Is Now The Time To Be Investing in South London HMOs?

An HMO, or House in Multiple Occupation, is a property rented out to three or more unrelated people who share facilities such as a kitchen and bathroom. Investing in HMO properties can be a good way to generate a high rental income, but it also comes with some risks. Lots of onerous regulations make up lots of trip hazards, so read further to see if it's for you!

Pros of investing in HMO properties:

• Potential for higher rental income: HMOs can generate more rental income than traditional buy-to-let properties because you can rent out multiple rooms.
• Diversification: Investing in HMOs can help you diversify your property portfolio and reduce your risk.
• Demand: There is a growing demand for HMOs, particularly in urban areas where there is a shortage of affordable housing.
• Flexibility: HMOs can be a flexible investment, as you can rent out the rooms individually or as a whole property.

Cons of investing in HMO properties:

• Increased management: HMOs require more management than traditional buy-to-let properties, as you need to find and screen tenants, collect rent, and deal with any disputes.
• Regulatory compliance: HMOs are subject to more regulation than traditional buy-to-let properties, so you need to make sure you comply with all the relevant laws and regulations.
• Risk of damage: HMOs are more likely to be damaged than traditional buy-to-let properties, as there are more people living in the property.
• Tenant turnover: HMOs typically have a higher tenant turnover than traditional buy-to-let properties, so you need to be prepared for the hassle of finding new tenants.

Overall, investing in HMO properties can be a good way to generate a high rental income, but it's important to weigh the pros and cons carefully before making an investment. In days gone by letting a property to a group of sharers was the most common thing in the world, and there wasn't all the extra regulation to deal with. There is certainly more to it nowadays. Whether you are renting out the property on one tenancy agreement or many agreements (by the room generally) the same rules will apply for fire safety, licensing and so on.

If you are looking at an investment property and would like a professional to glance it over to see what rent it would fetch then drop me a line, I'd be happy to help!

Are you still banking on HMO yields with Vanilla Let investments?

 I've recently been asked about my portfolio - when I started, why I continued, but most importantly what sort of yields I achieve.

Firstly let me start by saying I hate gross yield as a yardstick for how good an investment performs. If you know me, you'll know that I always look at the return on capital employed, or how much money is left in the deal after refinance. You may however be getting an infinite return - if you've refinanced after several years of ownership and price rises you may have been able to borrow more than your initial outlay - this makes it even more tricky. A good friend of mine always compares the "net equity" - the amount of money you would have in your pocket when liquidating the asset, after all fees and taxes. He then looks at other things he could do with the money. Will it get a better return? He pushes the 'sell' button. Interesting, but I digress. Let's just stick to gross yield for now, the topic du jour.

I have been in property for nearly 20 years, being a landlord for over 15 of those. My first purchase was indeed a single (vanilla) let, moreover because it's a studio flat. Difficult to turn that into an HMO with multiple people in there! After that I diversified in to bigger units with more bedrooms, because I realised that the "price per bedroom" was simply lower the bigger the number of rooms became. This increased yields. Coming from an estate agency background I was easily sold on the idea of letting in August and September, because after all, that's the busiest time of year - new students flood the London rental market, pushing demand and rents 15% above average for the year. What's not to love?

The concept of running an HMO, or multi-let, was fairly alien to me. I didn't really want the hassle of tenant 1 moving out a different date to tenant 2, and then tenant 3 kicking off because the other tenants are too messy or whatever. When you let to one group it's very nice, they all move in and out at the same time, they're all friends so you don't have to play mummy or daddy to them when the washing up isn't done and so on.

So why are people still multi-letting? What is it that we don't know? Well, people pay a high price for certainty. People pay a higher price for having flexibility. That is key with today's renter. There is a growing number of renters who prefer to try out different areas, don't want to commit to a houseshare where they don't know anyone (and are worried they won't like them). 

