Why Real Estate is as good as its positive cash-flow?
The best strategy is buy and hold. Never sell real estate. This is number one priority. The more Real estate you own the better but it has to produce positive cash-flow for the real estate to have any real value. Real Estate that produces no income is only pure potential and nothing more.
How much a piece of real estate represents as a real security is dependent on its cash-flow. The more the real estate produces monthly the more it is worth. However tt is not merely the square footage and it is not how “good” looking the building is.
The Value the real estate create is based on:
- How much it can turn over and
- why it can turn over that much. Is it a business you need to manage or hands off investment?
The why is also very important. Lets say you have a hotel that turns over 100K a year after all expenses including maintenance you the 100K for example and one apartment building that runs over the same 100K annual profit after maintenance and all other possible expenses. Which one is worth more?
The apartment building of course. Because it is completely self sufficient , it does not need staff, the type of customers need to live somewhere permanently, there are not many variables to the reason the turn over should go down , no matter what, people need a place to live and there is nothing you can do about it. People need a place to live,it is a necessity, and if you couple this to some discretionary luxury included in the price and you still have a good return you are a winner.
The hotel on the p#other hand has staff that provide various services , the staff needs to be managed and the level of service is dependent on the human factor therefore the level of service can get better or suffer depening on the staff and there might be a future increase or drop in turnover dependant on the level of service. Therefore the hotel business still requires hands on management.
The hotel business can becoeme a hands off investment only if it exceeds certain threshold of economy of scale that allows the management to be hired on site and keep the level of service consistent, so that the investor (you) do not need to be involved in the day to day running of the business. This is the reason for big hotel chains only to own large buildings,only large building allow such an exonomy of scale to meke the hiring of stff on site viable. Also many times hotels (like many other commercial buildings) are discretionary purchases, they are not 100 per cent needed, so the turnover goes down in period of recession and this could be problematic in some cases.
Now you know the reason banks do love apartment buildings. and do not like commercial real estate as much. Commercial is discretionary and subject to a number of factors that determine their rental turnover and residential is necessary.
When the cash=flow comes from long term residential real estate banks love the asset more and value a multiplier of the annual rental income (depending if you go for a commercial valuation). The same applies to commercial buildings but the interest rates are higher and the secured loans are harder to get.
It is similar to valuing a business but better, banks hardly loan on businesses but they loan on residential buildings very easily. A business is valued based on the turnover and profits. Also the type of turnover of course. In a similar fashion banks value real estate.
They say Cash is king, yes it mught be true if you do not have any residential cashflowing real estae, once you have enough real estate then Cash becoes trash, shasflow is kin!
The Risks and Rewards of Development. Whatever you do Do not lose the property!
Property development represents one of the best opportunities for wealth creation there are.
The main rule of investment is do not lose money. As we know it is almost impossible ot lose money in real easte in the medium or certainly in the long term. Even if you buy a bad deal a long enough time frame will ensure you will not have lost money and you will be happy you bought he asset. One way and the most common way to lose in real estate is by being repossessed by banks or lenders. You do not want that. All you have to do is avoid being repossessed, whatever you dpo, you need to see the project to the finish line
However you have to be always stress test the development because what can go wrong will go wrong. This is almost guaranteed. All you are doing is make sure the development gets finished with you still being the owner of it. Finish the development without getting repossessed is key. As long as you get on the other side you will be fine if you know what you are doing.
Obviously it is assumed you have planning permission or permitted development rights to make the changes you want. But by far the highest risk and opportunities lie in the development of real estate.
The risks are due to:
1 many different skills required to achieve the end result you want. Usually one person does not hold all the skills required so you are likely to needing to hire a number of people over time to see a project to completion. You will see people attempting to cut corners, People will let you down , some will make mistakes and take no responsibility and leave the cost of fixing their mistakes up to you and much more.
2 the costs can spirell out of control. It is very easy to miscalculate the cost of a project. It is true the say that any project usually cost more that you think and take double as long. I have seen a number of buildings being sold by the banks at auction because the developers could not finish them on budget and given up hence got repossessed.
3 Surprises. Usually bad ones, as you start to do the works on existing buildings you find that you need to knock walls down and rebuild them. Joists a are rotten and need to be repaired. And many other unpleasant surprises which are beyond your control.
The ultimate risk you are trying at all costs to avoid is not to be repossessed. This is the ultimate outcome you do not want. In oterdeer to do this you have to plan very much ahead and plan for the very worse. Meaning, if you run out of money and credit can you afford to keep paying the loans monthly so you do not get repossessed?
How to mitigate the risks of a development? Easy, tight control. Never leave site only leave if you need to go fetch materiel . Guard the site like your life depends on it, and if the project it large our financial life probably depends on it. Live on site if necessary, I have done that! The risks of vandals setting it on fire exists if people think there is nobody tin the building. The risks of having people robbing your wires, copper pipes etc does exists too. Risks of mutiny and sabotage from your workers, and the burden of the risk is all on you so you cannot afford to leave site until the main bulk of the work is done and you have the building functional and more importantly occupied by paying tenants.
