HMO's - good investment

[Marty Funkhouser]

Thinking seriously of buying 4/5 HMO's using cash for 25% of the deposit on each. There are a handful on the market near me and the figures seem to add up. The two I am interested in would seem to give me around 16% return on my outlay (the 25% of the purchase & stamp).

Are there any experienced HMO landlords here? I know the regs change all the time - are there any major changes coming in the near future that could mean a big cost? Any advice and tips gratefully received.

[spikeyhead]

What does the return look like when you add in paying interest on the loan for the 75% that you're borrowing?

[Puzzles]

is that including utility recharges etc?

[98elise]

Marty Funkhouser said:

Thinking seriously of buying 4/5 HMO's using cash for 25% of the deposit on each. There are a handful on the market near me and the figures seem to add up. The two I am interested in would seem to give me around 16% return on my outlay (the 25% of the purchase & stamp).

Are there any experienced HMO landlords here? I know the regs change all the time - are there any major changes coming in the near future that could mean a big cost? Any advice and tips gratefully received.

16% return before utilities are paid for?

What EPC are they, and how expensive/intrusive would it be to upgrade them?

[FlyVintage]

One of the reasons we offloaded was the upcoming renters bill changes which you should familiarise yourself with and decide if you can live with the consequences of a poor tenant(s) under those conditions. Another was the requirement to have an EPC of grade C, which was just not a practical upgrade for us in a Victorian house.

Many landlords in our area have already gotten out for similar reasons to us, so check you’re not getting in when the seasoned investors are getting out!

Our landlord experiences have been largely good, but we weren’t landlords by choice, just by circumstance and I’d not do it again unless we absolutely had to.

[PurpleFox]

I have a number of HMO's and yes, the returns can be good, they have been for me. You need to have your eyes wide open and be prepared to be hands on. It's not a passive investment. Lenders are wary of HMO's and you will be paying more than a typical BTL rate so factor that in.


There are so many questions and so many variables......
Are you paying bills?
Where is it?
How much is it?
Does it need work?
Does it already have a license?
Does it have planning for C4 (essential and not the same as a license)?
What is your target (students / working professionals / lower end DSS etc, never mix these groups in one property)
Will you manage or use an agent?

[Marty Funkhouser]

Yes I have allowed for the following in calculating the potential profits:

Interest Only Mortgage repayments
Agents fees
Insurance
Utilities (Gas, electric & water)
Council tax
Broadband (although not sure this is expected)
TV Licence
Cleaners
Maintenance
Voids

It has a licence to 2027 and needs no work, although there is the possibility to refresh.

Have had a ball park figure for interest only loans at 75% so am confident on that figure.

There are half a dozen for sale near me some of which seem to be priced at a point where around 15% profit is possible while others are around 10%.

Edited by Marty Funkhouser on Thursday 27th March 17:09

Edited by Marty Funkhouser on Thursday 27th March 17:12

[*Fletch*]

I manage HMO and co-own a mini-mo (4 bed HMO). A few tips

If you are self managing:

• Its very important to select the 'right' tenant as tenants rights are only getting bolstered so getting a bad one out can be problematic.
• Get tight control of the thermostat using a specialised HMO one like an Inspire. This prevents the tenants messing with it, hanging it out a window, turning the thermostat to max 24/7 and opening windows when they are too hot etc
• Keep a close eye on energy bills, some tenants like to plug in Bitcoin miners or electric heaters (fire hazard)
• Have enough fridges and storage space for the tenants.
• If you accidentally get 'incompatible/anti-social tenants' be prepared for late night calls about bust ups, 'someone stole my cheese' type phone calls.
• If using traditional keys have lockboxes on the outside of the property and outside each room to make it easier dealing with lost keys and contractor visits.

If you are using an agent:

• Ask them to show you round other HMOs they manage. You will then get a feel for how they manage them.
• Most agents don't like managing them due to how noisy they are relative to single lets so they don't do a good job.
• Don't let your agent put any tenant they want in there, check they are vetting correctly.
• Take control of the thermostat monitoring and energy bills or make sure your agent will do so.

[Marty Funkhouser]

*Fletch* said:

I manage HMO and co-own a mini-mo (4 bed HMO). A few tips

If you are self managing:

• Its very important to select the 'right' tenant as tenants rights are only getting bolstered so getting a bad one out can be problematic.
• Get tight control of the thermostat using a specialised HMO one like an Inspire. This prevents the tenants messing with it, hanging it out a window, turning the thermostat to max 24/7 and opening windows when they are too hot etc
• Keep a close eye on energy bills, some tenants like to plug in Bitcoin miners or electric heaters (fire hazard)
• Have enough fridges and storage space for the tenants.
• If you accidentally get 'incompatible/anti-social tenants' be prepared for late night calls about bust ups, 'someone stole my cheese' type phone calls.
• If using traditional keys have lockboxes on the outside of the property and outside each room to make it easier dealing with lost keys and contractor visits.

