HMOs - What They Are and How They Can Make You a Lot of Money
- The Millennial Millionaire
- Jan 12, 2018
- 2 min read
What the hell is a HMO
It stands for 'House in Multiple Occupation' and could be your tool to financial freedom.
In this article I'll explain exactly how you can set one up cheap, and not even have to touch it.
It can just be left to make you money from the comfort of your home.
Location, location, location...
The most important thing when buying a HMO is the location.
You want a relatively central property with amenities close by.
Location is everything for making sure the property is in high demand and at maximum occupancy.
How much should I pay?
When it comes to a HMO, the rule of thumb is to pay £25,000 per rentable room.
Normally the most profitable way to go about this is to pay £100,000 for a 4-bed property. Now you may be thinking, these properties don't exist where I live!!
You may be correct, and that's why you have to broaden your horizons and look elsewhere in the UK.
Examples of locations where this is possible include Middlesbrough and Walsall.
Let's talk return
Let's take the example of someone putting down 20% on one of these HMOs. That's £20,000 invested.
In order to convert this to a HMO you'd require firedoors, locks etc.
Doing this to a property will likely cost £2000, lets say solicitor fees are £2000, and you have some touching up to do, so your initial investment amounts to £25,000.
Let's make the big assumption that the property is at maximum occupancy for the sake of the yield.
The income will be around 300 per room per month, some more some less.
That's £1,200 a month.
The £80,000 borrowed is likely to have a mortgage rate, fixed for 5-years at around 4%, amounting to £267 a month.
Council tax will cost £120 a month.
Utilities and broadband £150 a month.
Now we don't want calls at 2am nor do we want to have to travel to the property.
So we pay a 10% management fee, £120 a month.
Let's also get renter's insurance at £155 a year.
Crunching these numbers we are left with a yearly profit of:
£6361
That gives us a yield of:
6361/25000=25.44% That's a return that you're unlikely to see in any other property investment.
Usually you'd expect atleast a 20% return with this strategy, and the expenses should meet roughly 50% of your rental income.
When this figure gets closer to 30%, you'll be laughing.
Things to consider
When starting out with HMOs, you require a £750 licence per HMO property, which normally lasts 3-5 years.
In addition, you have to conform to various rules and fire-safety regulations, hence the start-up cost is something to consider.
You can find out more about this here.
With interest rates currently as low as they are, you can take full advantage of HMOs and use debt to leverage your wealth as I've explained in How to Double Your Rent Using Debt.
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