Said that the rewards are incredible. As an example I took a house that was not habitable and was last rented for 400 pound per month and it started to turn over 2500 pound per month as soon as the development works finished. The rent increased five fold! There you go this is one of the amazon powers of development, of course you have to calculate your return on investment and other factors but property development is one of the tools in your toolbox to become seriously rich.
What I always say is that , if you take the price of a refurbishment and you want to achieve luxury for the real estate you are developing you only need to increase the cost of the refurbishment by 20 to 30% at most. But that 20 to 30% on top will make all the difference to the value of the asset to renters. It can make the asset literately irreplaceable tot he renters.
There are many investments vehicles in residential housing in the UK.
HMOs are built!
You can find ongoing concerns all over the place but you need to pay a premium for HMO already in operation and to be fair I do not believe they are worth as much. But if you love development and you build HMOs yourself you can build truly invaluable assets.By the way what are on going concerns? They are businesses already operating, in case of HMOs they are houses already rented out and fully licensed as HMOs and with the appropriate planning permission.
One of the main strategies to become righ in Real Estate is to add value to a building. What a better way to add value to a house than turning it into an HMO! The advantages of turning a house into an HMO is that you double and sometimes triple the rental income once the building has been turned into an HMO. You you acquire the house for a low value and for every pound you place in refurbishment sometimes you get 2 3 pounds ablack in final valuation of the house plus an incredible uplift in rental income. What better way to create massive wealth! What great investments. This is why HMOs are built!
Some people call this Buy Refurbish Refinance Rent, what better way to become rich! You get your investment back from the bank after the refinance plus the multiplied income. The umbers can be amazing!
Why did we mention development earlier on? This is because development is one of the keys to building wealth through HMOs. Therefore sometimes development is almost necessary, especially in HMOs.
Yes HMOs are usually built! These are the best HMOs you can possibly get. Buying an HMO as ongoing concern is certainly possible, however they are hard to find if you are looking for a bargain. What you normally find is that this asset class in the UK is overpriced. And it is overpriced for a good reason, for as long as the HMO has a license and the correct planning permission in an article 4 area then there are few and far between and in high demand from tenants.
Do not worry, in most cases HMOs are not the most difficult or expensive to develop as there are generally only a few factors to take into consideration. However you would want to start getting comfortable with development in general, Compliance with fire protection regulation.
For the development of HMos you will need to understand
1 the design of Grade A fire Alarm systems.
2 Fire doors. You need to have fire doors with auto-closer in every room including the Kitchen. Bathrooms are excluded. This is easy so we will not spent
3 Achieve the 30 minute ceiling fire resistance requirement bu the legislation in general. In this case there are only a few things you need to know.
Therefore one of the best trick in HMO is to build them, when I say build them is convert existing large house into compliant and extremely luxurious HMOs.
HMOs or Housing in Multiple Occupation are a very valuable assets for reasons we will tell you shortly.
Building control. Is it worth it? Can they Fine you or prosecute you?
In reality building control is not always and most of the times not necessary in HMO development. This is because in HMO development generally there is not a grreat deal of heavy building work to carry out. Usually building control is necessary if you undertake heavu building work like some structural correction or alteration, maybe placing a new bathroom in a room etc. However if you are =placing like for like it is not usually required. If you want to be sure ask the building control department in your council.
It is my advise to use building control whenever required, but it is an added expense every-time . Sometimes it is quite frustrating dealing with building control because as an experienced builder you know that certain things they ask you to do are an overkill.
It is important to know what building control can do if you are required to have building control but you do not use it if you do not want to. Remember if you get it wrong and the wrong is found out by the council you need to correct it according to building control otherwise you mey face prosecution. It is important oo understand that the council cannot fine you can only prosecute you. And the this is a big difference. A prosecution is expensive and if it is not done right the council will lose the prosecution case and many people in the council will look stupid. And they are stupid many times!!!
All the council can do is prosecute, but they only have time of 12 months after the specific non compliant work has been done. Ig they start prosecution and you can prove that 12 moths have passed they will fail the prosecution. We are not in the business of doing any cowboy jobs at all because we keep all the real estate we worked on but sometimes you might think it is better to keep the council out of the door. It is your preference and you take the risk. However you have to get the job done right and for novices paying a little to building control can teach you a lot.
How think about this? In order for the council to carry out a successful prosecution there needs to be very clear evidence of a crime. Remember that the purpose of building control is that some types of building works are carried out to the latest building standards, this is all. Therefore as long as you carry out the work following the appropriate standards it is hard for the council to even consider prosecution. Said that if you are found carrying out building works that require building regulation compliance and you have not engaged building control, then the council may try to see if they find anything wrong in your work. Remember if somebody looks for faults they will find it.
What is the likelihood of a prosecution? Lets consider the following.
1 The council needs to have evidence that a building work was not complaint with building regulations. This applies only to certain types of new building work. Not all building forks require building regulation. How can the evidence of non compliance of a recent building work can be gathered? In most cases once the building work is done, the evidence is buried behind a wall in a foundation for example. Therefore in most cases it is almost impossible to access the evidence. But always know that if you do a poor job it will bite you at the back later on if you do not flip the real estate and as I said we are not in the business of flipping anything at all let alone real estate. We are in the business of building great lasting and low maintenance high cash-flow assets. This is what we do! And keep it for life.
