Unlocking £1,000 Monthly Net Profit from an HMO: Insights from 100 Landlords
Understanding the Numbers
What does it really take to earn a net profit of £1,000 per month from a House in Multiple Occupation (HMO)? We surveyed 100 seasoned HMO landlords to find out how much gross income is necessary to achieve this, after accounting for all possible deductions.
Defining Deductions: When we talk about deductions for an HMO, these generally include running costs like gas, electricity, council tax, and Wi-Fi, given that “all bills included” is the standard offering. Beyond these, landlords must budget for management fees, mortgage expenses, landlord insurance, and compliance costs. These are likely familiar items on your financial spreadsheet.
However, more unpredictable costs also come into play:
- Voids (empty periods)
- Ongoing maintenance
- Non-payment of rent
- Taxes
- Accountancy fees
- Personal expenses related to property management
How do you estimate these costs? Do you allocate a percentage for each? This is where the insights from our landlords become invaluable.
Survey Results: Real Income Needs
Landlords were asked to calculate the required gross rent to net £1,000 per month, factoring in a management fee of 10% plus VAT and a 75% LTV loan at 6.5%. Here’s what they said:
- 7% of landlords believed they could net £1,000 with an annual income of £36,000 or less. However, it’s possible some may have misunderstood the query or have different operational models, like excluding bills.
- At £36,000 per year, which breaks down to £3,000 per month, the deductions for management and mortgage alone would leave approximately £1,440—posing a challenge to reach a true net of £1,000 after covering all operational costs.
- 90% agreed that a gross annual income above £36,000 was necessary, with 57% suggesting a range between £36,000 and £39,000. This indicates a monthly gross requirement of £3,000 to £3,250 to achieve the target net profit.
- Surprisingly, 15% of participants stated they needed £45,000 or more, equating to at least £3,750 monthly.
A poignant observation from a well-known HMO forum highlighted that significant profits often stem from self-management and maintaining a low LTV, which might not apply to a typical 75% LTV, hands-off investor.
Taxation: The Unpredictable Variable
The major unpredictable cost for landlords remains tax, which can significantly vary and complicate the net profit calculations. Therefore, the general consensus points to a necessary turnover of £3,000 to £4,000 monthly to realistically achieve a net profit of £1,000.
HMO Value vs. Net Returns
Let’s analyse what this income range implies for the value of the properties:
- HMOs generating £3,000 to £4,000 monthly typically feature six bedrooms. The required rent per room ranges from £500 to £666, accommodating properties across various UK regions, from the North West and Midlands to the South West and East.
- Yields in these areas vary from 8% to 14%, suggesting a purchase price range for HMOs of £257,000 to £600,000 to achieve the desired net profit.
To minimise risks related to high vacancy rates and tenant turnover, a more focused price range of £300,000 to £450,000 emerges as the sweet spot for new landlords aiming for a £1,000 net monthly profit.
Investment Scaling: This implies that to achieve a net profit of £1,000, an investment of about £25,000 to £37,500 per £1,000 in profit is needed. Does this scale linearly for larger HMOs?
If an investor aims for a minimum profit of £2,000 per month, the anticipated investment would likely range between £600,000 and £900,000, assuming they need to generate over £6,000 PCM. This scaling assumes similar conditions and costs as smaller HMO investments, though individual circumstances and market variations could affect the actual figures.