Now I don't believe that renting by the room is worth the hassle - in some areas that is. If you are letting in zones 1 and 2, and even 3, you're going to be just as well off renting to a group of friends as you are renting to 3 or 4 separate people. Demand is strong there. Zones 4 and outward you may struggle to get a big group. Generally the further out you go, the higher the percentage of owner occupier/families will be, so prices don't stretch as high as the inner zones because you just won't get as many larger groups wanting to live together.

Moral of the story? If you're going to aim for sharers, be prepared to multi-let if you are further out in order to get the good returns. In zones 1 and 2 (from personal experience and anecdotal evidence). You can't expect the same returns from bigger property the further out you go. Now interestingly enough I've been reading some articles that seems to dispute this - commuter towns that are beating London's average 4.1% yield. Now let me start by saying you must be doing something seriously below par if you are achieving a 4% yield, so it's not difficult to do better than that! My lowest yielding property is achieving 5.8% and the highest a whopping 8%. It will come as no surprise to hear that the 8% yielding property is a 5bed. It's an HMO. Do I multi-let? No. It's let to a single group of friends. Lovely!

Moral of the story - if you are looking for great returns and invest in Clapham and surrounds you need to be looking for more bedrooms in order to increase your yields, not necessarily let by the room.

Do stay tuned for property investment tips/tricks and updates and by all means do check out the DownToSouthLondon YouTube Channel for entertaining and informative videos to help you invest with confidence! I also offer coaching on a one-to-one basis so if you are looking to get into property investing and require personal guidance then head on over to www.jeroenhoppe.com.

The truth about HMOs - with Rod Turner

Another day, another podcast! Glad to welcome fellow investor and friend Rod Turner on to the #DownToSouthLondon podcast this time; we frankly discuss the ins and outs of HMO investing, in South London and beyond.

Click here to listen to the podcast.

https://podcasts.apple.com/gb/podcast/down-to-south-london/id1471978277

I hope you enjoy the podcast. As always, If you are looking for help with your property investments please feel free to reach out to me via email. Also, if you are interested in more information on property letting and investments do head over to my youtube channel.

Ro Sharma and his HMO Development in South London

We are LIVE! Many of you have already downloaded and subscribed to the #DownToSouthLondon Podcast, but for those of you that haven't yet - here is a taster. Ro is a good friend of mine and he kindly took the time out of his day to come on the show to talk about his latest HMO Development in Croydon!

If you would like to hear more episodes subscribe to the Podcast on Spotify or iTunes!

As always I'm happy to help you so do reach out via email. I love to help other investors old and new find their way in the myriad of strategies that are available. Are you looking for coaching, mentoring or simply after a sourced deal? Do check out my personal website to choose a package for you!

Is individual room council tax banding killing off HMOs in Clapham?

I've been getting a lot of feedback through the investor grapevine that HMOs (House in Multiple Occupation. Generally let room-by-room, nobody knows each other, each bedroom is effectively a household) are getting more and more difficult to run. You will have heard about new regulations, I'm sure, for "vanilla" buy to let properties over the years. You have to carry out Right to Rent checks, you have to deliver the "How to Rent" booklet and much more of course. HMO managers have even more red tape to contend with. I won't bore you with all that now of course.

The real attack here via the council tax. Some councils in the country have taken to banding HMOs by the room, not by the whole property.

What does this mean?

Well in layman terms you as the landlord or HMO manager will be paying the bills (including of course, council tax), and this bill will go up substantially. Naturally a room is of less value than a whole house, but an HMO of say 6 rooms charged by the room will end up costing more than 1 house. A moneyspinner for councils then, isn't it?

I don't care, I don't let out an HMO

This may be. For the moment. You will find that Southwark for instance is clamping down on properties let to multiple tenants and multiple tenancies. If you are, therefore, letting by the room you run the risk of, in the future, being caught in "additional licensing."

But I'm in Clapham/Lambeth

You may be. Lambeth does not have as strict HMO licensing criteria as Southwark, this is true. But it may only be a matter of time before they catch on to this money spinner.

What do I do?