2 Do you really get random inspections from building control to prosecute? No they are not normally bothered. You should know how many people I fired over the years and they threatened me to have building control around and nothing ever happened. They usually cannot be even bothered because even if they did they cannot be bothered to risk an unsuccessful prosecution. This is not to say thet prosecutions are impossible. Surely in egregious cases they can be successfully carried out.
Then lets assume they find the noncompliance point (unlikely) do they really want to prosecute. Remember prosecutions are difficult and if you knoiw what you are doing it is almost impossible to be prosecuted successfully.
Please bear in mind that I am not saying that you do not use building control when the council asks you you to do it. It is simply that sometimes you are faster doing it without as long as you are mospiant with building regulations. Aolso remember that for a normal refurbishment without structural work you do not need building control. In theory you need 30 minutes fire resistance between florrs in hmos but how is going to check within 12 months. And lkets say they inspected any of my houses where bukding contol was not used, they willl still find double boarding fir fire-line in every ceiling. But then even if they managed to fins any non compliance the works were done years prior therefore the is no option for porcectition.
Once again I am not saying you do any cowboy stuff. I certainly had gone over the top in my refurbishments and over complied anyway even if building control was never involved in it. I had a number of scumbag builders trying to rat me out they thought ot building control and the council but guess what happened nothing, And why simply because everything was over compliant anyhow.
All my housing stock is there to support me and my family for as long as I am here and it is not for sale. So I made sure it had been done more than to standard.
Therefore when you refurbish an HMO if you have the cash always make sure with the council if you need building control, they are on your side anyway. At times when I had loads of disposable cash and no time I used building control to keep my builder in check. After all building control and I have the same objective in common whe want a high standard finished product not done by cowboy builders.
How to achieve 30 minutes ceiling fire resistance between floors.
It is said in several website that a 12mm plasterboard and a coat of multifinish plaster is enough to achieve the required fire resistance of a ceiling in the Uk. The reality is that most building inspector will require you more! They so far in different jurisdictions in the UK are required either to:
double board the ceiling in a stacked fashion plus a coat of plaster
Boarding the ceiling and then placing a false ceiling beneath it. Then plaster it.
or boarding using n12.5mm plasterboard on an existing ceiling, plus a coat of multifinish plaster
What rules here is not common sense, it is the building control officer. So it is up to the building control officer and the above is what they ask for every time.
HMO Location, Close to or inside the centre!
When I look for opportunities I am looking for the largest possible building in an non articla 4 area. I want to avoid planning permission, because if I have to apply for planning permission then I know I will never get it or it is not going to be worth getting it. The location is always the most important factor. You have to think about convenience. It is important for the tenant never to need a car. The building has to be close to a Train station, it has to be close to the centre and even better if it is in the centre of a large city.
Your tenant have to be able to go to work without a car and walk to the nearest station. This is a must in my opinion. If the building is far from the centre there is no much point.
It is important to understand that you are fulfilling the need of young professionals and or students who do not have a lot of disposable income and who do not have a car. Therefore location is number one priority. In my opinion it does not matter the reputation of the area as long as it is very close to the center and close to a major train station.
One of the sui-generis HMo I own is in Sneinton Nottingham. It is a large HMO. I remember when I bought it people used to tell me I got a bad deal. I paid 83K in 2010 for it. It was a bargain in my opinion. I was told that the area was dangerous and nobody wanted to live there. In my eyes the area was more than fine, it was excellent, no issues and very close to the centre. Very convenient indeed. After all if I only walked 5 minuted towards the center the house price was 3 times as high. In my eyes the market had it all wrong. To be fair I had some encounters with some chavs and other dodgy individuals at the very beginning, but no those horror stories people were telling about Sneinton and St Annes of being very deprived and full of violence. It was the opposite.
The Advantages of HMOs and why the government does not want it for the commoners to own.
Hmos do behave like normal housing in terms of the length of stay of each tenant. Some tenants stay in the room for a good number of years without even moving out into a flat or house. Therefore you as a landlord benefit from a rental income that is secure and stable like the ones that come from flats or single family home with the added advantage that it is much higher. It is like having a hotel but not needing the day to day work of a hotel.
HMOs are not hotels. The problem with hotels is that the turnover of people do require in house cleaning, services of various degree of services therefore the income is based on the attention you put into it. With HMOs you can have hands off investment.instead, do the work once and get [paid forever.
You cannot expect to leave a hotel to prosper on its own unless we the Hotel benefits from economy of scale and has 60 rooms or over. You cannot just lease a hotel and let it run on its own unless the hotel is so large that the economy of scale allow the employment of an in house management and then you can treat it as a passive investment. Look for example at Holiday inn, Best western e and all the other big hotel chains, they count on economy of scale for their building which usually have more that 50 rooms to be valuable plus they have the strength of their brand.
HMO Protection through regulation.
