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Should I invest in a Derby HMO?

As local letting agents in Derby, we’ve decided to share our inside view on the Derby property market. Over the years, we’ve noticed a sharp increase in landlords attempting HMO properties. This article is written for landlords either with HMOs in Derby, or landlords thinking about investing in Derby HMOs.

What is an HMO?

First of all, let’s explain what an HMO is.

An HMO, is an abbreviated term for Houses in Multiple Occupation. What this means is, a landlord is able to utilise a single property and let parts of it to multiple tenants. The aim of this is to maximise rental returns. See the example below:

A landlord has a 3 bed terrace property on Street X and is renting it to a small family for £500 pcm. A few doors down, another landlord is renting a similar property but has converted it into an HMO and is fetching £900 per calendar month. The landlord has achieved this by renting 3 separate rooms at £300 each, per month. Better yet, a property on the next street has also been converted, but is fetching £1200 pcm. The landlord here has converted a ground floor reception room into a bedroom and is again, renting each room for £300.

On the face of things, converting buy to let properties into HMOs seems like a certain no brainer. However, in reality it isn’t always the case. Here’s why.

Void Periods

HMO properties tend to have more voids than traditional single lets. An accumulation of void periods can soon eat into your buy to let profits. Single lets, when let to the ‘right tenant’, can be void free for a number of years. Tenants that live in HMO properties, rarely stay for one year, let alone a number of years.

What this means is, if an HMO was fully let at all times then the rental income would be a lot higher when compared to a traditional single let. In reality, HMO’s are rarely without voids, but that doesn’t mean to say that it’s impossible. When HMO’s are converted to a very high standard and in a prime location, then landlords do minimise the risk of voids.

Outgoings

HMO properties are associated with more outgoings in comparison to single lets. Every HMO we manage, is advertised as all bills included. If you’re a landlord and are thinking about multi-letting a property, then don’t forget to include bills in your contingency. Landlords often include utility bills such as electric, water, gas and council tax. Some landlords will go one step further and include free internet and Sky/Virgin television.  With traditional single lets, tenants are of course responsible for their own bills.

In addition to bills, HMO properties tend to require more maintenance. Even with multiple tenants that know each other, sharing the responsibility of cleaning communal areas such as kitchens and stairways is often ignored. As a result, many landlords hire cleaners to make periodic visits either fortnightly or monthly to maintain their HMOs. This of course is an additional expenditure. With single lets, tenants and families alike are responsible for the upkeep of the property.

Set up costs

HMO properties will often cost more to set up than traditional lets. This is because HMO’s are almost all of the time offered as fully furnished. When I say fully furnished, I don’t just mean a bed and a cupboard. Landlords are now providing everything, from TVs to kettles, microwaves and toasters. In addition to bedroom furniture, dining tables, etc, the refurbishment generally requires an immaculate and attractive finish.

With single lets,  landlords don’t need to go ‘over the top’ with refurbishments and décor. This is because traditional tenants rent homes that are blank canvases, empty and unfurnished.

Furnishing property isn’t the only cost. HMO’s may require structural changes within the property, such as dissecting rooms to provide more additional bedrooms for example. Some landlords will also add ensuite bathrooms to rooms. That said, landlords who convert homes into HMOs are often able to remortgage and withdraw a lot of their funds out. This is quite a common strategy for HMO landlords. Nonetheless, this strategy can also be used for traditional lets.

Location

HMO’s in Derby, only work in certain locations. Landlords need to remember their target market. Whether your aim is to let to students, working professionals or housing benefit tenants. I’d highly advise to stick to one type of tenant. Mixing students, with professionals and housing benefit tenants simply won’t work in my opinion.

Once you’ve assessed your target market, only certain locations will be viable. For example, if you’re aiming to let to students, you’d want properties in and around a University campus. If your aim is working professionals, then City Centre locations tend to work the best. As tenant demand for locations such as these is quite high, competition from investors is also rife. What this means is, the entry price for such properties is often higher when compared to other areas in Derby. It can therefore be more difficult to secure deals in such areas, with landlords often having to pay the asking price. Again, if your aim is to carry out an HMO conversion, you’ll be adding value to the property so this isn’t a huge concern.

Traditional single lets can be successful in pretty much any area in Derby. Streets Ahead Estates manage rental properties throughout the Derby area and surrounding Derbyshire areas. This means landlords are more likely to secure better deals and can often let properties as soon as they complete their purchase. Our average duration for a single let is just 10 days and includes a thorough referencing report. By increasing your patch, you’re able to cherry pick the best deals., simply because you have more options.

Competition

Perhaps one of the biggest problems with Derby HMOs is saturation. Currently, Derby is at its peak with HMOs. The amount of rooms and converted flats is at an all-time high. 7-8 years ago, landlords were able to offer bog standard rooms which would let.

Due to competition rising, landlords have tried constantly to outdo their competition. As a result, the standard of HMOs has drastically improved. This is great for tenants, as there is so much to choose from, with some stunning rooms on offer. This is of course bad news for landlords, as void periods will only increase and of course refurbishments will need a lot more time and effort to stand out from your competing landlords.

Nonetheless, buy to let in Derby is competitive. Cities across the UK are competitive with buy to let and with thousands of landlords trying to secure great deals. However, the demand is there for traditional single lets. Currently in Derby, it seems as though the demand for rooms is less than the supply, simply due to how many landlords are trying HMOs. When supply outdoes the demand, it’s not a good sign.

HMO licencing

Depending on the size of your HMO, you may need a licence by law. The following is taken directly from the Derby City Council website.

“The Council operates a Mandatory HMO licensing scheme.  Most landlords of HMOs that have five or more occupiers forming two or more households require a licence.  This previously only applied to properties with three or more stories (including habitable basements and attics) but from 1 October 2018 all HMOs with five or more occupiers forming two or more households regardless of the number of storeys will be subject to HMO licensing”.

Single lets of course don’t require licencing.

Should I stay away from Derby HMO properties?

I’m not trying to put anyone off on HMO conversions. This article is simply to give landlords an insight into what estate agents in Derby are experiencing. We manage a number of successful HMOs throughout Derby with little voids and they run pretty smoothly.

My advice for new landlords would be to try traditional lets first. Once you have passive income from single lets, then try an HMO. That way, if you do experience voids, income from your other rental properties can subsidise the loss. Remember, the aim is to make your money work for you.

Over the years, I’ve seen landlords get it right and I’ve seen landlords get it terribly wrong. Diversify your portfolios so you have a mixture of properties, in varied areas and varied set ups. My personal advice would be, try HMOs once you have a few single lets in your portfolio. Furthermore, diversify the location of your properties. Don’t invest heavily in just one area and diversify your style of investing.

I’ve seen too many novice landlords try HMOs as they only look at the basic figures. Remember to consider the overall outgoings that HMOs entail and then make an informed decision on what’s best for you and what you’re comfortable with.

There’s a number of ways to maximise your returns from a single dwelling, such as flat conversions. Rooms are not the only strategy.

Derby HMO letting agents

We are landlords letting for landlords. As investors ourselves, we’ve mentored and advised many landlords throughout Derby, all with varied strategies. If you’re thinking about HMO investment or a buy to let in Derby, then do make an enquiry for a free consultation. We’ll highlight any potential pitfalls in your investment strategy and highlight some great investment gems to help you in your journey.

Read more here regarding our management services for Derby landlords.