If you are using an agent:

• Ask them to show you round other HMOs they manage. You will then get a feel for how they manage them.
• Most agents don't like managing them due to how noisy they are relative to single lets so they don't do a good job.
• Don't let your agent put any tenant they want in there, check they are vetting correctly.
• Take control of the thermostat monitoring and energy bills or make sure your agent will do so.

Thanks. A couple of questions:

- Is broadband expected to be provided?
- What sort of % return are you seeing?

[CaiosH]

I’ve been an HMO landlord since 2010 (landlord since 2007), I'm also a mortgage broker with a lot of HMO clients. I have a spreadsheet I use to calculate return on investment on HMO’s, if you PM me your email. I'll email it to you.

A very basic rough estimate used to be a 10% yield would give you around 20% ROI on your capital. When I say 10% yield I mean, £200k house, gross rent per year £20k. With increases in costs all round, you need at least 12% yield now to get that kind of return.

My most recent purchase I picked up has a 17% yield, although did require some minor works. £15k spent, bringing it in at 16% yield. The end result on all capital invested is a ROI of 25.5%. I was out of it, but this one was to tempting to turn down.

When I describe ROI, I’m referring to cashflow only, and does not include any gain from property value growth. I should also add, when I say capital invested that includes 25% deposit, stamp duty, legal fees, mortgage fees, etc.

Also, over time with rent inflation, if you resist capital raising then your ROI grows.

As others have said, HMO's are not passive. I started with naive ideas of travelling and living on the income. The reality is once you have enough to replace your income you have a new job which is part letting agent and part handy man. But with some flexibility with your time and some asset growth on the horizon.


There is a lot to learn and even after 15 years I’m still improving the way I do things. I still and have always self-managed, for a few reason that are to long to get into here. As Fletch above says;

• Key safes outside every property.
• Never have yale type locks on bedroom doors or they will constantly lock themselves out.
• Bin management is a constant headache.
• Become a anorak on thermostat settings.
• I provide a welcome book / house manual to try smooth some things, but a lot don’t read it.
• Signage….e.g. please clean shower, bin day is Tuesday, etc
• Plus many many more…

The increase of the additional rate stamp duty to 5% is a further kick in the teeth to property investment.

Edited by CaiosH on Friday 28th March 11:33

[Mattylane]

I would say tread carefully as anything offering a 16% return and is for sale means that the seller has found something with a better return or less aggravation.
I know nothing of current HMO legislation but inadvertently in the 1980's I was left as the last renter in a 4 bed house when the others went to Ireland and Australia, I decided to live downstairs and try and rent out the 4 bedrooms via ad's in shop windows. The 10 months left on the rental agreement saw me have I guess 10 people in the 4 rooms over that time. I doubt it's changed but you will be dealing with the bottom tier (largely) of society but not exclusively, Only one of the tenants was what could be called well adjusted and he was only there mon to fri on a contract and needed a bed, 3 more like him and it would have been brilliant.
One guy seemed normal until the smell and air freshener got so much that I said the landlord was doing an inspection, he agreed and then disappeared. Instead of using the toilet he used black plastic bags. Or the minicab driver who was accused of rape and the Police broke the front door in looking for him or guy who took so many drugs he had an psychotic episode, wrecked the room and then came back with a group to get his weeks deposit.
Financially it was good as upstairs paid for my rent and everything else for the 10 months but cleaning up and fixing after these people was a pretty full time job.
Years later I got to know someone who had a few houses and he used a couple of right aholes if any tenant got out of line as he saw it.

So 16% recurring income is either too good to be true or you'll do a lot of work and btw, I give the idiot who wrecked the room his deposit back so had to fix a room and pay him for the privilege.

[CaiosH]

Marty Funkhouser said:

It has a licence to 2027 and needs no work, although there is the possibility to refresh.

oh and the HMO licence is not transferable in areas I’ve invested. Planning / use is fine if established, if in article 4 area. But you need to re licence in your name asap and then renew every 5 years. This is a further cost.