Regulation is good and bad. Bad for the commoner but good the ruling class. Business as usual. It is bad for the commoner because it makes it difficult to get in, and good for the ruling class because it provides protection from the commoner investor. This is the truth. The justification of fire safety, and other stuff is all an excuse made to trick the commoner so that he/she will not get into HMOs that easily.
HMOs in the UK is one of the most tightly regulated investment vehicles in Real Estate. So regulated that if you run an HMO and you do not have a license you are a criminal. Would you believe that? In theory you could go to jail for renting out rooms to people without a license, doe sit not sound insane?It does to me!
Again if you are an investor like me you do not care , you welcome this nonsense because more and more people will be discouraged by the licensing alone. And as this is a very good thing from an investment point of view but it is not a good thing for the market, less people willing to invest in HMOs the less the supply the higher the price to the tenant! Great for me! But not good for the ordinary person. If the events in 2020 have not made you realise it the game is rigged it is quite difficult to wake you up, HMOs are rigged too. But you can take full advantage of the rigged system still to this day.
The system is rigged in order to create and preserve a monopoly, and you want to be the monopoly holder. This is one of the reasons for me to invest heavily in this asset class.
There are a number of ways to ensure your investment is protected in HMOs and the government had made sure you as an investor are indeed protected.
Why are HMO so financially Valuable and Viable investments
First and foremost HMOs are a very good investment without the need of any regulation, red tape, any special skills and so on. They are very good because they present several financial advantages for those willing to rent a room.
Advantage 1. No council tax and bills included. This is not something you want to take lightly this is a great advantage! If you want to rent a flat or house. you will have to fork out: council tax over 100 pound a month, Wifi costs it can range from 30 pounds to 60 puds, Gas from 150 to 150 pounds a month depending on usage, electricity 150 to 200 pound a month, water rates, plus the rent. You will end up spending as overhead in the region of minimum 700 to 800 pounds a months just to keep a roof over your head and nothing else. This is insane! Whereas if you only rent a room you can spend from a minimum of 280 permission to 450 depending on location, quality of accommodation whether you have an en-suite room etc. And on top of this all bills are included. No worries for keeping the cheating on longer lights on longer etc.This for a single person
Therefore if you want convenience, peace of mind and save tons of money in rent, living in shared accommodation is the best option. This is an option especially suitable for young professionals, students and migrant workers or professionals of any age. Over the years we had all sorts of renters in our HMOs, they were especially young however we also had a goodd number of over 40s renting our rooms for literally years and years. This is due to the convenience of this type of accommodation.
If licensing was not enough we now have Planning to block it to for new comers in the market. Therefore you will love HMOs once you get in your investment is protected by the government from the competition. This is by law!
Planning permit the last government before dissolution introduced a new class called C3 and made the HMO as a new class called C4. C4 is an HMO with 6 households. Before and after 2010 houses with 7 or more households required planning permission for change of use from single family home to Hmo Sui Generis. Any house with more than 6 households is classed as sui generis and is required to hove planning permission. It is important to emphasize that we are talking about households and not rooms. This is a very important legal distinction.
HMO licensing and planning are independent.
HMOs licensing legislation and planning are completely independent. Although for example Nottingham council says in their website that if the HMO does not have planning permission they would only grant the license for 1 year this could be challenged , or appealed to and if the council looses then thy have to meet very high payouts.
What this means ids that you can have a full HMOs license without planning permission and this is more than fine. All licensing does is ensuring the premises against minimum space standards, and fire safety amenities est. (the interpretation of fire safety varies from council to council). As long as the manager complies with the background check of the council and the house cmolies to all the regualtion then there is nothing the council can do they have to issue the license.
You can have a HMO license without ever had planning permission for the use of the premises as an HMO.
In other words the council has the duty to issue the HMO liense as long as your building is compliant and the manager is also of “good Character”. Planning permission has no say on the licensing. Therefore you can have a licensed HMO but in breach of planning permission.
Also you can have the grandfather rights to HMOs use but you never had an HMO license have and this can be more than fine. In other words you can apply for lawful use as a C4 without ever had a HMO license before. The two paers of the legislation are completelly separate. Yes the HMO license can help you in your apoplication for lawfuluse but it is not legally necessay
Really, when do you need planning permission?
This is a very good question and it varies from case to case. Generally the planning department rarely goes around checking whether a house run as an HMO has the correct planning or not. This is a fact of life, but rarely it happens that due to complaints someone send an email to the planning department and the planning department sends an officer out to investigate.
This is not usually done because actually HMO are not usually a nuisance to anyone. Also what the planning department knows is that many HMO although they do not have a formal HMO planning approval they had been run as such for so long that an enforcement is futile. So why bother.
In my opinion it is always beyyer to formalise the planning status of an HMO at your earliest opportunity from a panning point of view this is because this helps you in many ways
1 it is peace of mind. You know that you will not need to fight an enforcement notice with the council at any point in th efuture.
2 most importantly this is what Banks require in order to give you a mortgage on the house.
Therefor ein any case it is always better to formalise the use pwti an application of lawful use. The good thing about this type of applications is that it is realtively easy. You do not need an architect or panning consultant and you can get it relativelly easily most of the time.
