Houses of Multiple Occupancy (HMO) continue to be the buzzword in the Derby property Market, despite increased discussions around nationwide Article 4 roll out, , and a huge number of properties coming onto the market.
The reason for this gold rush is that the figures thrown around by investors are enough to make anyone giddy with excitement. ‘Retire on one deal!’ or ‘Make £1,500 per property per month!’ do sound appealing, and whether you’re looking at it from a rental income, yield, or ROI perspective, the numbers are very appealing.
So what’s the truth behind all of the top line figures?
We’ve recently finished our latest HMO Project – turning a 3 bedroom semi-detached house into a 6 bedroom licensed HMO – and now that all the rooms are occupied and been running for a few months, I thought I’d share the breakdown of monthly running costs we have to deduct before we get to see how much money we’re really making from our HMO.
So how much does it actually cost to run an HMO?
Some of these running costs are fixed, and some are variable, some are paid monthly, and some annually, but we feel these should all be taken into consideration for the majority of HMO properties.
Mortgage payments go without saying really, unless of course you’re fortunate enough to own the property outright. These will vary from house to house depending on level of borrowing, lender, type of finance (commercial or residential etc),
Opinions are split on whether you should use a letting agency or not to manage your property. On the one hand, nobody will care about your property quite as much as you do, but on the other hand I’m sure you didn’t become a property investor to replace one job with another.
I fall into the latter camp, so use a letting agent to manage our portfolio (even if I own that letting agency…). Rates for HMO management would typically be 10-15% of monthly rent collected, which may or may not be subject to VAT on top of that depending on who you use.
I charge myself 10%, which is a slightly discounted rate compared to what we charge typical customers.
Having the right insurance in place is critical. Make sure the broker you speak to know the house will be rented, that it’s an HMO, there are locks on the bedroom doors, whether or not it needs a license etc.
There is nothing worse than having paying for insurance only to find out when you need it that the policy isn’t valid. Similarly, having a properly insured building can get you out of a seriously bad situation.
Gas, electricity and water can again vary massively from property to property depending on the size of the house, number of tenants, type of tenants, energy efficiency and so on.
This HMO was taken back to brick and had a new roof so is well insulated. Most tenants are out of the house during the day as well so there’s less demand on heating and hot water from 9am-5pm. If you have tenants who don’t work or work shifts, you might find your heating is running 24/7.
This house doesn’t have a water meter, so it’s based on average usage for this size of house rather than actual consumption. If you have a water meter, your costs could be significantly higher.
£170pcm on average as it is lower during the summer months and higher during the winter
Thankfully we don’t live in a city where the council tax valuation office are enforcing Band A council tax ratings on individual rooms within an HMO. This is a serious risk in many areas already though, and seems to be spreading.
Our property is in council tax band A, making the payment quite low.
Monthly Council Tax Payments – £81
Broadband & TV Packages
I suppose in theory broadband is a discretionary cost, but I doubt you’d be getting many professional tenants or students moving into a house that didn’t offer broadband. Be aware that good broadband is classed as an essential in our houses, almost more so that heat and running water!
TV packages are more of an added extra, and it really depends on who your target market is and what your competition are offering. Freeview is pretty good these days, and services like NetFlix are starting to make TV redundant to younger generations.
We put in a basic Virgin Media package, which is a step up from freeview and comes with a set top box that allows recording of live TV etc. We’ve noticed some of our competitors are offering full sports/movie packages though, and even some subscription services like NetFlix & Apple TV, so we might need to up our game in future.
Monthly Virgin Media Payments – £38.99
This is a slightly tricky one. In theory, every room of an HMO should have it’s own licence if they have their own TV. In practice, we provide one licence for the communal TV that we provide, and advise the tenants that they will need their own TV licence if they choose to watch TV in their own room as well.
So far this has worked out OK, but keep in mind the official advice is to get licences for each room (and if each room does have its own licence, you don’t need a further one for the communal area).
Monthly TV Licence Payments – £12.13
Cleaners are an absolute must in any shared house. Without them, the standard of the house can quickly deteriorate and tenants tempers can flare as arguments escalate over whose turn it is to scrub the toilet.
As well as keeping the communal areas clean and tidy, they also act as a first line of defence in spotting potential maintenance issues, safety hazards etc and reporting back to the landlord or agent.
Depending on the quality of housing you provide, the size and the prices you charge, your cleaning could vary from a weekly deep clean to a monthly run around with a vacuum and a mop.
We started off with fortnightly cleans in our HMOs, but moved to weekly pretty quickly as we found it kept the tenants happier, didn’t cost us much extra, and reduced maintenance costs for things like resealing shower trays and replacing communal carpets.
Our cleaners charge £10 per hour, and in this house they do 2 hours per week.
Monthly Cleaning Payments – £80
Everyone has their own way of estimating what maintenance and voids will be. I don’t think this is so much about guessing how much it will cost you on any given month, but more about getting into the mindset of putting money aside for when things do go wrong.
You might have a 6 month period where you’ve got full occupancy and not a single issue, then all of a sudden 2 tenants move out, their rooms need redecorated (fair wear and tear so no deposit deductions to pay for it) and the boiler goes on the blink.
Putting aside a set amount every month helps balance these costly months with the ones where everything is going to plan. We typically allocate 5% for voids and 5% for maintenance of the gross rent. We find this gives us a good buffer when things do go wrong, and any excess makes for a good a shopping trip!
Monthly Maintenance/Void Payments – £240
The other costs associated are licensing fees, electric safety certificates, gas safety/service, alarms servicing, pat testing etc
We budget £35pcm
|Gross Rental income £400 per room (all en-suites)||£2400|
|Letting agent Fees||£240|
|Monthly Net Profit||£1488|
These figures are based on our costs there could be significant savings on cleaner costs, voids, maintenance, and bills, so the actual figure for you can look more towards £1700 net
Also it does not take into consideration interest on mortgage costs as this varies from property to property.
If you are thinking of investing in a HMO why not give us a call/email to discuss potential investments!