TOP SEVEN TIPS FOR HMO LANDLORDS

1. Cash flow is everything

I was tempted to make this the only tip, perhaps because when I was writing it I was going through one of my regular cash flow crises, so important is it.  Unless you can pay the mortgage interest and bills in operating your business then you will ruin your credit rating and eventually go bust.  It is essential that you have sufficient reserves to ensure any expected contingency can be met.  Three months running costs and mortgage payments is considered prudent.
I am the wrong person to give this advice as if I had three months reserves I would buy more property! By reserves I do not only mean cash in the bank, I mean available credit lines, for example, credit cards, bank overdrafts and loan facilities etc.

I would usually buy property which gives an income after deducting all expenses and be very wary of discounted mortgage deals. These usually only provide a discount at a cost added to the mortgage, for two or three years which then reverts to a fairly high interest rate. It is OK if you can then re-mortgage at another discounted rate. I prefer life time trackers, you know where you are, though I know investors who prefer long term fixed rates. It is down to your own assessment of the risk.
     
2. Do not expect logical or fair behavior from anyone in the buy to let market e.g. tenants, Local Authorities, courts, regulators, valuers, lenders etc.  Just accept what is and get on with it.

With lenders I have given up trying to understand them.  One lender will be exiting the market but will not tell you so you waste time and money applying for non available finance while two more will be charging in with a shed load of money.  Some valuers are beyond contempt, their arrogance is unbelievable.  I have strongly disagreed with valuers over the property value or more often rental income.  I have 520 units of accommodation yet I am told I cannot get the rent level I do and have been getting for years!  However, my greatest contempt is reserved for the regulators, Local Authorities and courts for their bias against Landlords their hypocrisy and stupidity.  They have little excuse the evidence is clear that what they are doing is wrong and reducing the supply of accommodation yet they ignore good sense, hide behind ‘the rules’ and create and often zealously enforce counterproductive legislation.

If you want to become a landlord you need to understand that a landlord is one of the few human beings who society fails to protect and can be abused, robbed and exploited with impunity by their tenants and maligned by everyone else and blamed for most of societies wrongs. Thank goodness most tenants honor all or most of their obligations but if they don’t when you are letting to what I will call the ‘non professionally employed’ end of the market there is very little you can do about it. I have had tenants who move in with no intention of paying rent, keeping the Housing Benefit which was agreed should be paid directly to me but I suspect is deliberately paid to the tenant by a maliciously motivated Housing Benefit Officer, and the tenant then refuses to hand over the money to me. Tenants who have also stolen the contents of the property and damaged what was left and there is nothing I can do and the police will rarely take any action against such people. I forgot, the tenant usually gives me a boat load of abuse as well. If you believe that the world should be fair keep away from this business or certainly the lower end of the market which gives so many more problems. 
 

3. Understand your market then trust your instincts.

Once you know what you are doing take very little notice of what others say and just get on with it.  There is so much conflicting information out there, you just have to trust yourself to make the right decision. Be very cynical of those giving advice.  Ask what do they know about the subject and be even more careful if their advice results in a profit for them. Remember, if they are so clever and knowledgeable about property why are they not multimillionaire property investors themselves and if they are why are they talking to you and giving their valuable advice for free? It is not so much about what the seller is making out of the sale but what you can make from the deal.

 The difficulty with this one is when do you understand the market?  The wise are always open to new ideas yet are prepared to stand by their own opinion.  Decisions in this business can make or lose substantial sums of money and are not easy to unwind.

A property is like a dog, for life! I have never bought and sold a bad deal and got my money back, never mind at a profit and what I mean by a bad deal is a property I originally bought to let and when it did not let well or had problems, I tried to sell.  In fact I end up keeping some as the gradual loss per year was far less than the capital loss from a quick sale and guess what, after a few years the loss making property turned into a nice little earner.  Property is like that, but it would have been better to have used the money tied up in the deal to have brought even more property.

Flats, especially new flats, I tend to avoid which I know is going against the majority opinion. I am deeply cynical about those who promote them. Long term tenants do not want flats, they prefer houses. With the over supply of flats I doubt many will do that well with capital appreciation. It is the high service charges that are the main problem with flats and the poor services provided for those charges. I am in dispute with many of my service providers and most of the time I just let the issues go because I have not got the time and energy to chase them, yet I must be one of their biggest pains so it only goes to show what they get away with.  However, always look at the demand and figures, if the flat stacks up giving a healthy income then this may outweigh the disadvantages.  

