Know Your Numbers!

Welcome to this week’s edition of The Business Owners’ Property News - my weekly newsletter dedicated to helping business owners get started in property investing.

Today, we are going to look at the true costs of running a HMO. Remember, a HMO is a House in Multiple Occupancy - and high end shared properties need to be well maintained and the housemates usually expect all bills to be included in the rent.

Done right, a HMO can be a good monthly earner - but how much are you REALLY making every month?

Read on.....

My ￡1,200 per calendar month HMO

The spreadsheet told me my latest 5 person HMO would make ￡1,200 profit per calendar month (pcm).?

The fully let rooms would generate ￡2,495 pcm

The mortgage was ￡875 pcm

And many people on Facebook told me to allow for ￡75 per person per month for all other costs. That was ￡375

NET PROFIT ￡1,245

Not bad eh? Few more of them and financial freedom, here we come!

Unfortunately, some of our best performing deals live on a spreadsheet, not in the real world!

Once you’ve run a HMO for over a year, you can start getting an idea of the true costs of a HMO property and start working out what the true return on your investment is.

The 8 Operational Costs of running a HMO

The first step is to recognise the 8 main operational costs of running a HMO. Guesstimating ￡75 per person per month may have worked 6 years ago before rampant inflation including steep increases in gas and electricity.

You need to know your actual costs for the following expenses:

- Management (actual or if self managing, use 10% for your time)

- Repairs

- Insurance

- Council Tax

- Energy

- Water

- WiFi

- Cleaning

Other Overheads

The above is not an exhaustive list of costs. Here are some other costs you need to consider

- Rental Voids (a Commercial Valuer will use 8%, always worth working out your actual)

- Furniture leases

- Accountancy

- Netflix or similar

- Inspection and Testing

The Spreadsheet Revisited

So, three years on and this is how the 5 bed HMO is performing with current rental, mortgage, operational and other costs.

￡2,567 Rent (adjusted for 8% voids)

￡696 Mortgage (a great rate of 3.64% fixed in 2022 before the mortgage mayhem)

￡257 Management (I self manage, but have added my time @ 10%)

￡147 Council tax

￡113 Gas

￡129 Electricity

￡44 Broadband

￡14 TV Licence

￡19 HMO licence fee (apportioned)

￡50 Repairs (apportioned)

￡45 Inspections and Alarm Tests

￡40 Accountancy (apportioned)

￡37 Insurance

￡89 Cleaning

￡16 Netflix

Total costs ￡1,696

Net Profit ￡871 pcm or ￡10,452 per annum

After revaluation, my money left in the project is ￡49,850

Return On Capital Employed is 21%

Conclusion

As you can see, the HMO is making ￡871 per month - not ￡1,200 as I used to think! Thankfully, it hits my target ROCE of 20% and over, which means I can pay 10%/12% on funds borrowed from investors and make a margin.

But it's clear that you MUST know ALL your costs in a HMO or any other property project!

And above all, you must always be prepared for contingencies - one event like a new roof can wipe out all your annual profits and more.

Always bear in mind that property investing is a long term game!

As an ex Chartered Accountant, knowing the numbers is very important to me and we put a lot of emphasis on the financial analysis at every stage of buying, refurbing and managing a property project.

Our 12 month programme, The Business Owners' Property Programme #BOPP is designed to focus on the numbers and save you more money than the cost of the course.

Call me on 0121 647 7090 or email us at [email protected] to have a chat on how we can help you get started in property investing.