As a property investor who attends a lot of property networking meetings, I. often meet investors whose strategy it is to take a 3 or 4 bedroom house which has 2 reception rooms (ie a lounge and a dining room), and to convert one or both of these rooms into further bedrooms, thus increasing the number of total bedrooms from anywhere between 4-6. And of course if it is a larger house then an HMO can go anywhere up to 15+ rooms. By the way, HMO stands for ‘Houses in Multiple Occupation’.
The advantage to this kind of strategy is that the rent for the individual rooms far exceeds the amount of rent one could command if the property were to be let out as just a family home.
Jim Haliburton has been using this strategy to create a healthy stream of cashflow for over 20 years, and so the points below come from experience!
‘Property investment is not difficult, I compare it to used car dealing except the figures are larger, the strategy is different and it is much easier. Property is less complicated than cars and the longer you keep property the more valuable it becomes unlike cars which usually depreciate. However, whilst you are waiting for your property to increase in value, you have to live and cash flow is essential especially when property prices are going nowhere, you need to cover your costs.
I believe that HMOs outperform the property market and so I have come up with the following unproven statistics acquired from observation of the HMO market. Take a building, for example, a large house, and turn it into a HMO with a minimum of five units, the HMO being developed over the years to maximise its full potential as a HMO then the following HMO Daddy rules apply:
1. Rule of Twenty
After twenty years the original purchase price of the property which is then converted into an HMO will equal or thereabouts the gross rent. For example, a house purchased in 1991 for £30K will produce a rent of about £30K per annum today as a HMO.
2. Rule of Forty
After forty years a house purchased and turned into an HMO then the gross rent per annum will be about ten times the purchase price. For example, a house purchased in 1971 for £4K will produce a rent today of about £40,000 per annum as a HMO.
3. Rule of Three
An HMO grosses about three times the income of the same property let as a single unit.
Note: You need to spend a considerable amount of money over the years improving and keeping your property up to standard to achieve these returns.
Be clear about why you are investing in property and remember why when things get tough as they will. Most people want financial independence. How much money will give you financial independence? It is generally accepted that a million pounds would not be too far off the mark. So how do you get a million quid? Borrow the money to buy a million pounds of property today and apply the rules above and wait for the property value to increase and in the meantime get a good income from rental.. HMOís give a substantially greater income compared to single lets so you should easily be able to repay any mortgages or loans.’