Top 20 HMO Landlord Rules from HMO Daddy

RULE 1 – Just Do it.

You will never be ready, the longer you delay the harder it will become to start being an HMO landlord. You will also be held back by the good deals you have missed and hope a similar deal will come along, they rarely do. Accept that much in this business is an act of faith. The following questions are unanswerable you just have to try it: Will you get tenants? Will you get finance? Will property prices increase? Where will interest rates go to? etc etc.

RULE 2 – The 5 tenant rule

An HMO to be viable needs to have at least five tenants. Though there are exceptions to this Rule. The rule goes like this: The first two tenants pay the mortgage if you have bought using a mortgage or the rent if you are renting. The third tenant pays the bills i.e. council tax, gas, electricity, water, insurance, etc. The fourth tenant covers maintenance, voids, and bad debts and the fifth is profit. Try and have six or more tenants as all the extra tenants are extra profit. I find it costs the same to operate a four-bed HMO as it does an eight-bed.

RULE 3 – The 3 X rule

An HMO let by the room grosses three or more times the income of the same property let as a single let. This rule is a rough approximation. It does not apply to areas with high property prices, where the margin is far less but capital appreciation is awesome.

RULE 4 – No money left in

Cash release and no money left in.
HMOs can be valued on income i.e. the gross annual rent is multiplied by a factor of 6 to 1 times, sometimes more. This is known as the investment value or a commercial valuation. Which multiplier is used is down to the valuer. In areas of reasonably priced properties, this method of valuation will give a cash release as lenders will lend up to 70% of the value (sometimes more or less) resulting in no money tied up in the property and tax-free cash to spend! (Money released from remortgaging a property is treated as a loan and so not taxable).

A lot of people including mortgage brokers have difficulty in understanding or believing this rule, I have done this over 100 times and I am still doing it so I know it works.

RULE 5 – The rule of 5

The rule of 5.
Use the rule of 5, to assess whether to buy an HMO. But if the purchase price of the property plus the cost of improvements and other costs equal or are less than five times the gross rent. Follow this rule if you can and you will not go far wrong. Unfortunately, not everyone invests in areas of low-cost housing so to successfully invest in the right areas the alternative way to assess a prospective HMO is to do the income and expenditure calculations for the property very carefully.

Example: Property, when converted will house 6 tenants at £70 pw, gross rent £21,840 (6 tenants x £70 pw rent x 52 weeks in a year). I would not spend more than £110k (£21,840 x 5) on buying and refurbishing the property.

RULE 6 – Property doubles every 10 years

Property doubles in value every 10 years.
Property on average doubles every ten years, though the increase in rents is much slower. Property prices and rent are not linked. Is there any other business where the largest working asset cost is fixed when you buy it yet the income from and the value of the asset increases?

In twenty years a house brought for say £100k will be worth it if average price increases are maintained, which they have with a few exceptions consistently done since 1900 be worth £400k. If you assume rents have only doubled then you will have doubled your return and be sitting on a substantial increase in capital value. Reflect on this when the day to day niggles or worse get you down.

RULE 7 – Be professional

Keep it professional.
The next 4 rules and many of the other rules all have the same theme. You need to be able to stand back, detach yourself from it all, treat it all like a bit of a game otherwise it will chew you up and spit you out. I am not saying do not care or be concerned but if you let your emotions become too involved it will exhaust you and you are in danger of losing your cool.

Remember the numbers, you will lose some but take it as a percentage. X percentage of tenants will not pay or cause damage and the same goes for tradesmen etc. With careful management, you keep it to a small percentage so it does not matter. Look at it as a cost of doing business. Keep in mind the bigger picture, see Rule 6 & 20.

The people who rip you off today will be ripping others off in 20 years’ time and have nothing to show for it. Remember it was your own fault in using or choosing them in the first place. While you, on the other hand, will be extremely wealthy, even if you only have a few HMO Rules.

RULE 8 – Give Respect

Give respect – You will find it much easier to deal with tenants and others if you are nice to them even if they do not deserve it. Remember they are your customers. Do not expect respect in return and you will not be disappointed.

RULE 9 – Don’t play fair

Don’t expect fair play.
In nearly every other sphere of business if the rules were so one-sided there would be an enormous outcry against the unfairness of it all. Discrimination against landlords is rife and no one cares a dam. One of the largest landlord associations even appears to be campaigning for more action against bad landlords, yes I said ‘against’ landlords.

