Yep, you read that right. Double.
A typical gross rental yield of 5% will likely jump up to 10%+ if you lease the same property under the HMO – or ‘rent by the room’ – model. In today’s market, it’s a great way to provide much needed affordable accommodation for singles and couples AND make you more money as an investor.
What is a HMO?
A House – Multiple Occupants (HMO) is a residential property that looks just like any other house on a street, but inside it is shared by several tenants who are not from a single household (ie. who are not members of the same family). Generally, each of these tenants have their own bedroom, but share access to communal areas such as the living room, kitchen and garden.
HMO rentals aren’t really suitable for families. However, they are in great demand among students, professional singles and couples saving for their first home, single senior pensioners (who sadly these days often can’t afford their own place) and new arrivals into the country who need an anchor point as they work out their plans.
So, how does it work?
Unlike a single lease agreement, where a group of mates living together might sort out amongst themselves who contributes how much to the rent, under the HMO or rent by the room scenario each of the occupants has an individual lease agreement. One tenant can come or leave, and this doesn’t affect the other leases.
The tenants make a single payment for rent, but you, as the landlord, pay for power, water, gas and internet. Make it really good internet, by the way, if you want to save yourself the headache of complaints. You also will need to pay or organise the gardening and fortnightly cleaning of the common areas.
Finding or converting a property to HMO
Not every property can be rented out by the room. Ideally, you want a minimum of a four bedroom, two bathroom, two lounge house. Size really does matter here, so aim for large, comfortable rooms.
Next, consider opportunities for adding in at least one more ensuite bathroom, and converting a lounge or dining room into another bedroom. In one of my own HMO properties, I was able to install a small kitchenette into one of the rooms, which allowed me to increase the rent for that room by $85 each week.
Depending on the original layout of the house, some of these modifications can be done relatively quickly and cheaply, and the costs don’t take long to pay off. In today’s market, a single bedroom without an ensuite will rent at $185 a week, while an ensuited micro-apartment can fetch up to $400.
Other things to think about
Unlike a regular rental, you need to offer a fully furnished home. Vacancy rates for rent by the room properties are lower than traditional rentals. A brand new listing (as in, a for a whole house) is likely to be filled in less than a week and a half, while a single room is rarely empty for more than a few days.
You will want to make sure you have a decent size shed, to allow for storing bulky items like bikes or surfboards, and sufficient parking space. If you have a garage, this can be leased out to one or two of the tenants for an extra $10-$15 per week. A security camera in the front also helps, in case you ever need to sort out any tenant disputes, and a pet (just one, super smoochy, friendly one) can really help to make the property feel like a home to those inside.
A HMO requires an HMO specific lease. It is based on a standard residential lease, but one of the key differences is that it includes house rules related to tenant conduct. For example, it stipulates that tenants limit noise after 10pm, must clean up their own mess, only use their allocated space in the pantry etc. A lot of this is common sense, but necessary to make sure things inside the property are civil.
Finally, success of an HMO depends on who is inside it. It’s imperative to vet potential tenants thoroughly to try and make sure that they are a good fit for the rest of the household. This is where having a great property manager is essential. You really want one who understands that managing a HMO is as much about managing a community as it is about managing the ins and outs of a standard rental. And yes, this does add a few extra challenges into the mix, but the wins to you are well worth it. Trust me.
Have I convinced you yet? I hope so. Whether you are still not sure or want to know more, or if you want to jump into it straight away – get in touch with me, and I’ll walk you through the process.
