Being a HMO landlord is not for the fainthearted
You’re often not just a landlord, but also a social worker, a rent collector, a counsellor, a detective and even the local citizens’ advice bureau.
But the rewards can be big. It’s not as passive as single lets and perhaps only suited to landlords who enjoy working with people (…unless you can leverage a good letting agent).
So a few of these compounded and you can perhaps live the life of luxury Rodney?
Not so fast!
Here are some things you need to be aware of.
Tenant Selection
This is often the most overlooked part. It’s so critical that it’s essential.
It’s land lording 101.
Not:
‘Give me the discount. Give me the cash-flow. I want it 30% BMV’.
(Although it would be pretty sweet, right?)
You see, you get bad apples everywhere. A tenant who pays late every month and always has an excuse which is never their fault. Can you related? What about a tenant that doesn’t want to renew their AST? Perhaps even a tenant that you might even have to evict?
Or a tenant that leaves your HMO well beyond the remit of “normal wear and tear” or worse, beyond their damage deposit?
You see, until you have great tenants, it’s probably unlikely you can appreciate a bad tenant. For some reason (not always..) and depending on which market you are targeting, HMO’s seem to draw in more problematic tenants than single lets.
Non payers, high turnover and voids can kill any potential cash-flow, so always be extra vigilant with tenant screening for HMO’s.
Single Lets Can Be Less Problematic
There is often an element of luck with single let tenants. We call it undergraduate level land lording.
They can stay on for years if they are good (similarly to LHA tenants in HMO’s). They make the house their home, and you might only have to replace them once every 5 years if you’re lucky.
One good tenant can mean you never have to enjoy the fruits of a bad tenant. It’s not that difficult to house single let tenants much beyond basic landlording fundamentals.
HMO land lording is a different animal altogether.
You have to wear different hats as part of your landlord duty. You can’t let things slip and have to be on your A-game every minute, of every day.
Everything you learned in undergraduate land-lording becomes essential here. This is the granddaddy level land-lording, especially if you are targeting low-income or LHA areas.
If you’re just starting out, HMO’s tenants will eat you alive if you’re not prepared, or if you let them…
Yes, you can get great high-end-boutique-HMO tenants, but you have to target them, and more importantly, spend some good cash on an excellent refurb.
But the rewards are great for those who are brave enough to enter the Dragon’s Lair.
HMO Turnover
Turnover happens more often with multi-let tenants. Why?
They often have shorter term goals, and want to squirrel away money every month to save up for a deposit so they can buy a home in the near future.
Or they have a short term work contract, and know they will have to up-stick to another location within 3 months. Or they simply cannot afford a single let family home, so they choose HMO’s as it’s often a cost effective ‘all in one solution’ & affordability is not as stringent.
But as soon as they have enough money saved, or a higher paying job, they will probably move out to a new flat or a house, leaving you to find new tenants.
They are also more likely to cause hassle and have conflicts and disagreements with other tenants, making them more susceptible to being evicted the most.
Perhaps twice as often as single let tenants.This causes AST’s to being terminated much more often too.
Tenant Harmony
Its vital that HMO tenants can get along with each other. Be extra cautious and ensure the right tenants are not in the wrong house….
You see, just like Big Brother, they share communal areas. They share kitchens and bathrooms. They live above or below and share walls, floors and ceilings with them.
One bad apple can upset the cart. It can cause move outs among great tenants. They can consume your time and energy.
You begin to think is it all worth it? They devour every minute and cause you more stress than all of the other tenants. (‘Perhaps I should have stayed in the 9-5 after all?’)
And it often happens right after the bad tenant moves in. While your great tenants have been with you for a quite a while, they are probably often near the end of their lease and unlikely to renew their AST.
You are left with a problematic tenant causing you grief. With potential more voids to fill yet again.
In a single let house, as long as your tenant pays your rent on time, you don’t really care if everyone in the street or area moves out.
One bad stellar tenant in a HMO can mean game over before it’s even begun!
But every down side has an upside, right? Yes you might have to find new tenants more often, but the advantage is you get property management experience, really fast.
Things like, how to spot problematic tenants, handle lost rent, evictions, damages and other headaches that go along with below average tenants.
But that’s not to say HMO’s are all doom and gloom….
No, they do have their advantages.
HMO Advantages
The biggest advantages of HMO’s are they are cash cows. Big returns are standard. Sometimes lots more.
You can often make 5 times the cash-flow than single lets.
15% yields are pretty standard and double digit cash on cash returns are not uncommon. You can also get a commercial valuation on a remortgage and pull out more of your cash to re-invest (this is not a myth, like most ‘experts’ make out!)
But the entrance fee in terms of cash input and hurdles to get in are high, but the rewards are higher too.
When you can successfully manage and make a decent income from multi-lets, you’re part of an elite group of landlords. The crème da la creme. You’ve earned your stripes with honour.
What do you think about investing in HMO’s?
Do you prefer single lets? And are HMO’s more problematic?
