Education HMO Investing Mindset Wendy Whittaker-Large  

The 10 Most Common HMO Mistakes

Over the last 20 or so years that I’ve been investing in property and the last 10 in which I’ve been focusing on HMOs, I’ve had lots of opportunities to meet with other HMO investors. Some of them want to be HMO investors and others of them are already very successful investors. So I put together my top 10 list of mistakes that I see HMO investors making all the time.

Some of these are people who are new to HMOs and are making rookie mistakes. Others are more seasoned investors, but when they move into the HMO market they still seem to trip themselves up. And the sad thing is a lot of these mistakes could be avoided. There are a few people that I’ve met over my time who unfortunately are no longer even investing in HMOs because their early experiences caused them such problems that they were not able to continue developing their portfolio.

Some of them had businesses that completely failed and fell apart. Others of them had nervous breakdowns and had emotional problems as a result of what happened to them. And as we go into 2024, I don’t want you to be faced with the same issues and problems that they were.  I also want to help you because I believe that HMOs are really powerful, not only for you as an investor, but also for the wider economy.

And I think that investing in HMOs is a very, very important sector of housing that we provide. Of course we want to innovate. Of course we want to show our entrepreneurial flair as we find deals, as we renovate properties, and as we turn them into good quality housing, whether that’s HMOs, co living, shared housing, student accommodation, or social housing.

Whichever route you go down, it doesn’t matter. These ten mistakes apply to anybody who’s investing in any form of those types of HMO.  So number one, the first thing that I see many people failing to do when they start investing in HMOs is very, very simple and straightforward

1. Preparation. You’ve probably heard the phrase, if you fail to plan, you plan to fail.

And while it may sound like a bit of a trite comment, it’s very true that preparation is key for any new venture that you’re starting off. And I think there are three areas, actually, where I would recommend that people consider preparation and consider preparing the ground before you get started.  The first one is in terms of your resources.

Because starting to build an HMO portfolio takes quite a lot of time. It takes a reasonable amount of money. It also requires energy.  You need a team around you, and you certainly need to be able to organise and manage things well.  And if you haven’t prepared for that particular aspect of building an HMO portfolio, you’re going to find very, very soon that you’re going to become swamped with all the activity, with all the demands, with all the voices in your head.

And that can really hold you back. So take some time before you launch into HMOs to prepare yourself.  First of all, make sure that your family, friends, business partner, life partner are part of your programme. Do they matter to you enough for you to actually enroll them in your ideas? Have you shared with them what you’re trying to do?

Because that’s actually really important. When things get tough, you want people around you who are going to support you and are going to be with you. And when things are going well, you want them to be there to celebrate with you.  By leaving them out of the original preparation for starting your new HMO business, you are failing to engage with key people in your network.

You also need to start to plan your time. Because there’s no doubt about it that when you start to invest in property, you’ve got to set aside some more time every week. And it means you might have to give something up. So, I wouldn’t recommend not exercising. I think that’s a very important part of keeping healthy.

But maybe you could work your gym sessions or your running or your fitness routine, um, around your diary in a different way. It might mean getting up earlier. It might mean staying up a little bit later. It might mean not spending Sunday mornings in bed. It might mean taking some time out on a Saturday to sit in your home office or wherever you sit and work to start to research properties and to start to teach yourself, to educate yourself about this very lucrative asset class. Without doing that, you’ll find that you will not be prepared for 2024, and you will not be prepared to launch into your new business.  Another aspect, of course, is plotting things in your calendar. I see a lot of people who fail to make this activity a reality. But in fact, it’s really important that you put things in your diary.

If you’re going to go and do some viewings, you’ve got to plot out when those viewings can take place. If you need to spend some time researching and learning, you’ve got to put that in your diary. You need to be really clear with yourself about when your activity and actions are going to take place.

And prepare your money, prepare your finances.  This is, again, another key aspect of core preparation before you launch into HMOs. Who is going to fund your first project? Are you going to fund it on your own? Are you utilizing a remortgage from another property? Are you using some cash that you already have in the bank? Are you borrowing money to do this? Wherever is the source of your income, make sure that you’re absolutely certain that it’s available. Because the worst thing is to get caught out halfway through a project and run out of money. Preparation is key.  And that leads really neatly on to number two.

2. Financial planning.

Financial planning is not just simply looking ahead though. It’s also financial management. You need to be regularly assessing the return on investment that you’re getting from your property. You need to be looking at the inflows and outflows of money. The costs and the expenditure as well as the rental income that you’re getting and you need to be spending time on a regular basis, having a look at that, that financial picture, that cash flow and also the profit and loss because only then can you analyse whether this is truly a good investment for you.

