I hold a steadfast conviction that Houses in Multiple Occupation (HMO’s) represent the ultimate cash flow property strategy. Yet, there exist numerous misconceptions and misunderstandings concerning HMO’s. It’s regrettable that many individuals lack a comprehensive understanding of HMO strategies, especially given their potential to generate substantial income.
One prevailing fallacy is the notion that substantial financial resources are required to invest in HMO’s. If you are planning to purchase a HMO, this can indeed be true to some extent, as it’s likely you’ll need a considerable sum of money.
The rationale behind this is that in addition to the 25% deposit and all associated purchasing costs, you may also need to allocate funds for ensuring the property adheres to all safety regulations.
Nonetheless, in this piece, I’m going to shed light on an exceptional strategy known as Rent to Rent HMO. This strategy enables you to reap the benefits of HMO cash flow without the necessity of a sizeable deposit or even obtaining a mortgage.
What Is A Rent To Rent HMO?
Rent to Rent is a strategy whereby you lease a property from a landlord, then sublet it to tenants at a higher rate, all with the explicit consent and understanding of the original landlord. In the case of Rent to Rent HMO, you seek out a landlord with a property that’s already established as a HMO, and for whatever reason, they are amenable to renting it out to you. This eliminates the need for significant setup expenses on your part. There can be a myriad of reasons why a landlord might want to relinquish their property; perhaps they’ve had poor experiences with tenants or letting agents, or maybe they live remotely making property management cumbersome. Changes in personal circumstances could also lead them to rethink their involvement in managing their HMO property.
Most HMO owners typically manage their properties themselves, primarily because not many letting agents are willing or equipped to handle HMO’s. While there is a growing number of agents who have developed expertise in HMOs, landlords often reach a stage where they desire a less active role in property management or are considering retirement. They might be seeking relief from the associated stress, and this is where you can enter the scene. You can provide a service to these landlords, alleviating their burden, while simultaneously opening an avenue for considerable financial gain for yourself.
Is rent to rent HMO legal?
You might wonder, is Rent to Rent a lawful means of subletting? The answer is a resounding yes, it is indeed legal. However, it’s crucial to note that some multi-let properties are defined as HMOs by the council and therefore, require a specific license for operation.
How Does The Rent To Rent HMO Strategy Work?
Rent to Rent HMO involves seeking out an individual who owns a HMO property. This could be a partially occupied HMO, or perhaps a student HMO facing a vacancy issue, either due to students failing their exams or a group dissolution before the start of the academic term. These scenarios may make the landlord anxious about the prospect of not having tenants for the next academic year, particularly if they view the property solely as a student HMO.
This method is particularly effective for identifying properties that may have been somewhat neglected or underutilized.
Suppose the student HMO is situated in a prime location. In that case, it could be repositioned to accommodate young professionals or conventional working tenants. You could take on the currently vacant property, possibly offering the landlord half of the usual income, enough to cover their mortgage payments and generate some profit. Subsequently, you can lease it at full price to other tenants. Your profit is then the difference between your rental income and the amount you pay to the landlord, proving to be a lucrative strategy.
For instance, you may encounter a property that’s somewhat worn and the owner is finding it difficult to secure tenants. Here, you could intervene with a minor refurbishment to enhance its appeal and make it a sought-after HMO property. Then, you could rent out all the rooms. However, it’s essential to familiarize yourself with the ins and outs of HMOs, as you’re essentially operating one, despite not needing a mortgage or substantial deposit.
How Much Should You Offer The Landlord?
My personal recommendation for a Rent to Rent HMO is to aim for at least a £100 profit per month for each room. So, for a five-bedroom property, you should target making a minimum of £500. Here’s how you can determine how much you can afford to offer the owner.
Firstly, examine the potential gross rental income. For a 5-bedroom HMO where each room can fetch £450, the gross rent totals to £2,250 per month. If your profit goal is £500 per month (£100 per room), you would subtract this from the gross rent, resulting in £1,750.
As the operator of a HMO property, you’re responsible for all utility and ancillary costs. This includes gas, electricity, internet, council tax, TV license, etc. An estimated monthly budget for these bills is about £100 per room. Therefore, for a five-bedroom property, this translates to £500 per month. When you subtract this £500 from £1,750, you get £1,250. This is the maximum amount you could afford to pay the landlord. In summary, in this scenario, if your aim is to secure £500 in profit and cover all bills costing £500, you can afford to pay the landlord up to £1,250. Of course, if you manage to negotiate a lesser amount, your profit margin will increase.
This reverse calculation method allows you to determine the maximum rent you can afford to pay the property owner. Remember, if the property is fully tenanted and free of issues, the landlord is unlikely to entertain a Rent to Rent HMO deal. Your focus should be on landlords who are weary or considering retirement, those seeking to relieve themselves of the management burdens associated with their property.
How Much Work Is Involved With Rent To Rent?
When considering a Rent to Rent HMO strategy, it’s essential to realize that it’s an active approach. Unlike passive income sources, you’ll be hands-on in managing the property. You’re responsible for tenant placement in the HMO property and ensuring there’s a robust rental demand to fill the rooms. An empty room or two can drastically affect your profit margins. Therefore, while it’s a promising strategy, it demands a comprehensive understanding of HMO’s and selection of a location with high demand for such accommodations.
It’s important not to overinvest in the property. Ideally, any money expended should be recouped from the cash flow within the first year. Therefore, your target should be a 100% Return on Investment (ROI), particularly since the typical rental period for such a property is 3 – 5 years, after which you return the property to the landlord. While there might be an opportunity to extend the lease, this isn’t a guarantee, so it’s best to ensure you recover your investment within the first year.
Sometimes, a HMO property might not be fully tenanted due to poor condition. If significant work is required, you can negotiate with the landlord to address these issues. For example, if the property is vacant because of an outdated kitchen, the landlord could refurbish it, allowing you to secure a tenant and provide them with a guaranteed rent. If the landlord lacks the funds for such upgrades, you could agree on the rent amount and offer to refurbish the kitchen yourself. This way, you’re enhancing their property value, which is a win for them.
The cost of fixing the kitchen, borne by you, can be deducted from the rent for the initial months. In other words, you won’t need to pay the landlord any rent while you recoup the kitchen upgrade expense. Given that the landlord wasn’t earning any rental income initially and now possesses a renovated kitchen, they end up in a significantly better position.
Summary
A Rent to Rent HMO thus presents an excellent opportunity to capitalize on properties that have been neglected, by transforming them into desirable living spaces. As with any HMO property, the key is to ensure it’s located in a desirable area and boasts adequately sized rooms. It requires a significant understanding of HMO properties to execute this strategy effectively, but it can be a potent avenue for rapid cash flow. Within a few weeks of receiving the keys from the landlord, you could start generating income, which is why many of our Property Mastermind students employ this strategy as a quick method for cash flow generation.
Once you learn how to identify potential HMO landlords and communicate effectively with them, it could become a speedy income source for you. You might even want to negotiate a few weeks or a month of rent-free time to allow income to start flowing before you begin paying the landlord.
It’s crucial to remember that your target landlords are those facing challenges with their properties. They’re looking for solutions that would be mutually beneficial for both parties, and everything is up for negotiation.
I hope this succinct introduction to Rent to Rent HMO has provided valuable insights.
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