With the need for flexible, affordable accommodation increasing the demand for good quality HMO’s is likely to increase. Combined with the growth in population, providing a good quality solution to these changing housing needs with a well-presented HMO could bring good returns.
If you have a suitable rental property you have probably asked yourself the question “could I make more money renting out rooms to individuals rather than letting my property to one person or family unit?”
The answer could well be “yes” but if you don’t know how to go about it and what the advantages and disadvantages are then you have probably just left the question floating and only come back to it when you have a void period or need more income.
If you’d like to get some answers then read on.
As they say fail to prepare…
You are likely to need an HMO Licence. The requirements differ from authority to authority but if you talk to a local agent that has a good relationship with the council and experience with HMO’s then they will be able to give you some pointers before you meet with the council and will often attend the meeting. The licence will be valid for a period – currently 5 years, attract a council fee, and be per property not per landlord.
You may need to make alterations to comply with legislation, such as fire doors and fire alarms. Other alterations could involve planning permission in some cases. It is wise to also consider tenant needs at this point to ensure that the facilities that you offer attract the best tenant for you.
The usual documentation such as an annual Gas Safe Certificate will be required, and you will need to provide a copy of this to the council each year. Electrical safety checks need to be carried out and it is good practise to have a portable appliance test (PAT) for electrical appliances supplied.
The council will carry out a Housing Health and Safety Rating System (HHSRS) risk assessment within a specified timescale of receiving a licence application (currently 5 years). If they find any unacceptable risks, then you will have to rectify this. This does however give you peace of mind that you are providing a safe environment to live in.
Once up and running you will also need to advise the council of any changes that you plan to make to the HMO.
Bespoke insurance – make sure that you make the right choice and get insurance that properly covers you as a landlord for public liability.
Mortgage permission – if you have borrowing on your property check with your lender first.
Fire safety and furniture and furnishings fire safety – make sure that you are fully compliant in these areas.
Do your homework and check out the competition in the area. Search sites such as Rightmove, OnTheMarket, Zoopla and Spare rooms. Get a feel for what is on offer, consider how you can stand out. Remember, price isn’t everything. Often the quality of cheap rooms is poor and will attract possibly the wrong tenant.
Good points to consider for attracting the right tenant who stays…
You are making an investment from which you will want to get a good return over several years, so thinking about how you can attract and keep good tenants is vital.
Some good ideas include:
Cleaning – Communal areas need to be presented in a clean and tidy manner to ensure that you current tenants feel at home but also to enable you to attract new tenants when a void period occurs. Unlike self-contained flats you will be showing prospective tenants around whilst others are living at the property, so consider employing a communal cleaner. This can also often help with the general checks at the property and keep you informed of any potential issues that may arise.
En-suites if possible – avoids bathroom sharing. Your tenant will be responsible for keeping their own ensuite clean which is an advantage. If space permits, then a spare communal bathroom for emergencies is ideal.
Easy to use appliances – saves unnecessary call outs and makes an easier life for your tenant.
Easy to connect broadband – use an easy to remember but secure password. There are very few tenants that will not need Wi-Fi as this is now a basic requirement.
Outside space – a small seating area will often help tenants to feel that they are in a homely environment. With the rising environmental pressures, it is an excellent idea to provide a bike shed – this also eliminates the risk of bikes being kept inside in the hall for example and in turn can reduce on wear and tear costs.
Locks – consider a digital key lock. These are often easy to set up and allocate individual codes which can be deleted on tenant changeover. They are also very useful for contractors as you may be able to set a time limited code for necessary maintenance access to the communal areas. Another option is a lock which has a master key for you to be able to gain access to all areas, with individual room keys for tenant security.
Allocated kitchen space – who wants to be arguing about cupboard space. If it is fairly and clearly annotated, then you shouldn’t get any issues.
Drying area – you don’t want wet washing hanging on radiators causing unnecessary condensation. If room permits and you can provide a dedicated drying area, then great – if not make sure that each room has a portable drying rack and request that tenants use this.
