,000, I want £15,000 out over the course of a year.
I aim to recycle money too, so look for capital growth within a short period – if not immediately, then in a year or two.
Sometimes it takes five years, which is quite a long time, but I want that money back out to put into another purchase.
YPN: As property is so capital intensive, how do you keep up the momentum? Did you have a formula to grow aggressively beyond waiting for prices to go up?
NF: As we all learned from the 2007-09 period, there is no guarantee of capital gain although there has been growth since records began. In the UK, we are fortunate that we are on a small island with more people than houses, so there is demand pressure. Anything in demand tends to rise in price so that is in our favour. My approach is to get a decent monthly rental return to provide an income while waiting for capital growth over time. Inflation helps that.
YPN: When did you introduce the HMO model?
NF: Some of the fixed rate mortgage products I took out in 2006 were coming to an end in 2008. New rates would be higher and that meant less income so I looked at the properties to see where I could increase that income. I stumbled upon the HMO model, then worked out the number of bedrooms that existed or could be created – and decided this would be the best way to improve the rental return. The first HMO opened in May 2008.
HMO’s are a very broad, diverse model. A 3-bedroom property can work, depending on purchase price and rent achievable, but you generally need five or six bedrooms to be profitable. If you can go over that to seven or eight bedrooms, profits and income start to increase rapidly, although there are planning issues with HMO’s of six or more bedrooms.
YPN: Did you target tenants in a particular market sector?
NF: There is no university and so no student market in Milton Keynes. Instead I went for young professionals – people with jobs and career prospects looking for a good, comfortable house at a fair rent; that has been our customer pool ever since.
We give them the type of house they want and many tenants stay for years, which avoids voids.
YPN: Did you quickly learn the skill of buying what a property could be rather than what it is at the moment?
NF: Buying with an open mind to what a property could be after refurbishing, adjusting the number of rooms, building walls, converting a garage, building an extension, doing a loft conversion and so on, is one of the great things about this game – once you own the property and the land, subject to local planning permissions you can more or less do what you want to create extra value and income.
YPN: Many are put off HMO’s because of management. How did you set up the model so that it didn’t drive you insane?
NF: My first HMO had six bedrooms and I took the view that it would be no different to having six small studio flats. There would be a bit more management, but on the flip side they were all in one place. I wouldn’t have to travel to six different locations but could go to the one house to deal with everything. There is no extra work per tenancy – I merely have six tenants in one place.
At first, I got involved in squabbles and the minutiae of running the property to make sure all the tenants were happy because I didn’t realise there was any other way. But I went far too far. You learn as you go along in any business, and we now have systems in place to select the best tenants. The company ethos is to provide homes for people, and one of our straplines is “Homes People Love”.
YPN: How did you get around being so involved? Did you outsource management, employ people or systemise?
NF: I tried all of those. I did it all myself for a while, putting systems in place very quickly, but it drove me mad so I eventually went out and found someone who was better and more experienced than me at running properties. Day to day management is not my skillset. As it continued to grow, I outsourced to an agent before finally starting our own agency. Now over 500 rooms are run by a team of three sales and ten management/maintenance staff.
YPN: Did you think the business would get this big when you started?
NF: Not at all! My first goal was to get one property; the next, to buy two. I set a target of ten properties at one point, then it just grew.
YPN: Could anyone do what you have done? Do people need x amount of capital, certain characteristics, business or property experience or an entrepreneurial streak?
NF: To build a business of this size you certainly need some entrepreneurial drive. Anyone can buy a house but the skill is buying the right house.
Property is a very easy game to get into with capital behind you, but a very difficult game to get out of if you make a mistake on the purchase. Buying the wrong house in the wrong area because it’s cheap and no-one else wants it might give you that same problem if you need to liquidate your position later. Learn, research, get to know your market and exactly what you are getting in to – and also what you want to achieve at the end of it. Do you want monthly income or capital gains over time? For most people, the answer to those questions is both.
YPN: Do you own the whole portfolio or control some of the properties through lease options?
NF: I have only ever considered ownership; I want long term control over an asset so don’t do lease options at all. I might do an extended completion but never lease.
YPN: What is your day-to-day role now that you have others to manage the portfolio? Do you still find the deals?
NF: I employ people in the business to find deals but always have the last say on buying or making a bid. Management teams for different areas, such as maintenance, lettings and sourcing, report directly back to me. Trying to keep up with every single element of the business now would be impossible, so I have trusted advisors who perform those functions much better than I ever could.
