Money Matters - Do HMO's make money in 2019

By Shelley Mackay

Jun 12

Let's ask ourselves a question. Do HMOs still work? But first, what is an HMO?

An HMO is a regular house or flat, except it's rented by the room by the week instead of the house by the month. So, that's what it is. It's a house. You know the sort of thing. Why would you do an HMO? Well, round about here I've got quite a few, and it may be the rent for the house as a house will be about £600, maybe £650 a month, but the rent for the individual rooms, because they're all bills included and everything else and they're really nice ensuites and blah, blah, blah, whatever.

It's £95 a week. But I've got five of them in the one house so instead of making £650 a month, I can make £500 a week. How hard is it to do HMOs? Well, in my view, not as long as you know what you're doing. Is it hard to drive a car? No, as long as you've had some lessons. Is it dangerous to jump in a car and drive it down the M1 if you have never had a lesson in your life? Yes.

Is running an HMO any more complicated than driving a car? No. Do you need certain licenses and permissions to drive a car? Well, you need a driving license, you need an MOT, and you need road tax. What else do you need? You need stuff to drive a car. Do you need stuff to operate an HMO? Yes. That's what it is, how much money you can make and how hard it is. But there's been some pretty big changes recently, so let's look at those changes now and then let's decide together do HMOs still work.

So today's Money Matters question, Do HMOs still work? What might we be thinking when we ask ourselves hat question, do HMOs still work? We might be thinking of legislation. We might be thinking of the political situation. So let's come back and let's start at the basics, demographics, people and houses. Not enough. The government, the Office for National Statistics says the population of the UK is going to hit 70 million by 2029. So all the data ... they've got much bigger computers, and much more time and money to waste.

The population of the UK is going up fast. That's number one. Number two, where are all these people going to live? They've got to live somewhere. Okay, well, the government has had a number of different study groups over the years and they decided years ago that what we needed to do was we needed to build 200,000 homes a year. They call them homes and that measure has been in place for more than a decade. Do you know the most we've ever built in a year? 180,000 and many years we haven't even built 150, and some years we've built less than 130. So we've consistently been under-building the number of homes that they know we need, and at the same time, the population growth forecasts keep going up, and up, and up, and up. I'm not going to bore you with too much economics and macro-statistics and whatever else, but I'm sure you know this. The average life expectancy is getting longer and longer, and more and more of us are getting divorced.

So you put that melting pot together, there's more of us, we're living longer, we're not building enough houses and there's more and more single households because of divorce. So what does that mean for housing numbers?

Well, recently the government reconvened its experts to do our stats, and what they decided is, well, because there's more people than we thought there were going to be and because we've built less houses than we thought we would, we're going to revise the housing build target. Okay. That's good, and that'll fix the problem. So instead of building 200,000 houses a year, which we never have, the target ... you'll love this ... is now 300,000. But how are we going to build those houses? Well, the experts weren't actually employed to do that bit. That's you and me. That's us property investors. So do you think there is going to be a demand for HMOs? An HMO, by the way, is a room in a house that you're renting typically by the week instead of the whole house by the month.

Studies show that there's millions of people in the UK living in HMOs. So do HMOS still work? Well, let's talk about it. But is there still a demand for a properly built and properly licensed, and properly certificated HMO? You bet you more than ever before. More than ever before. Now, there's been a recent flurry of legislation that's made it harder but you could argue in a good way to build an HMO that's fit for purpose, and I'm all for that. I'm an engineer. Fit for purpose, permits to operate, I'm up for that, completely up for it. So the first thing, I'll take you back to April 2018, they changed the EPC regs, energy performance certificate, so you've got to build it to a more energy-efficient standard. Good, say aye. So you're not allowed to rent any property now if it's an F or a G. It's illegal, and in April 2020, that goes to a D, so it needs to be a EPC of D or better, A being good, F being bad. But that's the same for any property, so that's not pro or anti HMOs. That's just a property thing. The more recent legislation in October 2018 said if you've got more than four, if you've got five or more people living in an HMO and it's two stories or more, suddenly you need a license. Didn't need that before. Previously, it had to be three stories or more.

Now, three stories for an HMO, I'm not saying it's impossible but it's relatively unusual. Almost all HMOs, all of my HMOs are two stories. So the situation changed massively. All of my properties that previously didn't need a license suddenly did. Was that a problem to me? No. Why? Because I'm an engineer. Because I'm looking for the next problem, not this one. So when we built our HMOS, we built them all to licensable standards. So do HMOs work anymore? Yes, if they're compliant, but that's never been any different. Is there a massive demand? Yes. Do they have to be compliant? Yes. So do unlicensed, illegal HMOs still work? No. Shouldn't surprise anyone. Is there an ever-increasing demand and money for serving tenants with compliant HMOs? Yes. So as we've seen this new legislation bite and it pushed out so many rogue landlords to use MediaSpeak. What's it done now? Well, since the legislation has bitten, our applications for our compliant, nice, comfortable, ensuite, big HMO rooms has gone through the roof. We're getting between five and 10 times the number of applicants that we used to get in the old days when any old cowboy could put anything on the market and stuff people in there dead cheap.

Our room rates have gone up so our occupancy, our room rates, and our demand have all gone up. So this is all good. But I see so many people on the forums bleating about the fact that HMOs don't work anymore. Don't work for them. That's because they're not compliant. So what does licensing mean? Well, it means you've got to have a sensible sized room. It's got to be at least 6.52 square meters, excluding the ensuite and the access corridors. But be careful because local authority by local authority could be a lot higher. So here in Doncaster where I'm talking to you from, it's got to be at least 10 square meters. Is that a good or a bad thing? Well, I would put to you that doing anything when you don't know what you're doing is a pretty dangerous thing to do, so please make sure you get the right level of education, knowledge, and support to do HMOs wherever you are.

What else does licensing mean? It means emergency lighting. It means fire precautions. It means set number of square meters per occupant in the kitchen. It means all sorts of things but they're not hard. You could learn about all that stuff in probably just two days. Now let's get down to the brass tax. I can still buy houses. I am still buying houses for £60,000, £70,000. And for £6,000 or £7,000, turning them into four-bed HMOs. £60,000 or £70,000. Then putting a mortgage on them and I've put in maybe ... I don't know ... the one I'm buying at the moment is, call it £60,000. I'm going to spend £7,000 so I'll call it £10,000, so say my total cost to buy it and develop it into a four-bed HMO is a total of £70,000. The mortgage I'm going to put on it is £85,000 so I'm going to have £15,000 cashback over and above all my costs and after I've paid a repayment mortgage, not interest only, a repayment mortgage through a limited company, my cash surplus per month is going to be around about £600. My profit per month, £600 on a four-bed HMO that's already given me £15,000 cashback.

So you tell me, do HMOs still work. Like almost everything in life, what are the fundamentals? Does the demand exist? Yes, and it's going up. Are you providing a service that people are prepared to pay for? Yes. Is it something that technology could make obsolete? Don't think so. People are always going to want to live in houses, I think. Is it a good business therefore to get into? In my view, yes. Can I do it in such a way that I can recycle my money? Yes. Even on the little bitty ones, can I make £600 a month after a repayment mortgage? Yes.

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