In my experience zones 2 and 3 are extremely high demand areas for letting. ESPECIALLY the bigger properties. In my 14 years of property in South London I have yet to experience a low demand for 3, 4, 5, 6 bedroom properties. They have always been scarce on my agency's books and always fly out the door. So why not let as one unit? Although not fool proof this will certainly help the council be convinced of your argument NOT to band it by room, but by property address. After all you are arguing it's one household, despite the group being unrelated. They are all friends, they cook together, and so forth. Criteria change all the time of course so this may not be fool proof.

What are the other benefits of letting as a whole?

Well I'm a big fan of this, so here's what it means for me:

1. Easier management. Deal with 1 tenant for instance, easier on the communication front.

2. Less repairs, you generally get less wear and tear

3. All of the tenants move in at the same time. If one does want to move out it will be his responsibility to find a replacement. They all want to terminate early? They are to pay for your agent to find a replacement tenant AND pay rent up until a new tenant takes possession.

4. Easier to get finance if you let on 1 AST

5. Generally eliminates the need of HMO Licensing (take advice on this of course, this will be council dependant) If you'd like me to put you in touch with an expert who can advise you on your property's HMO licensing requirements then let me know and I will connect you.

So to conclude - letting is becoming harder, so you as an investor have to look for ways to invest more profitably. This will mean making your life easier and it yielding you better returns, being higher income or lower costs. I am certain that letting a large property as a single unit will be easier and more profitable than letting it room by room, certainly once you factor in your time involved letting rooms and dealing with 6 tenants instead of 1 all year.

If you are looking to pick my brains on your property strategy do get in touch. I can help you define your strategy and help you build a profitable property portfolio. Having been active in buy to let in South London for nearly 15 years you can certainly make good returns. You don't always need to have millions in the bank to invest in London. Do you want good returns? Do you want to improve your current returns? Start the conversation: jeroen@claphampropertyblog.com

High Yield HMOs vs Low Yield New Build - which is best in Clapham?

Yield.

An often discussed metric in property, but what is it exactly?

Well there's different kinds of metric to measure the performance of an investment, and gross yield is probably the most basic form of measurement.

So what does it tell us? Well it tells us, broadly, how the investment will perform. Generally a yield of 4%-6% is the going rate for a London property, even less in Central London, more on the outskirts as generally the "safer" an investment the lower the yield. For reference let's remember the interest you get from your savings will be 0.5%-1%. But "safe as houses" varies, as does yield!

So let's drill this down a bit further. The above is only really relevant if you buy the whole property with cash and you ignore all the annual expenses. Truth is you won't generally buy with cash and you have to pay for letting fees, voids, repairs and insurance (and a lot more, I'm sure). So does that mean we have to measure net yield? Maybe. You can't predict all the expenses you're going to incur, but if we compare two opposite properties the picture will become clearer.

I was pitched a new build property in this development called Camberwell On The Green the other day. A lovely new build development - you'll never guess where it was. Anyway, a 2bed there was being sold at £695k with a £2000 service charge and an estimated rent of £2200. Estimated. Real rents probably about £1700-£1800pcm. Service charge of £2000p.a. and so forth. For the sake of argument I'll base the numbers on a rent of £1800pcm.

Let's compare this to a 3 bedroom house in a similar area that you could let to 5 sharers, using both reception rooms. Yes more maintenance, a bit more legwork when letting but let's compare them and see how they fare just for this example.

I prefer to use the Return on Capital Employed metric because this will take into account a few other factors such as:

1. You will have only paid a 25% deposit, the rest is leveraged from a bank (account for the interest payment in the monthly costs).
2. You may be able to add value and refinance, so you can apply this metric to the final figures once you have refinanced your property
3. This takes into account all the running costs. On a new build the repairs will be less but service charges will be higher. Houses with multiple tenants or Houses in Multiple Occupation tend to incur more management costs, both time and money-wise.

When I run some numbers through my spreadsheet such as projected income and expenditure I actually find that the gross yield for my hypothetical HMO is 5.57%. Respectable, but despite leverage this actually drops to 5.16% ROCE after taking into account the bills and management costs. Still miles better than the new build though: 3.09% gross yield and 1.1% ROCE.

