Remote Investing – Is it Harder?
Is there a correlation between the long term success of an HMO and how far away you live from the property?
As someone who has been around HMOs almost every working day for the last decade, I find this an intriguing question.
My interest in how well (or not) remote investors develop, manage or control their HMOs started a few years ago when I was selling dozens of tenanted HMOs to overseas buyers – many of them from Hong Kong.
“Can’t you sell it to a cash buyer from Hong Kong who doesn’t know what they’re looking at?”, was a question I was asked an awful lot by unscrupulous landlords, and this dismissal of the intelligence or due-diligence capabilities of overseas buyers extends beyond some HMO landlords and into the world of sourcers, builders, managing agents and deal-packagers, sad as that sounds.
Even without the presence of those looking to make a fast buck from someone who lives too far away from the HMO to ever ‘pop in’, there are factual and immovable barriers in place that must make the cashflow harder for remote investors who find themselves having to pay through the nose for services that a local could do themselves or for a fraction of the cost.
I sold an HMO in Doncaster in 2018 to a buyer from Hong Kong. I visited the HMO and it seemed well managed by a local HMO specialist managing agent, a small, Director-led outfit that appeared very attentive and ‘on the ball’.
Dereliction of duty?
In 2020, I went to value No.70, the HMO next door (that’s sounds like a name for a sitcom starring a disgruntled older couple who’s daily lives have been turned upside down due to ‘The HMO Next Door’, but I’ll park that idea until I’ve finished writing this) and a viewing agent from the same managing agency was there to show me in. As I looked up at the footpath to No.72, my previously completed sale, I spotted that water was gushing out of the front doorstep (as odd as that sounds) and I asked the agent what the hell was going on.
“Oh God, we’re really struggling to deal with the workload as we’ve grown too quickly”, she quipped, followed by an admission that it was their more remote investors that caught the cold hardest when the agency was sneezing.
“They can’t turn up to the office and kick off or visit the HMOs and see the neglect for themselves”, she might well have said.
Working with remote investors over such a long period has thrown up dozens of these stories. Tales of sourcers ripping them off, builders over-pricing, deal-packagers fudging numbers and local power teams ending up being local money-wasters.
“I was given an ‘all money out’ deal advertising that, after a renovation (which was underpriced by 50%), I could refinance my new HMO at £540,000 based on a yield of 10% and room rates of £750 when the average refinance yield was 12% and the average room rate was £600 PCM”, was the opening line of a message I received last week from an investor from Sweden.
“When did you find out that the deal didn’t stack?”, I asked, with the answer being, luckily, after she had completed her lengthy due diligence on the area. Due Diligence techniques that she only learned by making costly mistakes a couple of years earlier with a flip deal.
Number crunching
For the average HMO (which we will identify as a 6-bed, bringing in a potential of £600 PCM, per room, when full), how do the margins look when we compare like-for-like for a local self-managing landlord and a remote investor replying on management and outsourcing?
Most self-managing landlords that I meet (unless they are absolute morons) have occupancy levels of over 95% – they know their tenants, their product, their pricing and their patch.
This means that a self-managing landlord will be generating around £41,000 PA gross income or £3,400 – £3,500 PCM with the example HMO we’re using.
If we chip off 5% extra voids for the fully managed HMO, this figure reduces to £38,880PA/£3,240PCM (or thereabouts) and then there’s the 12% + Vat management to deduct off too which will add up to over £5,500 PA.
On a straight shoot-out, the remote investor is already over £7,000 ‘down’ before we factor in higher lending costs, lower LTV, more expensive maintenance charges and the risk of bigger issues cropping up due to often being the last to hear of any negligence.
Does all of this make HMOs completely non-viable for remote investors?
Surely, as an overseas/remote investor, you’d be better off looking at standard BTLs (less management costs, tenant churn, moving parts and running costs), commercial units, long-lease residential properties or focusing on adding value/capital appreciation?
It’s true that this ongoing ‘finger burning’ has dampened confidence in standard HMOs from the perspective of remote investors. Even within my own databases and network, we’ve seen many overseas investors follow the same path – they learn about the UK property market and the add-value, BRR potential of HMOs and start to work with deal packagers and sourcers and find out that this is a bit of a minefield.
They then look at the ready-made HMO market as a safer alternative, forgoing the ‘add-value’ aspect in favour of reduced risks and clearer and more reliable financial information.