Application of Lawful use as an MMO class c4 or sui generis
As mentioned it is alwys better to formalise the use of an HMO as a C4 or sui generis as you require it. Remember it is almost impossible to apply successfully for full planning permission and be successful.But applying for lawful use if you meet the requirements is very easy.
This is what you need to apply for lawful use as an HMO
tenancy agreemnts dating back at least 4 years prior to the application.
Swarn statements from as many people as possible that y they witness theuse of the premises as an HMO ideally for over 4 years
For some reasons they what you to prove the contious use for over 4 years.
The larger the HMO the better
The larger HMOs command the largest profits. Of course it depends how mucjh you purchase the building for!!
I hold mostly sui generis HMOs and the reason for it is not only that I had always being looking for the largest buildings at the lowest possible proce but mainly because I wanted the buildings fot be independent from me. Therefore even if they are scattered all over the place it is very profitable to set them up as self running investment almost independent from my work. One person in the house is usually in charge of conducting the viewings, in charge of the calling maintenance and these very simple management stuff hence making this investment almost hands off.
Also consider that the utilitty buills of a large HMO building is not very far off from a 4 to 5 bed house anyway. This is beause doubling the size of a building does not mean doubling the bills. The bill sdo increase but not by that much.
HEating a 5 bed house is not much different from heating up a 9 bed house. This is a fact. It is not that because you have duoble capacity you have double tthe gas bills. In reality if for example you pay 200 pound a month for a 5 bed house in gas for a 9 you pay 300 tops. There is a lot of added efficiency in a number of people living together under one roof!!Also if you implement exess utility bills surcharges, those surcharges if the bill go out of control, then the extra split among 9 people is a lot less than if it were split amonf 5!
This is why it is not the quantity of house in a portfoliio that counts, it is the quality. There is a place
Going for larger HMOs 7 or 8 bed without planning permission using PD rights.
This is a strategy I have used and it has worked so far. If you are not in an article 4 Area what I always tried and do is develop larger porperties and I always aim at acquire delilict houses thaty can have more than 6 rooms. This is because when you hvae a sui generis HMO this is far more porfitable than a smaller one. The more rooms you have in a buiolding the more you venefit from economy of scale.
DOte that having PD rightsis fundamental to try and implement this. This is because no matter what the coucil might try you have always the right to 6 houlseholds i the building.
I would not try this in an article 4 Area, I do not think it is worth the risk, however you can always resell the property leter but why attemptiong this if there are several non article 4 areas where you can play it safe.
What you are counting on is
1 the house hold definition. Remeber that the law explicitly refers to households not people. Therefore you can have 8 people in a building that form one household, in theory. What you are counting on it the fact that if you have 8 letteable rooms by the HMO standards. Remeber you do not ewant to upset the HMO standrds but you can play with the planning law a bit. Playing with HMO stanrds could have more dire consequences thatn planning. You csn play abit with planning but not wiht HMO standards.
The trick is int
What happens if planning enforcement is
How to circumvent planning permission in an Article 4 Area. The Secret loophole.
I was jogging along Nottingham when I saw a house been refurbished in an area I am very familiar with. I saw a house being refurbished and I got interested because it looked a heavy refurbishment. If I remember well I even met the person living there, but that cannot be for sure. What I was sure about ot the fact the at the house was uised ads a single family home. Thbis was for very sure. So I asked the person in change of the refurbishment what he was going to do with the house. It looked like an expensive job for a house. He stid it was an HMO I said bck to him: Do you hvae planning permission, this is an article 4 area” and he replied”I do not need p[lanning permission it was an Hmo before” I said back to him.” it was not and I am quite sure about it”. Se replied “well I have the previous tenancy agreements sent by the previous owner through he solicitros so that is good enough for me” To that I replied”you are saying he was running an HMO without a license?”
He retorted” none of my business what the previous owner wad doing”
Everything clicked in place very quickly, Basically he offered aa higher price to the seller if he provided tenancy agreements for each room for over 4 year period and very likely he had some wriotten declaration though the solicitor. This is enough to obtain lawful use certificate from the planning department and there you go.
I know this because I have applied for a numebr of lawful uses and they are all legitimate. But this scheme is flawless. This is because all you need is to demonstrate the use of premises by 3 or more households for over 4 years usually to obtain lawful use. Most councils do not require a license for 3 households and hence you do not need the HMO license and hence nobody can be prosecuted retrospectively either or to better said it is very hard to prosecute anyone retrospectively in those conditions.
All is required by the council for successful lawful use are:
Sward Declarations from any withnesses
Ideal councli tax bills (not necessary)
any oany otehr evidence you can provide.
Remeber the council ghas tthee options:
1approve it. No problem, nobody can blame them
not approve it. Hope that you fo not appeal it. If you appeal it you are very likely to win and the council loses loads of money with any appeal lost.
Safety of HMOs from the perspective of an investor.