If a tenant wants to they can cause you serious harm and it is very little you can do about it. You are expected to and have to follow the law – if your tenants don’t there is little you can usually do, apart from evicting. There is no point in using a person who has no assets and the only assets most people have is property. As I said in rules 6 & 20 above keep your eye on the rewards in the future.

RULE 10 – Be nice

Be nice to tenants.
People are very reluctant to sue those who they like. To understand this concept I suggest you read Blink by Malcolm Gladwell. On page 40 of his book, Gladwell discusses the research done to identify which American doctors are sued. Analysis of malpractice lawsuits shows that there are highly skilled competent doctors who get sued a lot and doctors who make lots of mistakes and never get sued. Gladwell goes on to ask why this is and speaks to medical malpractice lawyers and they all say the same thing, which is, patients will not sue a doctor they like however incompetent.

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RULE 11 – Be suspicious

Treat all excuses for non-payment as lies.
The exception is where a claim for Housing Benefit is now called universal credit is being made, below as it can take some time for Housing Benefit payment to be processed. With the rest of the excuses, they are lies. I can assure you that with over 20 years of experience this is inevitably the case so avoid the grief of believing tenants and then being upset when you discover you have been tricked. This brings me on to my 12th rule.

RULE 12 – Use a section 8

Serve Section 8 notice to evict, as soon as the tenant fails to pay.
Evicting tenants is a long-winded process and takes the same period of time if you start immediately or wait months! Don’t believe anything said about late payment of rent as rarely is it correct. Start the eviction process as soon as a tenant misses a payment. It may sound harsh but I can assure you from long experience that it is the best approach.

I have perfected a system that allows me to get a possession order against a tenant within 9 weeks of the first missed payment and I have now done over 350 evictions without failure. See my website www.hmodaddy.com for details on my DIY Eviction manual and courses.

It costs nothing to start the eviction process and you can stop the process at anytime. You can get a possession order and still allow the tenant to stay, especially if they start paying the rent and hopefully the arrears, though it is the exception for a tenant to improve their behaviour and pay off their arrears.
Remember Rule 10 and bear in mind Rule 13 so do it nicely. When I serve an eviction notice I am very careful how I go about it and make it look like I am doing the tenants a favor. I often get thanked when I serve an eviction notice.

RULE 13 – Retaliatory complaints.

Take great care when serving eviction notices as all the promises and excuses about going to pay the rent, which is rarely true, at that point go out of the window. The tenant will then say the reason they have not paid the rent was due to them having had an accident due to some defect in the premises which they have continually complained about but for which you have never ever heard about or faults in the property which you know nothing about but again they say they have complained to you about it ‘for years’!
To avoid this or reduce the likelihood of it happening I use a Late Payment Statement where the tenants signs to say they are in arrears and the reason(s) why along with an opportunity to identify faults or defects. A copy is available in my Forms, Agreements and Letters pack CD/USB only available from www.hmodaddy.com

RULE 14 – Keep goof records

To have a hope of defending yourself in court against a judiciary that is generally hostile towards landlords, you need to have good record keeping. Firstly, ensure all complaints are logged with time, date and details. Take and keep photographic evidence with a date stamped camera, preferably with the tenant present where appropriate. Patience, tact, and negotiation are the tools you need in this situation. NB the time is not relevant but it seems to impress judges.

I use a Late Payment Statement (available in my Forms, Agreements and Letters pack CD/USB only available from www.hmodaddy.com )which the tenant completes and signs to say why the rent is late and acknowledge they are in arrears and give the reason(s) why along with the opportunity to identify any faults or defects. Too often when I get to court the story changes, the favourite is that they did not know they were in arrears or they had paid. If the tenant admits in writing at the time what they owe this reduces the likelihood of them denying they owe rent and their credibility should they do.

RULE 15 – Tipping Point

Prompt and firm chasing up of rent payments will go a long way to reduce bad debts. I estimate those bad debts could be reduced by 80% by acting firmly and quickly. Once a typical HMO tenancy agreement is allowed to get over £500 in debt, this is the tipping point, there is little chance they will pay the arrears and they often just leave when chased for payment.

