HMO Investing Wendy Whittaker-Large  

Scaling Up with HMOs

I’ve noticed from working with plenty of people over the last few years that there are various stages in an HMO investor’s journey and thought I’d share them with you. You can see from the different stages where you are and what your next steps might be, depending on your vision for growth. Many people want to get the stage where they are financially free – i.e. where they have enough income coming in from HMOs to pay all their personal bills (mortgage, utilities, car, school fees etc) but then they’re not quite confident enough to grow further so that they can outsource the running of the business to other people. You may have a great managing agent who does the day-to-day activity but you still have to get involved with some aspects of the tenants and / or maintenance. So, how do you scale up without creating another full-time job? At what point can you grow and go? At what point should you stay and scale?

Stage 1 – is start-up phase where you have 1 – 4 HMOs and you might still be in a day job, or running another business, and you probably run your portfolio fairly easily yourself. Most of the sourcing, project management and finishing is down to you. You don’t have any staff and few systems. The business runs smoothly most of the time, and apart from the odd short stress point, you are enjoying building the portfolio. This stage can last up to 18 months to 2 years depending on how fast you can develop your HMOs.

At Stage 2, you have 5 – 8 HMOs and you are probably stuck in the ‘self-employed landlord’ category where you don’t feel that you can sustainably outsource enough and still make a profit. You are spending half your time managing your portfolio and finding the competing demands fairly heavy. The benefit is that your profit should be growing nicely and your initial HMOs should be settling down (they often take up to a year to get through teething problems) . You will have left your day job (or reduced your hours) and may have become part-time in your other business to concentrate on growing your portfolio. You may have a team of trusted trades who will step in and help you, and you are in charge of co-ordinating this work. This stage feels like you are growing quite fast, and you are able to juggle new projects with the ones already completed.

If you have 9 – 16 HMOs you are in Stage 3, and you will now be facing the challenge of working full-time in the business PLUS taking on staff, and upscaling your systems so that you can regain your freedom (that you had in stage 1 but have lost in stage 2). At this stage you can feel that the demands of running an HMO portfolio are too much! This is to be expected! You have a large portfolio and you are directing all processes and managing financial transactions on a daily basis.

You now need to use other people’s time, and you have the profit to pay others, but the focus should be on ensuring your systems and processes are up to speed and scalable. You may feel regularly overwhelmed and you start to wonder if this was all worth it. You consider diversification and doing other strategies. Your voids start to increase as you now have (in the region of )  50 – 90 rooms, and this puts added pressure on you. If you are using an agent, you start to wonder whether you could do a better job by bringing it all ‘in-house’ but the fear of taking on the role makes you concerned that stepping back in will create a thankless full-time job. Your personal drawings have not increased as you are now using other people’s time more, and this also reduces your enthusiasm for HMOs. I would suggest at this point that you must get a business mentor to help you focus on what is important NOT urgent, so that you utilise your time and energy wisely to get to Stage 4.

When I was at this stage I was also running a household with three boys (my eldest had left home by then) and the youngest was 7 years old. So my time was also taken up with homework, football, swimming and playing (the best bit)! I was pretty exhausted much of the time and wondered why we ever bought a TV as I never watched it.  My husband had just left his job to join me in the business, and everything felt rather chaotic. It is what Roger James Hamilton calls the ‘The Octopus Effect “On the surface, it looks like you or your business is successful because you have money coming in and so much going on; beneath the surface, there are many tentacles relying on one small brain, and everything sucks”!

By Stage 4 (over 17 HMOs – over 100 units) you will have regained your time from the day to day management of the properties and tenants, but now you have systems and staff to manage! Your focus at Stage 3 was to use other people’s time, and this alone will have taken a few months. You may find that you were not taking on new projects in order to focus on streamlining the business, and your focus is more internal than external. By Stage 4 your time working IN the business will have pivoted to being ON the business. Instilling good routines and rhythms will be essential. Regular financial, property and staff reviews are required so that you can direct operations without having to run them personally. If you are using a managing agent the transition to this stage should be fairly smooth, as many of the jobs are already being taken care of by the agent. Knowing your monthly profit and loss, and reviewing your cashflow is critical, so a company bookkeeper or accountant is crucial. At this stage measuring the time you spend ON the business can become one of your Key Performance Indicators. Aim to reduce this by 15% per month until you can confidently say you are balancing responsibility for running a sound business with the resources with which to do it. Once you reach this stage you are in a stronger position to develop a new strategy and expand once more. You will know your business inside out and others will be coming to you for advice and guidance. You may wish to do larger projects, new developments or conversions. This is the stage where that can happen as your HMO business has strong foundations and a structure for stability and steady growth.

Whichever stage you are at now,  recognise where you are and what steps you need to take to get to the next stage. If you have 6 HMOs you have a choice – do I grow the portfolio so that I can regain my time, or do I change strategy to increase my income exponentially? I see a lot of people do this as they think that the pain of managing HMOs will continue as they get bigger and they’ll end up in with money but absolutely no time or quality of life. So they get into commercial conversions, or developments. But their HMOs are neglected and still not properly systemised. They end up being liabilities and not assets, and in the end get sold or passed off as a ‘part of the learning journey’. This is a shame, as these should be assets that work when you don’t!

I like the phrase ‘set, let and forget’! This has been my mantra throughout the time that I have been building my portfolio and has helped me reduce my time exponentially whilst still growing the business. In reality what seems to happen is that there are huge peaks and troughs where your time is literally eaten up and then spat out! You are stretched beyond measure and then suddenly you regain oodles of time!

Having enough property and income to afford staff and outsourced services allows you the benefit of income and time and only you can decide how many HMOs and rooms will do that for you. Then you can run your portfolio for a few hours per week, still make great money, and do what you love! OR, make a conscious decision to stay in the stage you are at, but borrow learning from the next stage to ease your current pain.

If you are stuck in one of these four stages, you have options –

1) Sell up entirely and start again with a completely different strategy

2) Stay where you are and accept the problems (and the pleasure)

3) Grow the portfolio large enough to leverage to the next stage.

What do you think about where you are and what you really want? Where are you in your growth trajectory and do you think this is an accurate depiction of the stages of an HMO business? If you would like a FREE 30 minute consultation call with me to help you decide where you are and what your next steps should be please book a slot here:

To your growth! Wendy