I know that it might seem contra intuitive, however an HMO is more protected from vandalism from the tenants, from burglaries and any other type of damaged than any other type of accommodation. I have aflat in paisley that I have rtented for several years know, this hd been subject ot meter bypass,, various vandalism of different types, however neve too bad to make the investment not viable. On the other hand very little problems have arisen from ny HMOs for several years now. This is simpley because there are dirrefent peoeple liviung in the same building all at once. If someone in an HMO wants to start either willinging or unwillinginly while drunk to destroy the house then all the other people will be alertet, do you think that the sheer fact of having other poepl finding outr what you had been up to is not a great deterrant? It is such a deterrant that overt the years we never had any major issues with none of our HMOS. We even still have all the TVs we boughtover 10 years ago stgill in the rooms. I rememnber someone telling me that if I put tvs in the rooms in the area of linclon we have the HMO the TVs would have certainly been nicked. This had bnever happenend.
How are sui generis very large HMOs born and why this is iiportnat to understand.
No planniing department I know would grant plannning for a suigeneris HMOs. In my opinion this would be very rare for the coucil to grant planning wilfully for a sui generis 8 or 9 bed HMO. This would also cost quite a bit.
Generally the cases of sui generis HMos I am aware of and I have seen over the years do not have any planning. What happends is that a large house in a non article 4 area is used as an HMO with a license. and then after a while with the palnning department not ebforsing anything it has automatic fathered in rights.
Alsoi remember that often the planning department does not know what it went on with a house and since the HMO licensing is not in place
If you do not have a license
Driving without a license can get yo into rtrioouble but also running an HMO without a licensecan get you into trouble. However they are fiundamentally different. Remeberone simple rule, the coucil has no mone power that you as a single person do, all the council can do is bring forward prosecituiotns and prosecutions are not alwayts easy to win. What the council does in order to make sure that it maintains a perceived authority status is that from time to time when there is a poor landlord, usually old and unaware that rents out a few room in a house without license and firedooors they probe and see if the landlrd will amount to a defense. If they see theat the person will not even attempo a defense , and the council is quite sure about the successful prosectuion then the coucil press for prosecution. Yes they are cowords, the council rarely try to prosecute big guys, this is why someitmes I get asked if I own other HMOs etc, they are sometimes sizing you up.
Please remeber by mentioning this I am not saying thgat you can attempt to run any house or building without the appropriuate licesnse but wjhat I am trying to say it that the council is not that powerful as many people perceive it to be. It is not.
Always get a license or apply for a license but do not be terrorised by the coucil oficers because normally they are morons anyway and no wonder they can only try with the small people.
Once a council officer I have met because of a HMO inspection really upset me and I later found out that he issued an HMO license to another landlrd of asian origin only for 1 year, the landlord appealled it and won. So rtemeber as a rule of thumb council officers are moronic, and many times I have to try and calm be down dealing with them. The mound of absurdities they write int their repots is obscene at times.
You may not have applied for a license however the building might be fully compleinat. Remeber what the legisaltion is supposed to do is ensuting complaince to amnities and fire safety. So in theory even if you do not hold a license the coucil cannot do mych even if you run it without oa license. Howvever htey iwill theaten you and try and compell you to pay for their license fees.
In proctice asd long asd you apply for a license the council will not even try and porsecute anyone all they want is their money and the sense thatb people are trying to lidten to them this is all. So my advice it first payh and if the building is not compliuant, delay their visit. What you finsd is that as long and you pay they are OK, but this varies from council to coucil.
SOme consinls are very strict and otehr really could not care less. I had even beeen gtranted a license without a council officer cisit at all in one case.
How to achieve Fire protection compliance in HMOs.
This is one of the easiest things to learn. First of all you have to understand that building regualtion and council inspectors only look at the same things over and over. AS long as you know what they look at , which is not difficulat you can implement it in your refurbisment /Development work.
This is the most important compliance you require. Remeber if you do not install the fire alarm the council wants they will not issue the license and you are technically running an unsafe (from a legal stand point) building. Therefore you will be risking porsecution if you are cuaght running an HMO that does not have the appropriate fire alarm. In the rare occasions of prosecutions this are the main basis of prosectuions used in court.
So how to you resolve the Fire alarm dilema? This is how I reslove it. I install a Grade A fire alarm system in Every HMO, it does no matter whether it is a council requirement or not. You will find in all my buildingsa Grade A fire alarm system no matter what. I want peace of mind going forward and I want to make sure that the asset is mortgageable. If the bank surveyor does not think the building is compliant he will put it in the report nad you will fint it hard to get a mortgage.
A grade Fire alarm system is the top of the range so to speak, if you have it in place no officer can use use fire alarm protection as a way to prosecute you in any instance. So I alwats installt. What you find as well is that if you compare this wiht the proce of installation of a normal interliked frie alarm system this is no that more expensive.
In 2010 in the u
There something called
How to gavoid bad tenents,
First line of defense is a guarantor. The guarantor needs to have somethign they can lose. This is very important.
So just the fact that you rent a roomm it takes away the hughe commitments to gad electricity , council tax Wifi Ect.
So why is it possible that an HMO is far cheaper than renting a flatg or house? This is due to economies of scale. Infact what happens is that HMOs are more and more viable asd you increase the number or riooms in a house. As you increase the nuimner of rooms in s building , the council tax remains the same, the heating consumption wifi consumtion remains pretty much equal
The maintwenence of one builer is cheaper than the maintennce of a number o f buiolders,
In essence fro the renter, a room is many times cheaper and many times more conveneent than renting any other type of accommodation. Additionnally if they have an ensuite the only facility they have to shgare is the kitchen and this is it nothing else.