One of the first books I read when starting on my property journey was the classic Rich Dad Poor Dad by Robert Kiyosaki. In that he refers to a Cashflow Quadrant, a principle expanded in his second book of that name. That takes you from being an employee or self-employed to being an investor or business owner. So owning a property business where you have an income, create capital gain and free up time for yourself, is the Holy Grail.
YPN: Could your business operate without you?
NF: Absolutely. People in the office have everything under control and don’t really need my input. They provide me with KPI’s and regular management reports so I don’t need to be involved day to day. I still want to be, but it’s better for everyone when I’m not – I trust people to perform, and they do.
YPN: Did you find it hard to let go?
NF: Out of all the challenges over the last ten years, that has been the biggest. I found it incredibly difficult – it took years and I’ve only really recently got it into my head to let these talented people get on with the roles they are employed to do.
YPN: Has the HMO side of the business had to adapt to changes in the industry?
NF: Growing the portfolio through the period when financial products disappeared from the market and banks closed their business to property investment for a few years was a challenge, but we found ways to do it. We had partners invest with us, then once the banks were back in business we bought them out again. Whatever challenge comes up, there is always an answer somewhere – you just need to keep looking and asking until you find the relevant one.
YPN: Is there a danger of market saturation with HMO’s, or is there plenty of space to continue expanding?
NF: Demand for HMO’s is insatiable at the moment – not only because people have to choose shared accommodation due to budget, but many make it a lifestyle choice. Professionals higher up the career path still choose to live in a shared house for social, economic and lifestyle reasons. People used to be encouraged to get on the housing ladder but that’s no longer such an aspiration after the lessons of 2007-08.
We are almost always 100% full and a new HMO is filled within two or three weeks. We have waiting lists for most of our houses.
YPN: Room rates in Bristol have surpassed 1-bedroom flat prices in some cases – something I never thought I would see.
NF: People want to know where they stand moneywise.
We went through a period of free and easy money, easy credit, and a lot of people learned some very sharp lessons during the financial crisis. Shared living provides one bill per month for all living costs – heating, electricity, broadband, landline, etc. – as well as a place to be safe, secure and warm at night. With everything on one bill, tenants know what they have left for the month. That appeals to a lot of people, certainly those starting out on a professional career path who may not be completely sure about running their finances.
Also, the landlord provides internal and external maintenance as well as taking care of all the bills so there is less to worry about. That fits into many people’s lifestyles.
YPN: How can people avoid some of the risks and mistakes? Should they learn from someone who has done it before?
NF: An example of a mistake I made was when I first switched from single to multi-lets. After making the decision, I gave Section 21 notices to tenants in the houses I planned to turn into multi-lets to end the tenancy, without thinking through what would happen when those tenancies ended. I ended up with about twenty empty houses, and no income coming in from them at all. With a mentor who had already trodden that path, I wouldn’t have made that mistake. It cost me thousands of pounds. One house at a time might have been ok, but twenty in one go … ??
YPN: How does someone choose the right mentor?
NF: The starting point should be to find someone who has already done what you want to do. Then call them and have a chat to see if you get on – is there synergy between you?
A mentoring relationship is quite intense so you have to be able to work well together. Make sure they know how to get you where you want to be. Experience speaks volumes.
YPN: As a mentor yourself, what do you look for when taking on clients?
NF: I want to work with people who achieve their goals, are passionate about getting from A to B and then on towards C, and have clear income and capital goals. I enjoy helping them achieve those milestones and goals. What I don’t enjoy is working with people who think it is a great idea, but then don’t want to – or can’t – put all of their energy into it. Sometimes people have too much on their plate – work pressures, family pressures or all sorts of other things going on in their lives, when it is probably better to step back from property and mentorship and wait until the time is right, rather than throw themselves into something where they won’t perform. I prefer to work with committed people who turn up, perform and can see the results at the end.
We make it very clear during initial conversations and interviews with potential clients that it is not easy – it’s hard work. You have to do the research, make sure decisions are based on facts not fantasy, and grind out the results. You also have to know your goals at the outset – if you don’t know that, it’s impossible to achieve them. Both they and we have to be clear about what they want to achieve.
YPN: How do you strike a work/life balance?
NF: Property is my passion, but I have five kids who are more so. I want to spend time with them while they are growing up.
Having a systemised business that is run by skilled managers frees up my time. My role in the company is mentoring and making decisions on new acquisitions, and it is easier to take time out from that.