HMO stands for Houses of Multiple Occupancy, and they continue to be the talking point in the real estate sector, amid heightened discussions about the nationwide Article 4 roll-out, council tax banding on individual spaces, and a surplus of properties coming onto the market.
The explanation for this gold rush is that investors tossing around estimates is enough to make everyone giddy with excitement. A property that makes £1,500 a month will sound appealing, and if you look at it from the perspective of rental revenue, yield or ROI, the figures are really attractive.
How Much Does It Cost To Run A HMO Property?
Most of these operating costs are fixed, and some are variable, some are charged weekly, and some are billed quarterly, but we believe that for most HMO assets the following should all be taken into account.
You will need to get a mortgage unless you are lucky enough to be able to buy the property right out, of course. Mortgages can vary from house to house depending on the amount of borrowing, lending, a form of financing (commercial or residential etc.)
Whether or not you decide to use a letting service to handle your property divides opinion. On the one hand, no one should care about your property as much as you do, but on the other hand, you probably haven’t become an investor in property to replace one job with another. Using a letting agent to handle your portfolio. Tariffs for HMO management will usually be 10-15% of paid monthly rent, which may or may not be subject to VAT on top of that depending on who you are using.
It is vital to have the correct insurance in place. Make sure that the broker you are talking to know whether the house will be leased, that it is a HMO, that there are locks on the doors to the bedrooms and whether or not it needs a permit, etc.
There’s nothing worse than having to pay for protection just to find out that the policy isn’t accurate when you need it the most. Similarly, you can get out of a bad situation by getting an adequately insured house.
Gas, power, and water can differ significantly again from property to property depending on the size of the building, the number of tenants, type of tenants, energy efficiency, etc.
Many tenants are out of the house during the day as well so from 9 am-5 pm there’s less need for heating and hot water. When you have tenants that do not work or work shifts, you can find that your heating operates 24/7. Also if you have a water metre, the cost could be considerably higher.
I expect that the gas/electricity payments will adjust the most in the months to come as we send more metre readings to get a better understanding of how much energy is being used. Sadly, I think those numbers are just going to go up.
Regional authorities can now impose a tax on whatever way they wish, and many use these powers to mark each bedroom as an individual dwelling for council tax purposes. This seems more popular for self-contained rooms where they have bathroom and kitchen facilities within the space, but it’s worth finding out what the local council is doing before embarking on a project because that could add hundreds of pounds a month to the costs.
5.Broadband & TV Packages
I suppose broadband is a flexible expense in principle, but I doubt you’d get a lot of skilled tenants or students moving into a house that didn’t provide wifi. Be aware that having access to excellent broadband services in homes is rated as being crucial, almost as much as having heating and electricity.
TV bundles are something of an optional addition, and it really depends on who the target audience is and what the competition provides. These days Freeview is pretty reliable, and sites like NetFlix are starting to make television obsolete for younger generations.
This one is very tricky. In principle, because they have their own TV, every room of an HMO should have a separate licence. In practice, you should offer one licence for the whole HMO in a shared space and then advise the tenants that if they wish to watch TV in their own space that they will require their own TV license to do so.
Please keep in mind that the official advice is to obtain licences for each room (and if each room has its own licence, you don’t need another one for the community TV).
For every shared house, cleaners are an absolute must. Without them, the house’s condition could deteriorate rapidly, and tenant tempers will flare up as disputes intensify about whose turn it is to clean the toilet.
These also serve as the first line of protection in identifying possible maintenance problems, health risks etc. and reporting back to the owner or property management company, as well as keeping the communal areas clean and tidy.
Your cleaning may range from a weekly deep clean to a monthly run with a vacuum and a mop, depending on the quality of the housing you provide, the size and the rates you charge for it.
Often landlords organise a fortnightly clean, but if after your first inspection the house isn’t up to scratch then you may have to consider a weekly service. It’s a great way to keep the tenants happy, cost us a little extra, and lowered maintenance costs for items like resealing shower trays and repairing communal carpets.
8.Maintenance and Voids
Each of us has our own way of calculating what would be upkeep and voids. I don’t think it’s about wondering how much it’s going to cost you every month, but more of getting into the mindset of setting money away when things go wrong.
You could have a period of six months in which you have full occupancy and not a single problem. All of a sudden two tenants move out, their rooms need to be redecorated (fair wear and tear so no deposit deductions to pay for it) and the boiler decides that it doesn’t want to heat the water.
Putting aside a fixed amount each month helps align these stressful months with the ones where it’s all going to plan. We recommend having a reserve fund of 5% for voids and 5% for gross rent maintenance. We think that will provide you with a strong base to start from when things go wrong. Any money left at the end of the year can pay for a good Christmas party.
We hope this guide gives you a better understanding of how much it will cost to set up and also to run a HMO property.