This is an awsome protection. This ensures that only very smart and capable developers can convert buildings into legally viable HMOs. For staters you need a license, therefore if you operate a HMO without you could be prosecuted and face rent recuperation orders, fines etc. and please realise that it does not take much to becoem the target of a council prosecution, in theory it only takes a tennat who reports you to the council on its way out of his/her tenancy to trigger all hell loose oon you. In reality on the other habd porseciutions are not always guaranteeed to succeed and they are not used that often therefore no all landlords who run an illegal HMO get prosecurted. Usually the council prosecute only thos very small landlords who they feel will roll over and are difenseless under prosecution. Trust me the council officers are not that smart and not very knowlegeable themselves and they make a tion of mistakes and they know it themselves. I am not advocating for runnig any illegal HMO because it is not worth it in my opinion but it often very useful to know wht the reality really is. Whjt you see on the internet of successful proseutions anre the publicity that the councils do to their very sporadic prosectutions, because prosecutions are expensive afterall and risks for the council too should the council lose. Therefore for every psuccesful prosecution there is a ton of publicity spent on it. This publicity acts as a deterrent to many people, especially those who want to becoeme landlrds of HMOs.
At the bbeginning of my carree I looked at the HMO licence with diusdain and scorn. It was not fair to the market andf the general population, because it has always been very clear what this is meant for, which is make housing less affordable to the common person. The sysyem is rigged and do not forget it and it is a very good thing for you if you want to be part of this monopoly. After all it does not take much to become compliant, All it takes is compliance with fore regualtion, get the right amount of sockets in each room, comply with the space standards, install firedoors with autoclosers etc. I assure in prctice it is no much at all. But it is enough to deter may investors,
Dealing with the council officers a further deterrent.
The mother of my baby girl has seen the number of inspections of my HMO in Nottingham is getting lately and she thought , should I bother making my house a licensed HMO? The answer to her was and is a determined and definite YES! No doubt at all. After all these visits are harmless but yes a waste of time indeed. However on the flip side you generally have a very good guaranteed cash machine which will produce almost no matter what. It is very funny what these useless council officers come up with in order to fault pick and often it it ludicrous. We also had a letter stating that we had to repaint the external part of a bay window as condition of the license. This requirement obviously is completely made up.
The threat of the uncertainty of dealing with the council and adhering to these regulations is a deterrent to most amateurs. The beauty of these regulations is that once you know how they are enforced in reality then it is a relatively easy game for you but it is enough to keep many other amateurs investors who could be your competition at bay. Remember regualtions are never in place to maintain standards and public safety but on the contrary to protect and create monopolies in each sector that is being regulated. Compliance with regulation does not mean quality or safety, it means you are in the club that is all. Therefore if you want to get in HMOS treat the regulation as Godsand which is there to protect your investment from the competition. Regulation is only there to protect your investment from the competition this is all.
The term household.
The terms in the legislation is not person but household. Therefore from a legal point of view you can have 30 people living in an HMO but nothing can be done from a legal stand point by the council (in theory) as long ans the total household are respected. Please note that in the terms of the license the council will place the maximum number of people in each room but his is a slightly different story. This legal trick is very important to understand because there are many things you can do with it as we will see later on. Basically you will see how you can convert a 6 bed HMO into a 7 or 8 bed HMO without planning permission and this can be done legally. You will understand this once you understand how the planning department really works, their real enforcement power and your lines of defense.
Article 4 and planning permission.
up to 2010 there was not any particular class for any HMO up to six people. All you needed was a licence and this was it. This wasx not very good for our overlords. It was too easy for ordinary people to make HMOs out of a normal house, make themselves a fortune and break free from the chains of the 9 to 5 slavery system. This was certainly not good. Therefore our overlords talked to our puppets politicians and told them to introduce the new class C4 and this was the magic trick. Apparently the licensing was not enough, there was the need for further protection. After all it was far to easy to comply with the regulation. The new class C4 allowed the councils to prohibit he change of use of single family homes (c3) into HMOs up to 6 households C4. HMO’s with more than 6 people or households remain unchanged and they required sui generis planning permission. Do not think that if you needed sui genereris planning permission and you applied for it the council would approve it, they will not approve it of course.
The planning departments and their tricks
The planning department is one of the trickiest and deceptive public offices there are. They lie and deceive very often, but not all the time. They often play the hide and seek game. This is not the same across the board , There are some planning departments easier to engage than others. There are planning departments more honest than others, but generally they are not the commoner’s people friends, they can appear kind and polite but they are usually (not always) as deceptive as they can possibly be without ever getting into trouble.