Plenty of electrical sockets and possibly TV aerial points in rooms. Make your tenant aware that they will be responsible for their own TV licence. If you have a TV in a communal lounge, then you will need a TV licence. However, by ensuring that the facilities in each room are good you may not need a communal lounge – this then gives you another room to let out and increases your income potential.
Possibly the most important – make your tenants feel at home. Small homely touches go along way, but make sure that you are not putting to much of a personal touch and don’t put items in that matter to you if they were to be lost or damaged. A well looked after and presented property will often be better looked after by the tenants that live there than one that looks tired and uncared for.
Keeping control of your costs…
Switches that are timed – an excellent idea to avoid lights getting left on unnecessarily.
Remote heating controls – for example a Hive thermostat. You will generally be offering an all-inclusive rent. The ability to control heating remotely can save you unnecessary expense. You could also include a fair usage policy in your agreement – however this is often difficult to manage and impose. Having the discussion at the outset is vital to ensure mutual understanding. Often tenants will respond to being asked to consider the environment in their usage.
Keeping on top of décor – whilst it is tempting to accept marks on walls as wear and tear it is always advisable to have a regular maintenance plan so that a small touch up job does not become a full redecoration for example.
The same applies to general maintenance – ensure that you have a checklist to use when you or your managing agent undertake your weekly and monthly visits.
Consider using an agent who has a good reporting system for maintenance – time is also money so if you have tenants regularly calling you to report issues you can become distracted from your daily tasks and work. Fixflo for example is a software package (used by 4000 lettings agents) that enables tenants to report issues, with photographs and information, but it also requires them to answer further basic questions which can often prevent unnecessary call outs and costs. It also shows tenants videos before allowing them to report, such as topping pressure on boiler and bleeding of radiators again to save on unnecessary time and money wasted by tenant, landlord, agent and contractor.
From a prospective tenant’s perspective ….
Ideal for transient workers – you may get a tenant who is on a contract outside their home area. This can also be good for you as the wear and tear can be reduced if they are only staying for a few days a week.
New to the area – often a good way to get to know an area, network with other tenants. Often a room in shared accommodation can start out as a temporary solution, but if they really like your property they will stay for long periods of time.
Those looking to live in an area who can’t afford a self-contained flat – If your property is in a popular residential area where prices of self-contained properties are often high, then a room can provide an excellent affordable solution to professional workers.
What is the return likely to be?
The rental yield will very much depend upon the area, facilities that you offer, standard of accommodation and cleanliness. Each property would need to be assessed to give a true reflection. Often rental yields from an HMO can be as much as 3 times higher than a self-contained flat.
You will need to balance the costs of providing an all-inclusive rent against any increased return. Council tax, insurance, energy bills and broadband costs can all erode your return, particularly those that vary with usage. (See above for ways to control your costs).
You may have a greater turnover in tenants, but the chances of having all rooms empty at one time are usually low once you are established. The advantage here is that unlike a self-contained flat where once you hit a void the rental ceases until you find a new tenant, with an HMO you are likely to have other rooms still let that are bringing you some rental in. The same theory applies to arrears. Building a good relationship with tenants is a vital way of getting to hear if they are looking to move on so that you can work to market the room as soon as possible. Offering incentives to existing tenants who introduce an acceptable applicant for a void room can be an excellent way of keeping your property fully occupied.
Consider this like any other investment. The investment that you will be making would need you to consider this to be a longer-term project say 5 years plus. Take as much advice as you can. Consider tax planning, finance advice, a specialist managing agent, joining a local landlord association and keep up to date with the ever-changing regulations.
When it comes to an exit strategy remember that the resale market may be reduced to other HMO landlords and therefore affect the market value.
In our experience a well presented, well managed HMO can bring good financial returns for investors.
We have managed HMO’s for over 10 years. We have a wealth of experience and have built excellent relationships with the local council. We are more than happy to share our knowledge with our landlords and have a good reputation in our area for specialising in HMO’s. We work hard to ensure high occupancy levels and low arrears. We would recommend that you seriously consider the use of a local experienced agent to enable you to get the most out of your investment with the least hassle, giving you more time to build your property portfolio or concentrate on other projects in your life.
Whatever you decide we wish you luck and success and we are always happy to talk through any propositions!