Unfortunately, this still wasn’t stable enough for many and scores of overseas investors were left nonplussed by the quality of the ongoing management which directly led to an underperforming asset.
“Guaranteed Givernment-backed Rents”
Enter the ‘guaranteed rent’ that is the strapline of the social housing or supported living flag bearers and peddlers and the large portion of the active overseas investors now deciding that the best way to have a stable net return and a hands-off (and high-yielding) asset is to purchase within this space.
The good, the bad and the ugly of this decision is yet to play out.
Talking specifically about AST tenanted HMOs, though, how do we create a consistent product that won’t let down remote investors, Uk-based or overseas?
The demand is clearly there and there is no reason why HMOs can’t provide excellent returns for those looking to outsource everything.
Taking control
A shift in mindset and approach has worked for Simon, an HMO owner from the South East who has pivoted his approach with his remote (200+ miles away) HMO in reaction to poor management.
“Poor communication, no check in, check out inventories, overcharging for repairs and allowing tenants to leave without serving their notice…”, Simon was quick to point out.
How many of these issues could be addressed if a) Simon lived nearby or b) if Simon took on the job from day one of ‘managing the managing agent’?
In this case, this landlord decided to take all management in-house and rely on remote viewing agents, enhanced CCTV and tenant dialogue and modern technology to ‘meet and greet’ and vet tenants.
“I’ve been doing it for over a year now and so far it has proven extremely successful….My occupancy has gone from 80% up to nearly 100%”
I also chatted with an investor based on the South Coast who has a growing portfolio in the East Midlands. He has seen an increase in challenges as his portfolio has grown, largely down to the exponential growth of the managing agent he has used along the same timeline and their struggles to keep to the same service, attentiveness and proactivity that they had when they were a small, hungry Director-led agency (sound familiar?).
This investor, determined to stay on course for a sizeable and high-performing remote portfolio, accepted that the ups and downs come with the territory and focused on two things. In the short-term, he doubled his efforts to get the best out of the current agent whilst also making moves in the background to directly employ a local person to take over once he’d hit a critical size.
“Often, occupancy issues and saturation concerns occur within the rivalry of a managing agency’s own stock”
This investor’s approach is not uncommon. I was in Dubai in 2022 chatting with a remote investor and he swore by the benefits of not having a managing agent and instead having a directly employed team to manage his HMO portfolio.
Gaining trust
The risks are clearly higher as a remote investor, and the rewards are often lower than those locally can obtain, so what’s the appeal?
Despite the difficulties, there is still widespread confidence in UK property assets and the market performs better than many other countries. For investors based in the South East of England but looking to purchase above the ‘Watford Gap’, they are lured in by not just the higher yields but also the lower barrier to entry in terms of capital outlay.
There are also many, many developers, deal-packagers and managing agents that have made it their priority to service their remote investors – understanding that there is a real opportunity to in gaining the trust of the international investor community.
“There should be no difference in the approach and service that we offer to our landlords whether they live in Hong Kong or Huddersfield – in fact, we have a responsibility to be more transparent and communicative with our oversea clients”, said a well-known HMO managing agency owner from Greater Manchester.
In addition to the ‘good guys’ out there who are providing a reliable and secure route to HMO investing, there is also a growing number of exPat service providers in the UK who deal with investors specifically from their country of origin and are fully aware of the pitfalls in remote investing.
I was with a couple from Hong Kong recently who have been UK-based for nearly a decade and made a great business out of advising and working with Hong Kong-based investors looking to enter the UK property market. Their advice has evolved over time in terms of which property type currently works and how to navigate the challenges of moving money, securing lending, managing builds and getting the best out of their UK assets.
Having a specialist in your corner certainly helps but, again, it comes at a cost.
Conclusion?
So, have we arrived at our conclusion that, yes, remote HMO investing still works but, in nearly all cases, it costs more to maintain a high-performing asset?
I’m sat on a train finishing off the last couple of thoughts for this article and I’m on way to meet another specialist HMO manager (with overseas clients) and I’ll be keen as ever to learn about the difference within their service to make sure that there isn’t a correlation between the long term success of an HMO and how far away you live from the property…
The Hong Kong community that I used to sell an awful lot of tenanted HMOs to are now being taught by the same Hong Kong-based property training company to invest in social housing assets. My job over the next year is to showcase the best HMOs and couple them with accountable and reliable management. This way we can still provide a clear path to standard AST HMOs for remote buyers.