The reason for their lies and deception in my option is due to their sheer lack of real power. Especilly when it comes to change of use. The planning department , if they have any real power is in the demolition notices, and no much more. The problem they face, and do not ask me why is that in general the council has very little enforcement power in general. The most they can do is trying to enforce prosecutions and , prosecutions are expensive and the council may easily lose the prosecution case. Let’s say they threaten people or a business with fines, do you know what happens if you do not pay the fine? Of course it depends what kind of fine… most ofent than not nothing. You receive the fine, you ignore it they keep sending you a number of threatening letters, eventually pass it to a debt recovery agency and this is it. The debt recovery agency will send you some threatening letters, but if you ignore their letters long enough and block their numbers they will give up too. Guess what there is nothing that goes on your credit file, so your credit rating remains untouched. I received a fine for 60 pound for driving on a bus lane and I did not pay it on purpose, I never appeal it nothign, just ignored everything, it has been over a year and I have not heard for months, I am quite sure the debt recovery agency has given up. Although I have not had any other type of similar fines issued by the council , I believe the council in reality has no real power other than criminal prosecutions. This is corroborated by the number of letters received over the years by council officers threatening actions, but if you dig into it the only action they have is court action, and this is not an easy route.
So due to their lack of real power the planning department seem generally incline not to inform the developers on the applicable legislation, and more often than not plainly mislead. They can do it in writing, without hesitation. After all it is hard to be fired as a council officer. You really need to get into the office naked to have any chances of being fired, and if you are a woman council officer going in naked may get you even promoted.. who knows. Jokes apart it is very hard to be fired as a council officer, you really need to resign, upset your superiors or doing something very agregious. On the other hand the planning department will lie but not too much… they will lie just enough.
The need for planning permission means simply it is legally practically impossible to turn a single family home into an HMO. This is because if you apply for planning permission the planning department will find millions of excuses not to grant permission, and there is little that you can do about it. I believe that if you keep trying long enough and you get the right friends in the planning department you can get almost anything approved, but is it worth it, if you can focus your energies, money and efforts in areas where there is no such need for planning permissions.
The separation between planning law and HMO licensing
This is one of the best black hats tricks we have and it is absolutely beautiful if you learn the ad
The All included bills issue
A number of people said that a the increase in energy prices would have meant the death of the HMO market in the UK. now in December 2022 when gas is at 11p perKWh when it was only 4 per KWh only in September and Electricity is 33p per Kwh when it was less than half in September the demand has skyrocketed. What it seems to have happened is that most people cannot afford a flat are renting rooms. If you are renting a house or flat the utilities will kill you almost literally.
This is a problem often afflicting landlords. The bills are going to be higher than average in HMOS this is because there are always people living in the house and some people do prefer to keep the heating on 24 hours. In theory there are ways to resolve this issue but what I prefer which is what I am experimenting at the time of writing of this book is the maximum utility allowance.
This means that you will cover the utilities up to a certain amount and any excess the tenants will have to pay out of their pocket.
You can always decide to raise the rents per room but in a competitive market out there Therefore it is alwasys a cap to the rent and it is not always possible to asl for 500 pound for a singe room. So my solution had been s 20 percent increase in the rent to the existing tenants whcih I had never done in the past.
As an example of how high the bills are at the end of 2022 for example in one of my 7 bed HMO the bills climbed to 900 pounds in the month of December for Water, Electricity and Gas, on top I have to pay council tax broadband and maintenance. This is for a house which currently turns over 2100 pcm. There is very little profit left. Obviously the last resort is switching to pay as you go meters which I can do if nothing works.
So the solution I have found so far is to cap the utilities allowance I am willing to pay at 400 pound for gas and electric plus 100 for water rates in a 7 bed hmo. This Therefore any excess over the 500o pound in total will be split the following month almost the tenants. For this house in the month of December each tenant in each room will have to pay an excess of alost 60 pound each! Norte that the previous year the bills would have not exceeded 500 pounds for the same usage.
The clause I added onto the contracts:
3.3 The Landlord shall pay all reasonable electricity gas, and water charges for appliances supplied by the
Landlord. A maximum allowance of £13 p.p.p.w.for the entire Property. Should this figure be exceeded the Landlord reserves the right to levy a charge to cover the additional cost. It is the Tenants responsibility to monitor their own usage.
Alternatively pay monthly maximum consumption gas and electricity 400 pound per month in the winter and 100 monthly for water (October 1st – March 31) other months of the year the electricity and gas monthly cap is 300 pound and water is the same 100 pound any excess needs to be paid separately by each tenant.
(Meaning: The Rent is inclusive of utility bills but they are capped, so if you use more gas, electricity or water than included you will be liable for the remaining charges).
Please note that the split will be done between each room occupied. Therefore the less occupation the more the split excess bills. For example if only 4 rooms where occupied then the exess is split only by the occupiers of the 4 rooms.
If you cannot sort it out you can always revert to payas you go meters and this is it but this is the last esort. To this day most of the ads online are still all buills included but what it has happened is that that the minimum porce for a rumoom from 300 pcm has gone up to 400 for a single room. In Nottingham Sneinton Where I have another large HMO the minimum price for a room seems 450 pounds per month. Incredible! only 13 years ago there were not enough tenants in the area and one had to fight to get them, now they come and fight for the room depite the energy prices.
Afetr all this energy prices hike has been beneficial to HMO demand and the rents have gone up like crazy.