I am a young man based in Sussex and looking to start investing into property next year, and I seek some advices from your expertise, and knowledge.
I have currently saved £400,000 in total from selling assets, working, inheritance, friends and family.
I am thinking of investing in HMOs, but don’t know where to start.
My initial plan was to go up north and purchase cheaper properties to turn them into a HMO of 4-5 bedrooms, since my area has pricey properties ranging from 270K-300K for 3 bedrooms, compare to up north where it’s 120-150K for 3 bedrooms.
Do you think I should do this or not?
I have some questions regarding this matter and others:
How much deposit should I put down if I do purchase a house to turn it into a HMO?
What do you think I should start with as my first investments with the amount saved?
What should I watch out for if I end up going through with this?
Do you think it would better for me to purchase up north or down south in Sussex?
I agree with Colin3. Dont start with HMOs, (or arguably even end with them) and buy close to where you live do that you can manage them easily. Join a landlord association, do some training and learn everything you can about the law and the industry before you buy. Dont be seduced by reports of high yields in the North. The market can change much quicker than your portfolio and yield is only half the equation.
Good point that …Do not end with them…!! HMO are subject to a shed load of regs, Local authority licence, regular checking up on. Imagine a property 200 miles away from you and there is a problem with one of your 5 or so tenants .How will you handle that? You will have sleepless nights. I bet I know of one landlord who will tell of a bad experience being too many miles away from their property
Thanks for the advices and suggestions, Colin and David!
I forgot to mention that in that scenario I was thinking of putting a property agency to look after the properties, however based on your replies I will take into consideration to not try HMOs for the time being and seek some training before getting into it!
I just don’t know where to start in terms of investing at the moment.
I have made decent money out of property over 40 years. Only getting a mortgage on the first one . Then saving up and buying others outright. Probably my “easiest” ones are the commercial ones as less hassle. I always bought in an area I was familiar with . I always check property prices and what is happening in an area i am thinking of buying in every day. Then when a good one comes along , Pounce on it
I can tell you it’s a very bad idea being 275 miles from your property. (Despite what the sat nav said, i.e. 4.5 hours drive, the average real time for me was 8.)
I am in Sussex and went up North. If you can afford to (which you can from what you have said) without a doubt, stay in your area.
Good agents are very hard to find. I would not have trusted them to find tenants and get the paperwork right so did this myself with Open Rent’s help, and used the agent for three monthly inspections but still went up every so often to see for myself.
There were still problems and ended up having to sack them off and do everything in the end.
I was very resourceful at getting trades people, taking neighbours numbers and making myself known, etc., which did help, until my most reliable informant, died suddenly. So basically, anything can happen.
The tenants knew we were miles away and I do not think that helped with their behaviour.
A standard rental is hard enough to manage without the hassle of an HMO.
Dont let the availability of the funds dictate the strategy. I would start with a couple of one bed flats. By all means let an agent manage them for the first year if you can find a good one. It will take you that long to learn the ropes.
Being a new landlord too, people simply don’t see the pit falls and it’s only after doing it, the reality becomes apparent. e.g. such as lack of good agents, tenants taking advantage etc.
We also bought somewhere that needed renovations and trying to find trades people was also hard. I spent much time driving up and down those motorways and when we did find someone, again, being so far away, it is hard to keep an eye on them.
The builder also stitched up his mate (the heating engineer), by not paying him and telling him we had not paid!
Many would have broken in and recovered their goods, and tbh I wouldn’t have blamed them.
However, from photos I got the alarm installer to send me of the progress of the renovations, I had to get back into the car, and just happened to arrive unannounced when the plumber was there. I copied down the name, phone number on the van of said plumber which came in useful when all this came to light. As you can imagine I was furious and the builder could not work out how I had got my information.
But just to show, things happen that you would never imagine, especially if they think no one is around.
Mrs T.
Another thing is your landlord insurance. Ours had a clause that if the property was vacant it had to be inspected every fortnight in case of leaks etc.
If it wasn’t, then it invalidated the insurance.
Agents will do this - at a an extra cost.
If tenants go on holiday for longer than two weeks and refuse entry for this purpose, (as ours did) another load of problems and bad feeling.
Not sure about others however both my licence (HMO) and HMO mortgage wanted details of how long I had been a LL. Mortgage for a licences HMO may be more expensive. There are of course different types of HMOs. Those with multiple tenancies and those with 1 tenancy of 3 unrelated mates. The latter is easier but will not give you the extra returns you seek. With the former there may be weeks when you are there everyday. An agent will charge for visits so it will eat any profit.
Don’t get into the landlord business: it is risky and takes up far more time than you can imagine if you really want to be a good and compliant landlord, even using a good agent!
If you do decide to invest, the biggest investment risk is not meeting gas, electric and above all, environmental legislative rquirements. You may not be able to meet these without great expense, so make these a condition of purchase! And even then, put aside funds for pending legislative changes.
Not a good idea for your first property, and certainly not at a great distance away from your base, whereupon you will be reliant on remote agents and tradesmen.
A simple problem of who will clean the shared bathrooms and kitchen, could be a nightmare.
Having said that, my first was an HMO, 2 minutes from my home, but I quickly converted it into self contained flats.
I’m invested in the North, and yes, the properties are cheaper to buy, but the natural appreciation is less than in the South. I wanted to buy around Streatham, South London, but was thwarted by difficult mortgage terms in the early days before buy-to-lets became available, and my overseas residency totally excluded me from the mortgage market. Had I bought there, I would now be far better off, with the much higher rate of appreciation and rental incomes.
Make money work for you, your 400k will buy you 1.0M @ 60% LTV, a very comfortable ratio, where the best rates are available.
Also consider doing some work to upgrade or convert properties to add forced appreciation to your profit margins, assuming you are handy / capable, otherwise tradesmen’s rates will gobble up your profit margin. Alternatively, pay the tradesmen to get it done quickly and scale up faster.
As others have said learn the business, the laws & legislation, before taking the first step into buying.
I found a good read in Russ Whitney’s book “Building Wealth”, which will help you understand the financial aspects, and has some examples of development projects.
Good luck.