4. Go for quality

From experience I usually find the better the accommodation the more rent achieved and the longer the tenants stay.  As a rough guide I would guessestimate money spent on improving my units of accommodation produce at least a 20% to 50% return i.e. the cost of improvement pays for itself in two to five years.  After about four years HMO units become tatty and are in need of being refurbished but the increased level of facilities e.g. ensuites, kitchenettes etc still obtain a premium.  New build property always lets better than old but demand and location is crucial.

5. Avoid officialdom

Wherever possible keep your HMO properties away from your Local Authority, never give them the address of your HMO.  Most Local Authority officials will just heap pointless expensive works to do to your property or try and get you to make unnecessary planning applications and so increase your costs for few, if any,  tangible benefits.  The sinks in every bedroom fiasco has still not gone away, they are now at the discretion of your Local Authority.  Can anyone explain the point of: fitting electric meters in fireproof cupboards, the risk reward ratio in the almost useless passive protection fire standards and on a more trivial nature the point of replacing a double glazed window in which one pane is cracked?
 
I, and any other HMO Landlord, can give countless examples of useless inconsistent and often contradictory changes imposed by Local Authority officials.  I wouldn’t mind if they targeted the bad landlords but they rarely do, it is the landlords they know about, normally the better ones who voluntarily come forward they heap pointless standards on while saying they have no manpower or time to be able to find the bad landlords. I know I am being hypocritical here because there is a section of society that no one wants to house. Even the social sector will only house them if they are paid vast sums of money to do so and I am talking over £500 per week per person. If the ‘doss house’ landlords were closed down what would re-house the tenants never mind the cost for re-housing them?

It is the private sector landlords who are providing a valuable service, supplying low cost flexible accommodation, yet little help or support is given to us by Local Authorities. In fact the opposite is true, they often cause us immense problems. All the help is given to the tenants who seem to be able to do no wrong as far as the Local Authority is concerned.

I still do not understand why a tenant, if they are not happy with what they have will take or stay in a poor quality property when in most areas there is an over supply of rented property.   In a competitive market the customer will not normally take poor value products. I am not advocating unsafe or badly maintained property, any professional landlord will ensure their property is safe and sound, but the excess standards heaped upon landlords which neither the tenant or the landlord want or need and are not justified on a risk basis.

6. Try it and see

Where to buy and what to charge is often down to try it and see.  Yes town centers are usually popular but what about out of the way places?  I have tried some odd areas and have been surprised that I have managed to let the property.  If demand is good I buy another property in the same area and keep buying until demand slows down.  Location is essential if you want a peaceful life.  Keep away from owner occupied properties as the owners of the properties will generally resent you multi letting and report the property to the Local Authority and attract the attention of the planners and the Housing Standards Department who will involve you in loads of cost and hassle.  See my book How to Become a Multi Millionaire HMO Landlord for more on location.

What to charge is neigh on impossible to ascertain.  I charge what I guess tenants will pay and if demand is good keep putting the rent up.  In London I have found landlords charging £600pw for studios but they call them ‘Short stay hotels’.  Previously they had been charging about £180pw for the same thing.  Rents are often determined by what people earn and a rough guide is one third to a half of your tenants take home pay is the maximum you can charge.

What type of tenants you get is down to area, how quickly you want to let and how selective you are.  Most of the professional letting agents will only let to people who can be credit checked and agree to a six months let, if you do the same then join the queue, everyone wants those tenants.  If you are prepared to be more flexible then you will have fewer voids but maybe more bad debts but bad debts is more often a product of poor management. I find if the tenant fails to pay and you are immediately and regularly on their doorstep you will have far fewer arrears. You do not have to be nasty or anything like that, it is prompt firm personal contact which works.

I am not advocating you buy a property and then try it and see but if you already own a property or have bought a property at well below market price then what have you got to lose by seeing if it will multi let but your overdraft!  Multi lets bring in on average three times the income that a single let does so it often makes the extra effort worth while.

7. The tenant

Treat the tenant with respect, be fair, friendly but firm, but don’t expect to be friends. Give them, within reason, what they want.  Regularly ask them if they have any problems with the property and be prompt in getting the problems fixed and check it has been done.
Do not believe a tenant’s excuse for non- payment of the rent, it is almost always a lie and they do no intend to pay, take immediate action.  In this business do not expect any gratitude in return and you will not be disappointed. Try and become detached and philosophical.  The injustices and crap that landlords have to put up with can screw you up, just be grateful that the tenant pays their rent and remember in the long term you will be rich beyond your dreams while they will still be tenants and the officials who hounded you will still be doing their jobs or living off their inflation linked pensions.