So why should you invest in a new build? Well, above points to "you shouldn't" as it's the least likely to cash flow. In fact, I had to run the numbers on a 42% loan to value scenario because the rent achieved would need to cover 145% of the mortgage payment. And unless you put down 58% deposit it won't, and you'll find difficulty in finding a lender. So leverage will hold you back if new build is the way you are thinking of going. Service charges are enormous vs repairs on an older place (and service charges are guaranteed, you may be lucky and not need repairs).

The other point that I'd stress is that a new build is very niche in the sense that they will often be much more expensive than other local properties - developers will command a premium for their "brand new" flats. A 2bed in Camberwell goes for anything from £350k upwards, a period one for about £550,000, the new builds are being sold at a far higher price! However when you come to sell it's not brand new anymore. Remember that new car you bought? Right. Property is same same but different. If you hang on to a new build for long enough they will certainly go up in value like the rest of the market, but the first 5-10 years you will find that the value doesn't change much, in fact it probably goes down a bit because the developer is still finishing off the development, there may be a few unsold and if you decide to sell that particular day you would have to compete with the developer, so probably would have to sell at a cheaper price. Each development is different of course and there is certainly a market for people reserving a particular unit and then trading it on to someone else, but this is more common for developments with hundreds of units and built over 3-5 years. Let's ignore this for now.

In summary the values will go up at the same rate, but only once they've "normalised" and the premium is gone. In the same way a car's depreciation will become more reasonable once it's say 3 years old. New build is lovely and new, but if you're employing your money as an investment you will want better returns than a new build can offer you I trust! As you can see in the graph above, like-for-like comparison will see period property become more desirable in the long run, at least so is my prediction based on my years of experience.

So what to buy? Well new build if you must, they are as low maintenance as property investments come, but I would still advise putting your money elsewhere. There are plenty of developer projects where you can fund a property investor and make a 5-8% return on your money without taking any of the risk of enormous service charges and the like. If you do want to get more involved and benefit from longer term capital appreciation then buying a property to add value to in South London will most certainly offer good returns. I am currently averaging 22% return on capital employed over my last years' projects and I have two more in the pipeline which I'll tell you about in due course. If you want to hear more and how you can invest for better returns just drop me an email or come down to the Clapham Property Meet - we have an exciting talk on this month about property finance and I'll be running through my most recent deals with the audience too.

Southwark Council approves new landlord licensing schemes

Today's blog is by Richard Tacagni of London Property Licensing, specialist in helping residential landlords make sense of London property licensing.

Southwark Council is the latest borough set to implement new licensing schemes for private rented homes.

On 21 July 2015, the Council’s Cabinet approved borough wide additional licensing plus a network of smaller selective licensing areas spread across the borough. Both schemes will go live on 1 November 2015.

According to the Council, Southwark’s private rented sector has seen rapid growth and about 70,000 people now live in private rented homes – about a quarter of all residents.

The Council says that whilst much of the sector provides decent accommodation and is well managed, there are problems associated with parts of the sector arising from poor management, poor property conditions and issues of anti-social behaviour.

The Council says that their enforcement activity involving multiple occupied properties has increased by 289% over the past 5 years, leading to a 500% increase in the number of HMO prosecutions over the same period. Research by London Property Licensingplaces Southwark in the top five London councils when it comes to taking housing prosecutions.

Additional HMO licensing

The additional licensing scheme will extend House in Multiple Occupation (HMO) licensing to all HMOs in the borough. Every private rented property shared by three or more people who are not all related will need to be licensed – an estimated 10,000 properties.

Selective licensing

In certain parts of the borough, a new selective licensing scheme will extend property licensing to all private rented homes – including houses and flats rented by an individual or single household.

The scheme designation says it “…includes but is not limited to Walworth Road, Camberwell Road, Camberwell New Road, Camberwell Green, Coldharbour Lane, Denmark Hill, Camberwell Church Street, Bellenden Road, Southampton Way, Old Kent Road, Meeting House Lane, Queens Road, Rye Lane, Evelina Road, Lordship Lane (North), Lordship Lane (South)”.