Again, I’ve seen many people who have started off with great intentions, and they’ve got their cash flow forecast ready, and they’ve got their, their profit and loss statement with nothing much on it. But over time, they lose the habit of filling it in, of getting the figures and actually analysing the figures, but it’s so important that you create a regular financial rhythm in your business so that you are looking at those aspects and you are planning, but you’re also managing.

In fact, I’ve seen more people who are successful long term at property who start off small and utilise these tools and make them part of their daily, weekly, or monthly habits,  than people who start off with a big bang, but then fizzle out because some of these good habits they haven’t ingrained into their everyday rhythm and into their everyday business routine.

3. Risk analysis.

If you are going to enter into a new project, you’re going to buy a new property, or you are starting a new business, there’s always risk attached to it.  Risk is part of everyday life. Simply living produces risk. We can’t avoid it.  Risk needs to be analysed and in my mentoring program, one of the pieces, the pieces of work, the activities that we do is to look at a risk profile so that we can understand exactly how to analyse risk, because risk really has two components.

Risk is made up of likelihood and impact. And when you’re doing a project, let’s say a new development project of a seven, eight, nine bed HMO.  You need to be looking ahead before you even start at what those risks might be. One of the risks might be the builder going off the job, or the builder having an injury, or one of their subcontractors not being able to do the job, or not being able to get planning in time, or finding that that the costs of the refurb are going to be higher because material costs have gone up.

These are all risks that you can easily predict. With a bit of education, with a bit of knowledge, it’s not difficult to predict what some of those things might be.  But it’s much harder to deal with those risks when you’re right in the middle of it, when the project has already started and every day you’re having to make quite tough decisions about which way forward.

If you’d only stood back beforehand and filled out the risk analysis, And actually then had a mitigating action for each of those risks, you probably would be in a far less stressed position. And you’d be able to take much more strategic decisions because you’ve already thought it through.  So managing risk in property is really a key skill. And you’ll develop it the more that you do. The more property, projects that you start, the more HMOs that you develop, the better you’ll get at managing risk.  But it is a skill that you need to learn. And I would say from even before you start looking at HMOs, thinking about it from a risk management perspective is vital.

What it does is to protect you, and it’s protecting your cash and your money, but it’s also protecting your health as well. And it’s ensuring that you’re looking at the project from a 360 degree perspective. You’re not just looking at it and thinking, Oh, this is going to be a wonderful HMO. Well, yes, it could be.

But let’s look at some of the downsides as well. And risk is giving you that ability to analyse a project, not just from the positives that you’re trying to achieve, but also from the negatives that you’re trying to mitigate.

4. Growing too fast or Going too slowly

Anxious and ineffective.  And this is often a problem that I see with brand new HMO investors is that either they want to kind of overtake the whole world with HMOs, and they are, have got this fantastic idea. They’re going to create a thousand HMO rooms in their first year in business, or they decide that they would just like to get one HMO in the next two years.

Both of which I think are inappropriately paced because in order to create some momentum in your business, you’ve got to get going. There’s got to be a momentum. There’s got to be some energy behind it. Which means if you’re going to go too slowly, you’re just not going to create that momentum. On the other hand, I’ve also seen people who have literally gone too far too fast and then find that the whole thing is collapsing in on themselves because they’ve bitten off more than they can chew.

They’ve got too many projects running simultaneously. They simply haven’t got the manpower or the time to be able to manage them and they haven’t got the systems in place either to implement what’s needed to make these all a reality.  And especially if they have borrowed investor finance. I’ve seen far too many businesses, um, become bankrupt, sadly, because they have borrowed investor finance and often they’re borrowing Peter to pay Paul.

And that’s an extremely bad way, extremely risky way, but also extremely poor financial way of managing your business. So,  pace yourself. And I can’t tell you exactly what that pace is. It depends very much on your individual circumstances. For some people, doing one project every three months is doable.

For some people, one project every twelve months is doable. But what I would say is, don’t set yourself too low a target.  Part of developing an HMO portfolio and growing your income is also about internal and mental growth of yourself. You are going to be stretched. You are going to have times when you feel out of your comfort zone.

You are going to have times when you feel overwhelmed, but those are signs of growth. They’re signs of you.  They’re signs of you being able to actually cope with having more money coming into your bank, having more money coming into your pocket. So when you come across those moments and you’re feeling a bit overwhelmed, that’s the time to think, Okay, how can I avoid this?

What strategies do I need to put into place so that I don’t continue to feel this overwhelmed?  It might be a system that you need to implement. It might be a member of staff or a team member or something you can outsource. Usually there is a solution. And usually it saves you from continually feeling overwhelmed so that you can then implement and grow.

