Back to: Our model explained
You could buy a large House in Multiple Occupation (HMO) because the income appears huge, but at what cost?
We have seen investors purchase very large HMOs when they could have bought two smaller freehold houses for the same price and generate more income and better long term growth.
In addition, If you are required to add bathrooms or provide additional kitchens in a commercial HMO, you'll find your 10 room HMO brings in much less than a single (very efficient) 5 bed house. To make matters worse, we have found that tenants don't want to live with 15 other people so room voids are depressingly high.
Another major issue with HMOs is that the exit strategy is very limited. You'll probably be selling to another landlord and as a result capital growth is typically poor.
We choose to buy carefully selected properties which enjoy strong capital growth and then refurbish to add additional rooms in order to maximize income. We keep the number of rooms just below the licence threshold to avoid HMO limitations and associated costs.
Using this method we have been able to produce greater income on a salable five bed house than on a commercial (7 or 8 bed) HMO.
We also find that keeping the number of rooms just below the licence threshold prevents a lot of other headaches. As mentioned earlier, there is a tipping point whereby too many people sharing one house causes disconnect and prevents long term occupancy.
As you can imagine, there is a lot more to this subject, way too much to list here. It is unfortunately very easy to 'accidentally' buy a licensable property, or overlook the requirements that even non licensable HMO needs. Knowing what types of property to buy also takes skill because you can't simply cut a room in two and create a bedroom! Many considerations on living space need to be considered, as well as more complex planning if you intend on refinancing down the line.
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