Yet further investigation by London Property Licensing has found that the selective licensing scheme is far bigger than at first appears. The scheme extends across seventeen distinct areas including 134 streets and is estimated to include up to 5,000 properties.

This is one of the most complex licensing schemes to date and landlords and letting agents will need to study the arrangements very carefully.

Licensing fees

Whilst the selective licensing fee has been set at £500 / property for up to five years, the additional licensing fee for HMOs has been set at £250 / bedroom, making it £1,250 for a five-bed shared house for up to five years. This will become one of the highest additional licensing fees in London.

Landlords who apply within the first six months will receive a 20% discount, with a further 20% discount offered to accredited landlords.

The council says there will be an online application process and all properties will be inspected before a licence is issued.

Councillor Richard Livingstone, cabinet member for housing at Southwark Council said:

"With the rapid expansion of the private rented sector in Southwark, it is vital that we’re on the side of private sector tenants and those responsible landlords who provide a good standard of housing, particularly where children are concerned. We just want to make sure this is the experience of everyone residing in a private property in Southwark.

"On its own licensing will not solve the issues created by poorly managed private rented accommodation. But it’s a step towards ensuring that rogue landlords are held accountable and curbing anti-social behaviour."

Further information about property licensing in Southwark is available at www.londonpropertylicensing.co.uk/southwark, or by visiting the Council’s website.

(Is There Trouble With) Houses in Multiple Occupation (HMO), Anyone?

I’ve had a busy week answering lots of questions from landlords and one asked me about multi-lets. He was worried about HMO regulations and the like, something that you may have heard of.

“Should I be worried?”

“Do I need a license?”

“How much does it cost?”

“If I don’t get a license will I get caught?”

Well for starters what is an HMO? With houses in multiple occupation imagery of derelict bedsits come to mind don’t they? Nothing is further from the truth in London. A lovely 5 bedroom Victorian residence can be considered an HMO as can a bedsit squalor.

The following is defined as an HMO by the national HMO network:

• An entire house or flat which is let to 3 or more tenants who form 2 or more households and who share a kitchen, bathroom or toilet.
• A house which has been converted entirely into bedsits or other non-self-contained accommodation and which is let to 3 or more tenants who form two or more households and who share kitchen, bathroom or toilet facilities. 
• A converted house which contains one or more flats which are not wholly self-contained (ie the flat does not contain within it a kitchen, bathroom and toilet) and which is occupied by 3 or more tenants who form two or more households. 
• A building which is converted entirely into self-contained flats if the conversion did not meet the standards of the 1991 Building Regulations and more than one-third of the flats are let on short-term tenancies. 
• In order to be an HMO the property must be used as the tenants’ only or main residence and it should be used solely or mainly to house tenants. Properties let to students and migrant workers will be treated as their only or main residence and the same will apply to properties which are used as domestic refuges.

There’s a few terms thrown in there like “household” which is defined to death also but in layman’s terms – anyone eating or doing washing together or family-related.

Therefore three friends sharing together are considered three households. If a couple are sharing with a third person that would consist of two households. If a family rents a property that is a single household. If that family had an au-pair to look after their children that person would be included in their household.

BUT…

An HMO is not necessarily a LICENSABLE HMO. When asked about HMOs this is generally what people refer to, as quite frankly, if it has no effect on anything else then why bother calling it an HMO??

What properties need a license? Simple: You need an HMO licence if you own or manage an HMO that is:

• three or more storeys AND
• let to five or more people AND
• made up of two or more households.