5. Not knowing the regulations around HMOs.

And this includes the four areas that I often talk about, which is building regulations, Housing standards, planning permission, and licensing.  Each of these four areas is vital to understand because each of them have different regulations, different legislation, and really control the kind of legislative framework that we’re working within.

And if you’ve moved from a single buy to let or a single buy to let portfolio up to HMOs, you’ll probably be starting to realize that there’s far more regulations involved than if you’re just developing a single buy to let portfolio. But, you know, that’s not a bad thing. Because what it does is there are some people who are just not going to be able to learn about these regulations and they’re not going to therefore produce HMOs. For them it’s a barrier to entry, for us, it’s an opportunity!

But if you have got the willpower, and you’ve got the nous to be able to do it, then it means that you’re going to be ahead of the game.  Get some education though. It’s critical to understand what those four areas of legislation are so that you don’t fall into the trap. I see some new investors falling into racing headlong into developing an HMO and then only realising later that they haven’t got the right planning permissions in place, or they haven’t spoken to the building inspector or they haven’t spoken to other experts. And those experts are there for a reason. They’re there to help you to ensure that your HMO is going to be a success and that what you plan to do, you can do. So make sure that you understand what those different regulations are for those four areas and, if needs be, get some expert advice.

6. Not following a system.  When you first start developing HMOs, it’s very easy to feel like there’s so much to learn andwhere do you begin? And this is why I broke down my process of creating an HMO into my Five Step System. And the first one is Find it.

It’s simple, but it’s not easy. The first step in that finding it system is Master your Market.  Now, sometimes people don’t spend enough time mastering their market. And what that means is they don’t really know the local area in which they’re going to invest. They don’t know the average price of properties. They don’t understand where they can find the best deals. They don’t know how to find the best deals. They don’t know what kind of return they’re looking at. And they’ve got no idea about the kinds of revaluations that they’re likely to get.  Those are all key components for preparing your HMO portfolio, especially if you’re thinking of building a portfolio in one place.

Or, as I often recommend, two places is often a good idea, because one of them acts as a hedge for the other one. So I know people who invest in Walsall and Wolverhampton. I know people who invest in, in Yorkshire  where there are two towns very close to each other. So that they don’t put all their eggs in one basket.

If you can invest in two localities that maybe I don’t know, five to ten miles apart. Peterborough and Corby, for example or Rugby and Coventry. Choosing two town close enough together yet separate and far enough apart will allow you to spread some of your risk.

That’s not always possible in the early days. But have that in the back of your mind. Once you have got that information, once you have mastered your market, you can then do the other steps, which is to Analyze your Area, Scout to Source, Prepare the Project, and Decide on the Deal.

All of those feature in the first F in my five step system, which is find it. And I’ve laid it out like that because I know there’s an awful lot for you to learn. There’s a lot to take on board when you’re starting your first HMO. How do you know it’s going to work? How do you know what likely revaluation you’re going to get at the end of it, and the finance that you’re going to get out of it?

Who’s going to rent your HMO? Are you attracting the right tenants? Are you aiming for the right tenants? You see, if you don’t go through all those steps first, you’re going to build it possibly in the wrong place, you’re going to advertise it to the wrong type of tenants, and you will not get the return that you’re looking for.

7. Going it alone.  When you’re starting a new business of any kind, it’s important to have a support network around you. But equally with HMOs, you want to make sure that you’ve got your power team around you. And I know that lots of people talk about a power team or a dream team, but it’s really worth emphasising that the people around you are there to give you support.

They’re there to help you. And in fact, only today I was speaking to a friend of mine who has got a very good size HMO portfolio. But this year, what she wants to do is to develop her contact network. She wants to get to know more people who are specialists in their field, so that she can draw on their expertise, so she can develop her expert network.

And when she needs them she can call them, because they already know her, they know what she’s done, they know what size her portfolio is, and what level she’s working at.  They already have a relationship.

By going to networking meetings, you can meet those kind of professionals, whether it’s a quantity surveyor, or a planning consultant, or a specialist building contractor. It’s amazing who you can meet when you get out there and you start to network.  If you’ve got friends who are more experienced, or you know other HMO investors, ask for an introduction to those individuals that you need. Try and find those people and put them in your network list, put them in your contact database, make contact with them, because you just never know when you might need to speak to them.

This is where I found working in a JV partnership very useful, because my JV partner had a lot of knowledge when it came to property that complemented my own knowledge. I understood a bit more about my local market, whereas he understood a bit more about investing in property. And so together we actually created quite a good wealth of knowledge.

