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Hello, I’m new to property investing so I am currently looking for a bit of advice on calculating an accurate ROI on a HMO property.
As it stands it just doesn’t seem worth while having a HMO property in the region of 200k from my working out. Please correct me and let me know if I am doing anything wrong!
PP of a 4 bedroom property at 200k so will require a 25% mortage of 50k, stamp duty 7.5k, and legal fees (I’m not to sure so will roughly round these up to 2.5k)
So a 60k initial investment
Out goings every month will include mortage £600, Letting agent £100, Utilities £100, council tax £100, tv and WiFi £50. (Bills are just a rough guide)
Total out goings £950 and that’s not including voids!
So to come to a conclusion I have calculated it as monthly rent £1,400 - £950 for bills = £450 x 12 = £5400
5400 / 60,000 = 0.09 x 100 = 9%
9% ROI seems very low.
Is there any way of bringing mortgage payments down? And to make a better return am I just going to have to start looking at property within the £100k range?
Thank you for taking the time to read this post, apologies that I was a bit of a long one and thank you in advance for any advice given.
My view is that the yield is not bad for an HMO - no fantastic either but definitely in the range.
I think one of the challenges is that it’s only four rooms so it’s not getting the benefits of scale you often see in HMOs. I also do think you can do better on the mortgage. You can do better by either increasing LTV or reducing the rate (not both). Both will increase your yield.
Please get in touch if you wish my help.
Chartered Accountant, Tax Advisor and Mortgage broker
(and BTL portfolio owner)
I don’t think 9% is good enough. But your mortgage seems expensive. Is it repayment or interest only?
You have the right idea in your method of working out ROI and your monthly outgoings will be roughly right - the figure you give for mortgage is on the high side but council tax would probably be higher , you don't have water bills on there (£40 - £50 pm), council tax might be more, letting agents normally charge 10% + vat based on rent, you will have insurance to pay and there will be maintenance as well (cleaner, gas certificate, repairs etc).
I find that the profit in HMOs is very 'lumpy' ie there is no typical month as you might be fully occupied one month with no repairs then someone leaves, the boiler breaks down, someone doesn't pay rent and that can dent the profit for a whole year. It would only be possible to work out actual ROI over a very long time and even then one off things happen that you can't foresee. You need a good sized back up fund to cover contingencies.
All comments are made in good faith and are given to the best of my knowledge and experience but I would advise you to consult an expert before making important decisions and I accept no liability for comments made.
Appreciate the advice on HMOs being “lumpy” it does seem like you do need to be more aware of unexpected cost.
So being a early investment it may not be the best option until I have built up a larger cash buffer.
Hi Bradley, I dont know your area but 350/room/month seems a tad low in a 200k/4 bed area? trust you have done your research. Whilst it's a 4 bed, is there not the opportunity to convert a downstairs room to another bedroom as that would swing your figures in the right direction. Given the low roi what would it achieve as a simple straight forward single let?
Also I presume your are investing for cash flow not capital growth? If it's in a rising area the capital growth is worth attributing some weight to in your decision.
Hi Mark, thanks for the reply! I have double checked on sites such as open rent and spare room and the rent does seem to be sticking around 3/350 a month.
I have looked at adding an extra room onto the property and that will increase the ROI from 9% to 16%.
I have only checked it out as a HMO as it is a student area so wasn’t to sure if it would let well being a single let.
Yes I am aiming for cash flow at the moment!
You wouldn't have Council Tax costs if a student let.
ROI should be calculated without the mortgage.
Total investment £210,000 ( 4 bedroom property at 200k + stamp duty 7.5k, and legal fees 2.5k )
Rent per annum £16,800 ( 1,400 x12 )
Cost per annum £4,200 ( Letting agent £100, Utilities £100, council tax £100, tv and WiFi £50 x12 )
Net Return £12,600 ( before tax )
From myside typical property :
Property Purchase £180,000 ( £130,000 purchase price + £50,000 cost to convert to 6 bed en-suite )
Annual Rent £32,136 ( 6 rooms @ £103 per week )
Annual Costs £9,528 ( £320 management + £160 maintenance + £120 gas + £50 water + £110 council tax + £16 tv license + £18 internet (electric is recouped via landlord prepayment meters ) x12 )
Net Rent £ 22,608 ( before tax )
(electric is recouped via landlord prepayment meters )
don't you pay for common parts?
Common parts 10 to 20% of bill.