So if it doesn’t satisfy all 3 above, then you don’t need a license. In essence what one will find is that letting a large property as an HMO brings all sorts of problems. A lot of investors do it this way, but personally I’m not a fan… reasons below:

• Tenants moving in and out all of the time
• You will need to readvertise rooms regularly (tenants might not get on etc)
• Carry out inspections at every changeover
• Deal with deposit return and other admin every time someone moves in and out
• Tend to repairs more regularly as people treat the property less well (short term views)
• HMO regulations insist on modifications such as fire alarms, fire doors (shame to get rid of beautiful period doors for instance)
• Tempted by high returns but left high and dry with voids due to difficult tenants
• Once a property is registered as an HMO it wouldn’t likely be considered to be a family home for potential purchasers (stigma) hence limiting capital growth
• Finance may be more difficult to obtain as the investment is seen as higher risk – a higher deposit would mean tying up more capital than with other investments.

So in answer to my dear landlord above, costs are substantial. These vary per council of course but Lambeth will want up to £250 PER ROOM PER YEAR upon initial application (discounts available for “Accredited landlords”) which go down a little bit upon renewal, but eat into income of course. As well will your costs of sorting out fire alarms and ripping out your lovely period features. However proceed without a license and you will leave yourself open to prosecution. They have clever ways of picking this up, not just limited to checking how many people are on the council tax bill…

My professional opinion would be to limit the number of tenants to 4, perhaps taking a slight hit on the rental achieved in order to get the capital gain, but in all honesty the better yielding properties (and better for capital growth) have thus far been smaller units.

So bigger units? Great for diversification of course as there is usually a steady demand for family homes, and increasingly so as more and more properties are being chopped in to flats. Perhaps a good long termer, but in the short-medium term look at smaller units. Just look at the yield for now and build cash flow. This way with relatively small deposits one can build a portfolio which you can then diversify with acquisition of (larger) period properties. The problem with older stock is that it appreciates, but the yield is generally less good. This means that you will have to pay a higher deposit because the banks will require that the rent is 125% of the interest payment (always calculated at 5%, to allow for rate rises). Let’s compare two purchases:

A Victorian £400k 1bed flat will rent at 1500ish in a good part of SW2 or SW4.

• That’s £18k per annum rent
• Divide by 1.25 means your max interest payment is £14400 per annum
• Divide by 5% and the max loan you can get on this property is £288k, which means a 112k deposit.
• Realistically you will get a rate around 2.5% so will yield you £900gross per month yield

Ex-local 3bed for £300k in Streatham/Brixton Hill will let at the same money (worst case)

• £18k per annum
• Divide by 1.25 means your max interest payment is £14400 per annum
• Divide by 5% and the max loan you can get on this property is £288k, but capped to 80%LTV, so loan of £240k
• The difference between the mortgage and the rent here is 700pcm at 2.5% BUT you’ve only tied up 60k.

So you can buy two of these for the price of a Victorian. So your 120k will make you £1400pcm gross, not £900pcm. Plus of course the capital appreciation in the long run. HMO or smaller units, I know what I’d do if I was starting a portfolio or adding to a small one.

As always give me a call on 020 3397 2099 for a chat or drop me a line: jeroen@xandermatthew.com – always on hand to answer any property related questions.

£1000pw with nearly 7% gross yield - Clapham SW4

£1000pw with nearly 7% gross yield

Kosta Giannakakis MARLA

Branch Manager at XanderMatthew

Currently for sale is this 6 bedroom house on Aristotle Road SW4. An ideal buy-to-let if you are able to go the extra mile and comply with HMO regulations. I classify this property a good find for professional sharers, offering excellent living accommodation (1500sqft) with mostly large double bedrooms. The property includes the necessities such as garden, garage and a nice open-plan kitchen/living, features that professional people will be considering upon their search. You won’t secure a better location to invest in, with this particular property situated right next to the underground tube (Clapham North) station and within close proximity of Clapham High Street which offers an array of fine restaurants, bars and the vibrant nightlife one seeks within this location. This is an exceptional opportunity for investment purposes, resulting in a high yield and attracting the finest tenants. I estimate £1000pw, yielding nearly 7% at asking price. Properties of this size are rare and will be snapped up very quickly by a group so low voids are nearly guaranteed. Definitely one for the shortlist. Give us a call on 020 3397 2099 for a price update on your current rental property if you think your tenancy is expiring in the next few months or drop me a line on email.

Click here to see the investment property in question