If you’re asking yourself this question, congratulations, this is a great question to ask! If you don’t explore this before buying or converting a HMO, you may be in for a costly ride!
You won’t find this content in any training course and in few books, yet I think it’s very important to understand this.
Have you really got your numbers right?
When looking at your investment numbers you will generally have a spreadsheet which totals up all of your costs, and then all of your income. Basic calculations of income against costs will give you your investment numbers – yield, ROI, cash flow etc. When you compare these to buy to lets your eyes will widen and your heart will start to beat a bit faster. But don’t get too carried away yet. Most people under estimate their costs at this stage. The greatest margin for error here is your refurb cost. Even if your trusted builder has priced up the job, even his experience can’t tell him what he has yet to find. You will need a contingency figure here. 10% would usually cover it, but 20% would be prudent. The next thing investors are under estimating at the moment here is voids. If your voids contingency looks like just 10%, you may need to think again! Which leads me on to me next point.
The local market and your competition
How much research have you done here? How much competition is there in your area? How many rooms are available in your postcode? What standard are they? How many voids are there locally?
The supply of HMO’s is increasing in Leeds whilst demand has stayed fairly flat. The effect this is having is to increase the standards of presentation and finish in order to attract the tenant pool, keep voids down, and rents up. Woodchip wallpaper, magnolia walls, 20 year old furniture? Forget about it! You need to up your game to compete in the new HMO market!
The 2018 HMO market is very different from the 2016 HMO market in Leeds. We have seen HMO’s move in and dominate new suburbs where there were none only a couple of years ago!. Voids have skyrocketed as a result of the new entrants into the market who have usually carried out extensive refurbishment programs before hitting the market.
Many HMO’s have had to introduce routine cleaning of the communal areas to keep standards and presentation levels high enough to attract new tenants, and to preserve the condition of the properties. Overheads for investors are going up as a result at the same time voids are on the rise.
If you own HMO’s and you are managing them yourself, my hat goes off to you. I really understand how time intensive and complex they are to manage effectively. If you don’t have the time, skill, or knowledge, this is likely to lead to significant void periods. For this reason almost all HMO investors use a good managing agent that specialises in HMO’s to look after them on their behalf.
This is not an easy market. You will have good months and bad months. It’s certainly not the stable and relatively easy buy to let market.
There are of course many upsides too, and I look at those in this article. Reed both for a balanced view and to help you to establish if this is the right market for you.
If you want any further advice, please pop into my office to see me.