TWELVE COSTLY MISTAKES AN INVESTOR CAN MAKE USING THE HMO STRATEGY

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TWELVE COSTLY MISTAKES AN INVESTOR CAN MAKE USING THE HMO STRATEGY
Introduction – I have listed the mistakes in what I feel is their cost order.
1. The biggest and most costly mistake an investor can make is not to invest in HMOs or delay. Property prices have, in most areas, gone up faster than average wages. Just owning a HMO, would have over the last 40 years made most people more money just on the capital appreciation than they could earn by working for the same time, never mind the income.
2. Do the numbers: A HMO is rarely profitable with less than 5 tenants. The more rooms, the more profit. My experience is the running costs are not proportional, in other words, it costs the same to run a 4 bed HMO as it does an 8 bed HMO. That is an 8 bed HMO cost no more to run than a 4 bed. The fifth tenant is usually the profit which means that if you have less than 4 tenants, you are losing money. Another way of looking at this is that a 6 bed HMO makes the same, profit as having two five bed HMOs! The mind boggles at the profit from an 8 bed HMO! The maths do not normally work the same once you get over 8 beds except that I find that larger HMOs phenomenally profitable.
3. Do not mix types and ages: Keep types and ages the same i.e. all workers or professionals or DSS and in the same age group. For example a house with all middle aged professionals, do not mix with say unemployed or younger tenants as it will usually upset the existing tenants and they will leave.
4. Let with care: be cautious when letting, if you make a mistake the result can be very, very costly, not only may you not get paid, but lose all your other tenants and have the property damaged. The saying that an empty room is the cheapest option, is very often true.
5. Evict a bad tenant quickly: know the legal process and implications. A bad tenant whether it be a rent defaulter or due to behaviour, in my experience, becomes worse. Start the eviction process immediately after the tenant defaults or starts to become a problem.
6. Don’t give too much: tenants want a room, they expect to pay for everything else. Giving tenants over the top stuff is often more about the landlord’s ego than what the tenant wants or will pay for. What attracts a tenant and what they will pay for is what matters. The tenant will take whatever you give, then turn it around and blame you when it does not work. The saying that, ‘No good deed goes unpunished’ is very true in relation to this business.
7. Be a landlord: Do not expect others to run your properties for you. Rarely will others run your business as well as you can and will charge a lot of money for not a very good service. Worse they will sometimes make it very much harder than operating the business yourself.
8. Undercharging rent: you are running a business, the rent is set by the market regardless of cost. If you are making a good profit, save it in a reserve fund for when the market turns and you are not making a profit.
9. Be flexible but don’t show it: something is better than nothing, an empty room brings in no rent, but this is an extremely difficult strategy to use, as you will get problems and dissatisfaction if you charge tenants differently without good reason. However, you will need to fill and keep your properties full and on occasions being prepared to be flexible will help.
10. Failure to comply with standards: whatever the standards your council seeks to impose, it is usually best to comply with them. Do not ignore officials they can be very nasty and you could end up with a closure order and/or thousands of pounds in fines but also be prepared to stand your ground if the officials are wrong, which surprisingly is more often than you would think. Enforcement is very variable and most of what can be demanded is not needed nor benefits or is wanted by tenants or yourself. Find out what your council demands you do and within limits comply. You should always, at the very basic, have some fire detectors i.e. smoke alarms.
11. Avoid DSS: unless you know how to manage this market. The tenants are the main problem and add to this the Housing Benefit system is a nightmare to deal with.
12. Limit gas and electric usage: especially when housing DSS. With workers and professionals they tend to be more responsible and do not abuse it so often.