Do HMO’s Make Money in 2019 | Money Matters | Touchstone Education


– Hello, I’m Paul Smith, and
I hope you are very well. Let’s ask ourselves a question, do HMOs still work? But first, what is an HMO? An HMO is a regular house or flat, except it’s rented by
the room, by the week, instead of by the house, by the month. So that’s what it is, I’m sure you, it’s house share, you
know the sort of thing. Why would you do an HMO? Well, ’round about here
I’ve got quite a few. And maybe the rent for
the house as a house would be about 600, maybe 650 a month. But the rent for the individual rooms because there are bills
included and everything else and they’re really nice en
suites, and blalalala, whatever. It’s 95 pound a week. But I’ve got five of ’em in the one house. So instead of making 650 a month, I can make 500 pound a week. How hard is it to do HMOs? Well, in my view not as long
as you know what you’re doing. Is it hard to drive a car? No, as long as you had some lessons. Is it dangerous to jump in a
car and drive it down the M1 if you’ve never had a lesson in your life? Yes. Is running an HMO any more
complicated than driving a car? No. Do you need certain licenses
and permissions to drive a car? Well you need a driving license, you need an MOT, you need road tax. What else do you need? You need stuff to drive a car. You need stuff to operate an HMO? Yes. So that’s what it is, how
much money you can make, and how hard it is. But there’s been some
pretty big changes recently. So let’s look at those changes now. And then let’s decide
together, do HMOs still work? (light upbeat music) So today’s Money Matters Question. Do HMOs still work? Hmmmm. What might we be thinking when we ask ourselves that question, do HMOs still work? We might be thinking of legislation we might be thinking of
the political situation. So let’s come back and
let’s start at the basics, demographics, people, houses, not enough. Let’s be more specific. I was born in 1964. It took the first 50 years of my life, so from 1964 to 2014, for
the population of the U.K. to go up by 10 million. The population went up by five million in the first 36 years of my life, and then it went up by
another five million in the next 14 years of my life. In my lifetime I’ve seen
the population of the U.K. go from 50 to 60 million. The government, the Office
for National Statistics says that population of the U.K. is gonna hit 70 million by 2029. For all the data, they’ve
got much bigger computers and much more time and
money to waste than I have, they’ve effectively said that history, 36 years, five million,
14 years, five million, 10 years, 10 million. So not only is the population going up, but the rate at which it’s
increasing is getting faster. All right, and you can’t
really argue with that. It’s just, go check it out on the government’s website or whatever. The evidence is irrefutable. The population of the
U.K. is going up fast. That’s number one. Number two, where are all
these people going to live? They’ve gotta live somewhere. Okay, well, the government
has had a number of different study groups over the years, and they decided years ago
that what we needed to do was we needed to build 200
homes a year, houses a year, whatever, they call ’em homes. And that measure has been in
place for more than a decade. D’you know the most we’ve
ever built in a year? 180,000. In many years we haven’t even built 150, in some years we’ve built less than 130. So we’ve consistently been under building the number of homes
that they know we need. And at the same time the
population growth forecasts keep going up and up and up and up. And I’m not gonna bore you
with all too much economics and macrostatistics and whatever else. But I’m sure you know this, the average life expectancy’s
getting longer and longer and more and more of us
are getting divorced. So you put that melting pot together. There’s more of us, we’re living longer, we’re not building enough houses, and there’s more and more single households because of divorce. So what does that mean
for housing numbers? Well recently the government
reconvened its experts to do all the stats. And what they decided is well,
because there’s more people than we thought there were gonna be and because we’ve built less houses than we thought we would, we’re gonna revise the
housing build target. Oh, okay, that’s good. And that’ll fix the problem. So instead of building
200,000 houses a year, which we never have, the target, you’ll love
this, is now 300,000. But how are we gonna build those houses? Well the experts weren’t
actually employed to do that bit. That’s you and me, that’s
us property investors. So do you think there is
gonna be a demand for HMOs? I know there is. ‘Cause when I grew up, when I was younger, there was no such thing as an HMO, a house in multiple occupation. So an HMO, by the way,
in case you’ve gotten this far into the video and
you don’t know what it is, is a room in a house that
you’re renting typically by the week instead of the
whole house by the month. Studies show that there’s
millions of people in the U.K. living in HMOs. So do HMOs still work? Well, let’s talk about it. But is there still a
demand for a properly built and properly licensed and
properly certificated HMO? You betcha. More than ever before. More than ever before. Now there’s been a recent
flurry of legislation that’s made it harder, but
you could argue in a good way, to build an HMO that’s fit for purpose. And I’m all for that, I’m an engineer. Fit for purpose, permits to
operate, I’m up for that. Completely up for it. So the first thing, let’s
take you back to Aril 2018. They changed the EPC regs,
Energy Performance Certificate, so you’ve gotta build it to a more energy efficient standard. Good, say I. So you’re not allowed
to rent any property now if it’s an F or an E. It’s illegal. And in April 2020 that goes to a D. So it needs to be an EPC of D or better. A being good, F being bad. But that’s the same for any property. So that’s not pro and anti HMOs. That’s just a property thing. The more recent legislation in 2018 said if you’ve got more than four, if you’ve got five or more
people living in an HMO and it’s two stories or more, suddenly you need a license. Didn’t need that before. Previously it had to be
three stories or more. Now three stories for an HMO, I’m not saying it’s impossible, but it’s relatively unusual. Almost all HMOs, all of
my HMOs, are two stories. So the situation changed massively. All of my properties that previously didn’t need a license suddenly did. Was that a problem to me? No, why? Because I’m an engineer. Because I’m looking for the
next problem, not this one. So when we built our HMOs we built them all to licensable standards. So do HMOs work anymore? Yes, if they’re compliant. But that’s never been any different. Is there a massive demand? Yes. Do they have to be compliant? Yes. So do unlicensed, illegal HMOs still work? No. Shouldn’t surprise anyone. Is there an ever-increasing
demand and money for serving tenants with compliant HMOs? Yes. So as we’ve seen this new legislation bite and it pushed out so many rogue landlords, to use media speak. What’s it done now? Well since the legislation has bitten, our applications for our compliant, nice, comfortable, en suite, big HMO rooms has gone through the roof. We’re getting between five and 10 times the number of applicants that
we used to get in the old days when any old cowboy could
put anything on the market and stuff people in there dead cheap. Our room rates have gone up. So our occupancy, our room rates, and our demand have all gone up. So this is all good. But I see so many people on the forums bleatin’ about the fact that
HMOs don’t work anymore. Don’t work for them. That’s because they’re not compliant. So what does licensing mean? Well it means you’ve gotta
have a sensible sized room. It’s gotta be at least 6.52 square meters excluding the en suite
and any access corridors. But be careful because local authority by local authority it
could be a lot higher. So here in Doncaster, where
I’m talking to you from, it’s gotta be at least 10 square meters. Is that a good or a bad thing? Well I would put to
you that doing anything when you don’t know what you’re doing is a pretty dangerous thing to do. So please make sure you get
the right level of education, knowledge, and support, to
do HMOs wherever you are. What else does licensing mean? It means emergency lighting,
it means fire precautions, it means a certain number of square meters per occupant in the kitchen. It means all sorts of things. But they’re not hard. You could learn about all that stuff in probably just two days. Now let’s get down to the brass tacks. I can still buy houses. I am still buying houses
for 60, 70,000 pounds. And for six or 7,000 pounds I’m turning them into four-bed HMOs. 60 or 70,000 pounds. I can then put a mortgage on them. And I’ve put in maybe, I don’t know, the one I’m buying at the moment is 58, call it 60,000 pounds. I’m gonna spend seven, so call it 10. So say my total cost to
buy it and develop it into a four-bed HMO is a
total of 70,000 pounds. The mortgage I’m gonna put on it is 85. So I’m gonna have 15,000 pounds cash back over and above my costs and after I’ve paid a repayment mortgage, not an interest only,
a repayment mortgage, through a limited company,
my cash surplus per month is gonna be ’round about 600 pounds. My profit per month, 600 pounds, on a four-bed HMO that’s already given me 15,000 pounds cash back. You tell me, do HMOs still work? Like almost everything in life, what are the fundamentals? Does the demand exist? Yes, and it’s going up. Are you providing a service that people are prepared to pay for? Yes. Is it something that
technology could make obsolete? Don’t think so. People are always gonna wanna
live in houses, I think. Is it a good business,
therefore, to get into? In my view, yes. Can I do it in such a way
that I can recycle my money? Yes. Even on the little bitty ones,
can I make 600 quid a month after repayment mortgage. Yes. Do HMOs still work? I think so. If you’d like to learn more about HMOs, if you’d like to stay engaged
with the Touchstone family, I’d love you to. Please subscribe to this channel and you won’t miss another
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for an episode, please. Or if you want your questions answered about anything to do
with money or property, put it below, and the first
episode of every month, we choose the most interesting questions and we answer ’em live in
the first Money Matters of every single month. If you’ve enjoyed this please like it and please share it with two
of your family or friends that you think would
benefit from knowing about, in this case, the fundamentals of HMOs and do HMOs still work. Of course, there are so many people leaving the HMO marketplace, it’s a massive opportunity
for each and every one of you. If you’re an existing
HMO landlord, get more. If you’re not an HMO landlord yet, start. You’ve been wonderful. I’ve been Paul. See ya next time. Bye bye. (light music)

