What should you be looking for when it comes to HMO investment, and why?
Many landlords out there would probably agree that the most difficult part of setting up a property portfolio is trying to find the ideal opportunity that best suits you. That means getting the right city, location, and price among other things. Once you have your HMO property up and running you’re pretty ready to sit back and wait for the rent to come in. Especially if you have a professional management company to manage the property.
The first few main questions you should be asking yourself about any potential HMO property you have found is:
- What kind of yield can I expect?
- What’s the Return on Capital Employed (ROCE)?
- Is there plenty of demand in this location?
- What’s the competition like?
The rental yield you can receive with a HMO compared to a traditional buy to let is often twice as much. Yield’s you should expect to receive on HMO are around 10%-14% vs 4%-7% on a single let unit depending on location. This is calculated by dividing rental income by initial cost of buying the property. When calculating rental yield, you should include all your costs like mortgage, insurance, management fee, rental void period, etc. in order to get accurate results. This would then help you set your rental income which is usually given as a percentage.
ROCE (RETURN ON CAPITAL EMPLOYED)
This is absolutely key and the number that all investors should be most interested in. This, too, is often worked out as a percentage and lets you know whether or not the investment is worth getting involved in from the start. The way in which ROCE is calculated is by dividing operating profit by employed capital or by dividing operating profit by the difference between total asset and current liabilities.
New HMO properties can sometimes only be added to particular areas. Reason behind this is the high demand in having a HMO in locations where there are Universities nearby. Some councils, especially those in university cities and towns, such as Cambridge, Manchester and Leeds, are limiting the number of HMO’s available under Section 4 notices. If you’re looking to rent out a student HMO and the property is near a university then demand should be high. This is providing there aren’t too many similar HMO’s in the same locale.
Thanks to the high rental yields, HMO’s are a popular property investment strategy. As a result, you should expect to be up against a few other property investors when bidding for the property. For this reason if there is too much competition and the property price is to increase, it might be best looking elsewhere. Of course there will also be many other factors to consider such as whether there is a shop nearby for essentials, what the public transport is like to travel to town and whether the area is safe in terms of crime rates. If you are purchasing an HMO for students you may also want to consider whether there are decent pubs and restaurants nearby (at least one of each) and what the broadband signals are like as well as the neighbouring properties.
WHERE CAN BERKS FINANCE HELP
At Berks Finance we have access to excellent HMO property opportunities as well as early access to HMO off market deals before they go on to the market. But that not where Berks Finance stops, not only will we help you find your perfect HMO, but we will help you manage and grow a profitable portfolio.