HMO’s are a great income producing asset class, but the additional yields generated can easily be eaten up by poor decisions. Check this list of 6 common profit-leaking pitfalls to look out for, and make sure you tighten the tap in all of the areas mentioned.
1. Under-estimating bills
When I did my training, I was taught to account for £75 monthly per tenant in total bills. The reality is that my bills reliably average out at £100 per person at every house I have. It doesn’t sound like much of a difference, but added up across a portfolio, it easily equates to £1000 or more in extra costs each month. This £100 per person is based on a single rate of council tax across the house (rather than individually banded rooms), a weekly cleaner, reasonable gas and electricity usage, the fastest broadband available in the area, communal area TV license, water rates and regular gardening service.
Do a little numbers exercise. For each house, track your monthly bills, add them up and divide by the number of tenants in that house to find your monthly per/person rate. You should find the numbers are quite consistent (if not, perhaps there’s something that needs investigating at that particular house).
2. Buying cheap
Well, firstly, congratulations if you bought your HMO property cheap! But that’s where the cheap buying should end. Steer clear of cheap labour, cheap furniture, cheap installations, cheap services…
Everyone knows buying cheap is a false economy, yet many landlords are still drawn to the cheapside. If your target market is the lower end, of course, there’s no need to spend out on high-end details, but it’s still worthwhile investing in durable furniture and fittings, choosing tradesmen that will carry out considered repairs rather than doing quick patch-up jobs, and examining the long-term maintenance required of any installations you are contemplating putting into the property (eg, the costs of issues, repairs and replacements for cheaper installations like Saniflo toilets vs spending out up front on a traditionally plumbed toilet).
If you’re wary of paying over the odds, research any products / services / suppliers / tradesmen before using them and ask your list of contacts for referrals. Ask questions of the tradesmen / suppliers during your research stage – let them teach you about their product or service – and you’ll soon discover what you will get for your money at the different price ranges, where the mid-ground is and what good value for money is.
3. Leaving it up to tenants to report maintenance issues
I’ve been into HMO’s where the landlord hasn’t employed a property manager, yet hasn’t stepped foot in the property in four years either, preferring instead for the tenants to do the property manager’s job and report maintenance issues. Like buying cheap, this seems like a good idea initially as you hardly seem to receive any calls from the tenants and the repairs are minimal. Do not be fooled – this will cost you more in the long run. Tenant’s will only report an issue to you if it is an issue TO THEM.
If the grout between the shower tiles has cracked and water is seeping behind the tiles, damaging the surrounding wall and floor, it’s unlikely a tenant will report it. Not only does it not affect his showering experience, but he may not even realise such a thing would potentially cause serious damage to the house.
If you want to self-manage your HMO’s, be prepared to pay regular visits to the houses to check the condition and ensure both the house and the tenants are kept safe.
4. Ignoring toxic personality clashes between tenants
This used to be a little difficult to figure out, but since having WhatsApp groups set up for each house, I’ve found that it won’t be long before a toxic personality clash is exposed. By the way, not all personality clashes are equal. With some, the ‘personalities’ are mature and respectful enough to keep it between themselves and ensure their clash doesn’t impact on the other housemates. The ‘toxic’ clashes will destroy the harmony in the whole house and eventually cause the other tenants to move on to somewhere calmer and happier.
Pay attention to the “chat” that happens between the tenants in the WhatsApp group, especially when tension appears to be building, and step in immediately if any aggressive or toxic behaviour begins to show.
5. Failing to monitor the work of the cleaning company
Your HMO can be fashionably decorated, with clever layout and design, and good quality furniture, but the place will still look shabby if the cleaning company aren’t doing a thorough job. From experience, a regular cleaner will begin to develop “grime-blindness” after time, so it’s best to work with a company that can rotate their cleaners regularly, and that has a supervisor to carry out monthly or quarterly ‘grime-blind’ inspections.
6. Over-estimating room values
I see this often in a lot of the Facebook forums. Landlords compare room values against what is available in the local area, and price their rooms at the top end, whether or not the house/rooms/service they are providing are actually at top-end standard. I know it is difficult to remain objective about values when you are emotionally invested in your work, but you do need to be realistic when pricing rooms or you could be stuck with lengthy voids.
If you’re not sure where your HMO standard sits within the local market place, arrange to meet with some of your competitors and tour their properties. Seriously! Offer them a coffee or a lunch and chat about what you both provide. Okay, I admit not all landlords would be open to sharing in this way, but I have done it for other local landlords and I am sure there are others like me out there.
A word of warning here – landlords are often advised to act as a tenant and book a viewing in order to check out the competition. Trust me on this – landlords DO NOT appreciate having their time wasted, so you will likely only burn a bridge by doing this. Be open and honest about your intentions, and build relations with your fellow landlords.
The other point to note is that there are seasons in the houseshare market. Summer is peak, along with the first weeks of December and January (literally the first weeks of each month only). The rest of the year is slower, so it might take you longer to achieve the same peak-time rental rates, or you might have to drop your prices slightly to encourage a quicker rental.