RULE 16 – Believe in yourself

You will need this in enormous scoops. Most people have difficulty in believing in themselves so if you are like the rest of us you just need to work on excelling in this area. If you do not believe me regarding how insecure we all are then I suggest you attend one of the personal enlightenment courses. Choose who you think is a confident person, sit next to them and don’t be surprised that before day 3 you will be holding them while they sob their eyes out telling you how inadequate they are.

My point is do not rely on anyone. Do not seek the approval of others and make your own decisions. If the property was such an easy idea everyone would be doing it so expect more than a fair share of negativity. Your family, friends, and colleagues may be your life but they are very unlikely to support or approve of you being a landlord unless they are landlords themselves and maybe not even then. Be careful of professionals and be under no illusion that councils are there to support or help you. From long experience I can assure you, you are well and truly on your own in this business. Don’t look for understanding from anyone apart from your dog or cat! RULE 17:
Do research carefully- If you talk to landlords assess very careful what they say. They are unlikely to say go for it.

There are a number of reasons for this including:
• Most are selfish and do not want to give anything away
• They are fearful of competition
• They have had what they feel is a bad time
• They rarely have much of a clue of what they are doing!
The questions amongst others to ask are:
• How long have you been operating HMOs?
• What did you buy the property for and what would it be worth today?
• What proportion of tenants: – don’t pay, cause problems, go to councils, etc but don’t expect them to be able to work this out as they are probably innumerate.

A typical conversation I have had with an HMO landlord goes a bit like this:
Question: Do you have any HMOs?
Answer: I used to have an HMO but I got rid of it because I got fed up with tenants not paying, damaging the property and complaining, etc.
NB: You need to go on and ask more questions such as:
Question: What did you buy the property for?
Answer: It was in the nineties and I inherited it then after a couple of years I sold it.
Question: What would it be worth now?
Answer: I hate to think, about at least 4 times more than what I sold it for.
Question: What would be the rental income?
Answer: I could retire on the income if I had kept it!
The point I am making is that without intelligent questions you would probably have come away with the impression that having an HMO was loads of problems without understanding the benefits.

RULE 18 – Do not delay repairs

Do not delay dealing with repairs, tenants abandonment, and late payment.
A landlord is in a service industry, you need to look after your tenants. Try and avoid comparing yourself with the social sector, they protect their own and look down on the private rented sector. Look at the social sector service targets for doing repairs online, it takes them months to do things.

Do what you can as quickly as you can, otherwise, delay will become a habit. Some tenants will appreciate your prompt service while others not. You can never please everyone! Some will use any excuse to refuse to pay rent so try and avoid this by acting promptly with repairs.
The same goes with late payment unless you show concern about payment a significant number of your tenants will not. NB remember Rule 14 and keep good records of your actions.

RULE 19 – Use 3rd party authority.

I will have to ask the boss.
Use the excuse you have to consult with your partner/husband/wife etc. as a barrier to give yourself time to think, especially when letting. This is an intuitive business. At the upper end of the market, you can rely on references, guarantors, etc but most of us have to rely on intuition which is disregarded in this educated rational world.

You need to get your intuition up and working again. Our ancestors very quickly had to assess friend or foe, yet we debunk this skill. Sometimes it takes a bit of time to assess a person or situation so do not rush it. Give yourself the luxury of time to think and talk it over. You will often be surprised when you think over what would initially be a reliable prospective tenant that things do not add up.

RULE 20 – The 20-year rule

After twenty years the original purchase price of the property will be equal or thereabouts to the initial gross rent.
For example, a house purchased in 1994 for £30k and turned into an HMO will produce a rent of about £30k per annum today as an HMO. It is rental growth like this which makes this business so good but emphasises that it’s a long term business and not a get the rich quick scheme.

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4 Comments

  • Avatar
    P
    18/03/2020

    HMOs in Sheffield.

  • Avatar
    Avahvup
    09/04/2020

    Hello to all
    In this enigmatical span, I honey you all
    Esteem your one’s nearest and friends

  • Avatar
    Miriamvup
    10/04/2020

    Hello to all
    In this difficult forthwith, I disposition you all
    Prize your relations and friends

  • Avatar
    Dusecrefe
    19/04/2020

    Hi! Thank You for that…thx. Like the MOJOHEADZ Label =)

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