Buy New or Develop Your Own HMO?

There’s no right or wrong answer. It depends on many variables, circumstances and personal choices to the individual that no one can categorically say one is better than the other.

If you buy an existing HMO, there’s nothing stopping you from developing in the future and vice versa. We have sold hundreds of HMOs for and to people that fit into both categories. Below are some of the advantages and disadvantages of both;

Developing an HMO

If you have the time, experience, desire to refinance money out and feel confident in the planning and build phases then this is hugely attractive.

An uplift can be created once the HMO is operational which can allow you to refinance a huge portion of your money out whilst keeping the cash flowing asset.

A developer can ensure that the project is delivered correctly, with their own quality control, involvement in design and compliance. When the developer turns their focus into being a ‘landlord’, they can be part of the tenant find process and ensure that the house is completely set up correctly from top to bottom.

This perfect scenario makes developing HMOs such a no-brainer for those who ‘can’.

Here are some questions to ask yourself before commencing a HMO development:

• Do you have enough experience?
• Have you budgeted for planning/site delays?
• Do you have enough trust in your builder and their ability to hit targets and budgets?
• Can you physically visit the site and keep on top of things?
• Can you still find the properties in key article 4 areas?
• Can you afford your refinance to come back at 80% of what you hoped for? What will this mean to your JV partners or private investors?
• Do you know enough about the location to be confident that your room rate hopes are accurate and sustainable – is there enough tenant demand?
• Can you be certain that you’re not being optimistic on your ‘spreadsheet’ just to make the deal stack?
• If you can answer yes to all of the above and, crucially, find the right initial properties then we’re almost certain you’ll fit into the category of being a great HMO developer.

Buying an Existing HMO

Buyers for up-and-running HMOs usually view things from a very different perspective than HMO developers.
They want a finished product that they can sink some of their capital into and get rent back from day one of completing.

They’ve heard stories of builders going out of business, planning delays, budgets spiralling out of control, rising material costs, and they want to bypass all of these pain points.

They are, in theory, prepared to pay a premium for that privilege too.

If you were presented with an immaculate HMO, with 6 wonderful tenants, fully licensed and compliant, with 2 years 100% occupancy history, wouldn’t we all be buying tenanted HMOs?

But, of course, not all tenanted ready-made HMOs should be purchased, not without some serious due diligence.

Here are some questions to ask yourself before purchasing an existing HMO:

• Why is the landlord selling?
• Is the property compliant, licensed, with correct planning use?
• Are the tenancies set up correctly, are the tenants paying and settled and harmonious?
• Is the development good enough and have you checked there’s no ongoing build/maintenance issues?
• Is the property managed properly? And is this management transferable?

Does the property justify its HMO valuation?

There is no right or wrong answer to this question.

On a property by property basis, you can come to a different conclusion and that’s before you build in your own wants and experience.

There are clear advantages to each and also many areas where you must be 100% confident on your decision.

Here is a general opinion, which is based on seeing and chatting to hundreds of developers and landlords that fit into either category;

If you live fairly locally, have experience of working with builders and refurbishments and you have a limited deposit or amount of funds that you want to stretch out for as long as possible – Give developing a HMO a go. Less so, if you are based remotely but completely trust a local team to deliver a project for you lock, stock and barrel then also give it a go.

Word of caution – expect delays, expect a down valuation, expect budgets to go up and expect the initial batch of tenants to take their time to settle into a harmonious house.

If you are not ‘in property’ but looking to deploy some cash into an asset and you don’t have the commitment for working with builders or to trust a local team (especially if you’re not local or live outside of the UK) then buy an existing HMO. Even if it’s to gain an understanding of a specific location or gain confidence in the industry.

Word of caution – don’t assume that an already tenanted house is stress-free and that, just because it’s ready-made and has management in place, you won’t have to put time and energy into keeping the HMO in good shape.

Location and property size

It’s almost impossible in some key areas in the UK to find the ‘cheap C4’ to convert into an HMO in the current market – with either the stock not being available (Article 4 or high volume of residential property) or the cost of development increasing in recent times with bricks and mortar increases along with building costs spiralling in comparison to purchasing an existing HMO.

If you are interested in purchasing an existing HMO, or want some advice about developing a HMO property, you can get in touch with our experienced team on 01743 612 018 or email us at info@thepropertyadvantage.co.uk.