24 thoughts on “Do HMO’s Make Money in 2019 | Money Matters | Touchstone Education

  • Wait up… How are you getting an £85k mortgage on a £70k house, Paul? Isn't any mortgage offer based on the purchase price of the property – even if it's lower than the actual value?

  • Interesting Paul. Is there any reason you are suggesting a 4 bed rather than a 5 bed HMO? To avoid the licence fee or do you find the numbers stack better? Thanks for the new info.

  • Can we please talk about development finance as sometimes once you bought the house there is no money left to convert house to hmo. So what can be done in that situation.

  • I notice that most HMO educators uses examples of houses in Midland or further north where house price is low. Would HMO strategy work in cities the South, South West (e.g. Bristol, Exeter etc) where house price is a lot higher?

  • I think the biggest hurdle is tax legislation, most landlords are private and many dont understand how to get around stamp, capital gains and general tax!
    The private landlord is finished and those that dont understand could see there portfolio disappear!
    Even selling isn't an option unless your a Ltd company, you cant form a partnership over night either!
    Example:
    Bought a house 10yrs ago at 80k
    Its worth 180k today
    Landlord decides to sell however the tax man wants his share of the 100k capital gain! Therefore wiping out any profit and what if the landlord borrowed against that growth!? O dear negative equity…

  • And we want to live in build up city dense areas which means an acceptance of living in smaller spaces which means small flats and HMO demand is super strong….. I never have a problem renting anything central and decent

  • I have a property in london – I’m going to refinance it to pull equity out so I have cash to invest in new property. How do I go about giving that cash to my own limited company?

  • Awesome vid I would appreciate it if you could cover the legal stuff be compliant eg agreements insurance registration etc. How to go about doing this thanks

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