The term ‘HMO’ stands for Houses in Multiple Occupation. It’s a phrase that we use in the UK for houses that have multiple people living in them. For example, you have a five bedroom house that was designed for one family but instead we have five students, one living in each of the rooms and in some cases maybe 10 students – one living under the sink, one living in the cupboard…I am of course kidding – you should never do that, it’s against the law.
HMO is a term that we use to describe the concept of taking a house and renting the rooms individually. It doesn’t have to be to students, it can be two professional people who usually would stay in a hotel and they want to stay in a better home instead. HMO is the concept of taking a whole, dividing the whole up and selling the individual pieces for more than the whole.
Are HMO’s good investments?
An HMO is not just a good investment, it’s the secret behind making excellent cash flow from property investing. For example, if you think about a house that could rent for £1000 a month as an individual house, you could rent five of those bedrooms at £400 each month, essentially doubling your income – that’s a significant boost to your cash flow. You can expect your expenses to be a little bit higher, but the cash flow is excellent.
When we say HMO’s we are referring to the concept of dividing a property up into smaller pieces and renting those pieces out individually.
In the UK, the term HMO also refers to the legislation, and most places around the world will have legislation that will stop a landlord from putting 40 people in one house. It supposedly stops them of course; we still hear cases where people are cramming tenants into properties at cheap places or cheap prices, we call them slumlords. Never do that – it’s bad practice.
If you had the chance to double your income, would you do it?
What happens when you start to look at these HMO’s or these properties where you have multiple people living in them, your role starts to change from being a landlord or an investor. You start to become more of an entrepreneur because now you’re running a business. It’s like running a hotel – you’ve got rooms and people renting the rooms from you, whether you do it through Airbnb daily or a monthly basis, you have increased management considerations.
So, is that worth it? Well, absolutely it’s worth it because that increased cash flow is going to more than cover the costs of you having to pay to manage the property. If you think about one property that’s doubling its income by doing HMO’s, you need only a few of these properties to have enough cash flow to pay for someone full time to manage your portfolio which is what I did way back when I first got started.
What’s the catch?
On the downside, HMO’s mean more management, it means more headaches, but it doesn’t necessarily mean students and it doesn’t necessarily mean problems. It means you’re an entrepreneur and your properties need to be managed slightly differently. You also have to make sure that you get the right permissions to set up an HMO, if you don’t then maybe the authorities can come and shut you down; that’s going to be the end of your investment and probably a loss for you but overall, when everything is above board, HMO’s are great investments.
I like to take the HMO model and apply it to other things as well, for example, serviced offices are another great market to be in. You can rent a big space, a big office or a warehouse, divide it into smaller units and rent those units individually. A great example of the HMO concept in practice is Regus, they’re a big company that have serviced offices all over the world.
HMO as a concept is as relevant today as it has ever been and will make your cash flow increase. Take something, divide it up, sell the pieces and make more cash flow. I think that’s a pretty awesome idea.