However, we still had a mentor. We decided that that was important for us to be able to speak openly to a third party who could advise us. And so we brought on a more experienced business property mentor to help us through the first few years of developing our HMO portfolio. So that’s something that you should consider as well.

Who are the people who are giving you advice? Who are the people who are helping oversee your journey and your results? Who are the people who are driving you forward and keeping you accountable? They should also be part of that expert network that you’re building up. 

8. Not having a plan.

You’ve probably heard it said, a vision is empty without a plan. And it’s true, isn’t it? That it might be great, this idea you have to create a few extra thousand pounds or many more than just a few extra thousand pounds a month income.  Most people when they start off another few extra thousand pounds a month is what they’re aiming for.

Perhaps just enough to give up your job. But as time goes on, you realise that nothing further is getting done.  And that’s because you haven’t got a plan. It’s all very well to have a vision. But I believe that if you have a vision, you write it down. And from that, writing it down, you start to develop steps to do something.

It’s called taking action. And if you don’t have a plan, you’re simply never going to take action. So you’ve got to have a written plan.  I would suggest that in the first couple of years of developing HMOs, you really want a business plan that’s going to last for 12 to 24 months. Anything that’s longer than that is unlikely to get done, and it’s going to be a big document that you don’t need to write at the very beginning of your journey.

A good business plan acts as a guide. It’s a bit like a lighthouse, shining the light on all those crevices and those rocks along the way that can help to avoid some of the damage. Problems that you probably will very likely to encounter if you do not have a plan. But equally, it doesn’t need to be so detailed as to be a day-to-day script for what you should be doing.

It’s got to be a document that you refer back to, that you tweak as necessary, and it has all the fundamentals, such as the financials, the timescales, and the people that you need to implement your vision.

9.Not having documentation.

I didn’t really understand this very early on in my journey. I really ignored it because I thought I could do everything on the phone and through email, but you do need to write things down. You need to start to create documentary evidence for your business. An asset base is actually what you’re creating because those assets will be used time and time again, as you move forward in scaling up your HMO portfolio.

And without that documentation, you’re going to find in three or four HMOs time, you wish you’d created the documentation because now everything’s a bit of a mess.  So documenting your plans, documenting your progress, and systemising as you go through is critical. The risk analysis, for example, that needs to be a written document that you share, that you reflect on, that you update. Spreadsheets, systems, letters, emails and forms. All of these are documents that you will use and re-use regularly. Organise them in one place and make sure you have them backed up.

Your business plan also needs to be a document that you update. Utilise on a daily, weekly, monthly basis. It might feel a little bit like you’ve got some homework to do, but actually this homework feeds into creating extra cash flow. So although it might seem like a rather arduous task to have to create some of these documents, you’ll thank me for it long term.

10. PUDI errors

And the tenth most common mistake that I see HMO investors making is what I call the PUDI mistake. PUDI stands for Procrastination, Undisciplined, Disorganised, Indecisive. P U D I. And I’m sure that many of us can relate to some of those personal characteristics. And one of the challenges as we move forward in developing our HMO portfolio is actually recognising those character traits in ourselves and learning how to overcome them.

If you are somebody who procrastinates, then maybe it’s time to realise that you can get perfect later. Actually getting started and taking some action, whether that’s sitting down and doing some analysis, whether it’s starting to look at a specific area, or simply getting linked up and doing some viewings with properties. This can actually get you out of that procrastination hole.

Maybe you’re particularly undisciplined. You don’t get up early enough in the morning, or you say you’re going to do something, and then you don’t follow through. Perhaps 2024, this is a year to change that.

Maybe you’re a bit disorganised with your time. You let people down. You’re late for things. You don’t follow through.  Perhaps again, 2024 is an opportunity for you to change that, because when you are developing HMOs, you’re going to need to be organised, particularly if you’ve got a team of people who are relying on you. 

And if you’re indecisive, well, perhaps it’s time to just take a step back and say to yourself, Why am I so indecisive about it? What is it that I’m uncertain about? I think you’d find that if you sat back and you did a risk analysis,  that might actually really help to clarify what it is you’re scared of.

So this year, I want to challenge you. I want to get you to think about whether you fall into any of those traps, and whether you can relate to some of those issues that I’ve raised today.

Certainly, I’ve made many mistakes in my property journey. In, in my ten years since developing HMOs, I’ve had experiences where I didn’t educate myself enough, where I made mistakes on potential outcomes in buildings and where I miscalculated costs on projects or end valuations.

One of my mentors once said to me, ‘you’re earning or you’re learning’.  And unless you take these 10 mistakes and learn from them, you might find your earning is foreshortened too!