[CaiosH]

Mattylane said:

I would say tread carefully as anything offering a 16% return and is for sale means that the seller has found something with a better return or less aggravation.
I know nothing of current HMO legislation but inadvertently in the 1980's I was left as the last renter in a 4 bed house when the others went to Ireland and Australia, I decided to live downstairs and try and rent out the 4 bedrooms via ad's in shop windows. The 10 months left on the rental agreement saw me have I guess 10 people in the 4 rooms over that time. I doubt it's changed but you will be dealing with the bottom tier (largely) of society but not exclusively, Only one of the tenants was what could be called well adjusted and he was only there mon to fri on a contract and needed a bed, 3 more like him and it would have been brilliant.
One guy seemed normal until the smell and air freshener got so much that I said the landlord was doing an inspection, he agreed and then disappeared. Instead of using the toilet he used black plastic bags. Or the minicab driver who was accused of rape and the Police broke the front door in looking for him or guy who took so many drugs he had an psychotic episode, wrecked the room and then came back with a group to get his weeks deposit.
Financially it was good as upstairs paid for my rent and everything else for the 10 months but cleaning up and fixing after these people was a pretty full time job.
Years later I got to know someone who had a few houses and he used a couple of right aholes if any tenant got out of line as he saw it.

So 16% recurring income is either too good to be true or you'll do a lot of work and btw, I give the idiot who wrecked the room his deposit back so had to fix a room and pay him for the privilege.

EDIT* Good houses attract good tenants and by self managing you choose your tenants. After 15 years of it you get a sixth sense when meeting tenants on viewing of who is going to be trouble. Not saying it never happens but in 15 years and 100's of tenants major issues are rare. But I mostly deal with students and only have a small number of non student HMOs. But it is 100% a profession and experience is valuable.

and its 25% income, 16% if bought outright without leveraging.


What I tend to see is houses that have been managed by letting agents for 10 to 15 years, the landlords having very little input and amateurs. Then over time what was once a decent house degrades and become less attractive. Its then harder to let, ends up with worse tenants and the landlord after an easy decade loses interest and sells. That’s pretty much the lead up to every house I’ve bought.


Yes, sometimes they require an extensive renovation. But often it just new furniture, some carpets and a skip. I’m talking about things like the house having 4 broken hoovers hanging around, 10 years worth of junk mail in the hall, 3 old sky dishes stuck to external walls, 10 year old chip board furniture. Really simple stuff thats a result of bad & lazy management.

The property I describe above is not usual, in some ways it’s the best purchase I’ve ever made. It’s a 3-story newish build property on a desirable estate, EPC C already and would sell for more converted back to a family home. Which is something I love about it as it gives a potential exit. If the owner had been a competent professional they would have sold it is a family home, not a part tenanted badly manged and messy HMO that required turning round.

Edited by CaiosH on Friday 28th March 11:31

[surveyor]

*Fletch* said:

I manage HMO and co-own a mini-mo (4 bed HMO). A few tips

If you are self managing:

• Its very important to select the 'right' tenant as tenants rights are only getting bolstered so getting a bad one out can be problematic.
• Get tight control of the thermostat using a specialised HMO one like an Inspire. This prevents the tenants messing with it, hanging it out a window, turning the thermostat to max 24/7 and opening windows when they are too hot etc
• Keep a close eye on energy bills, some tenants like to plug in Bitcoin miners or electric heaters (fire hazard)
• Have enough fridges and storage space for the tenants.
• If you accidentally get 'incompatible/anti-social tenants' be prepared for late night calls about bust ups, 'someone stole my cheese' type phone calls.
• If using traditional keys have lockboxes on the outside of the property and outside each room to make it easier dealing with lost keys and contractor visits.

If you are using an agent:

• Ask them to show you round other HMOs they manage. You will then get a feel for how they manage them.
• Most agents don't like managing them due to how noisy they are relative to single lets so they don't do a good job.
• Don't let your agent put any tenant they want in there, check they are vetting correctly.
• Take control of the thermostat monitoring and energy bills or make sure your agent will do so.

I once ended up managing a HMO. It was bought by a client whose commercial work we were chasing because it was cheap at auction. How it ended up on my desk I still have no idea.

It was cheap because it was in a really bad part of town, fitted out really cheaply, and let to drug addicts, prostitutes and other people of quality character...

We did take some crime prevention advice at one point from the police, who advised us to lock the tenants inside the building and throw away the key to resolve 90% of the crime in the local area. Not really what I expected, but it was fair..

Thankfully the client got fed-up, emptied the building and put it back into auction... An experiment not to be repeated.

[drmike37]

Every time I read anything about renting houses (singly or especially hmo) I realise there are much easier ways to invest my money.
I’ve got a couple of places and they tick over ok, but given the renters rights stuff, aggro when something goes wrong, and tax changes, there’s no way I’d get into it now.

The main question to ask is, “If it’s such a lucrative property, why is it for sale?”

[MustangGT]

Marty Funkhouser said:

There are half a dozen for sale near me some of which seem to be priced at a point where around 15% profit is possible while others are around 10%.

The very fact that there are half a dozen for sale locally raises a massive red flag to me. Why are they for sale???