what rental yields do you achieve with your HMOs?

[pla]

hello, In an thinking about investing in HMOs. I would be interested to know from other property investors, what rental yields they do actually achieve (Gross rental income per annum divided by the purchase price, refurbishment and purchase costs). I saw some of HMOs for sale in the London area which seem to do about 7 to 10% yields. I mention the area because I feel that other areas where property prices are lower, yields could exceed 15%. Thank you for sharing your views and experiences.

[mind the gap]

hello, In an thinking about investing in HMOs. I would be interested to know from other property investors, what rental yields they do actually achieve (Gross rental income per annum divided by the purchase price, refurbishment and purchase costs). I saw some of HMOs for sale in the London area which seem to do about 7 to 10% yields. I mention the area because I feel that other areas where property prices are lower, yields could exceed 15%. Thank you for sharing your views and experiences.

I think you are being very optimistic. In areas where property prices are lower than in the capital, rents tend to be lower as well - disproportionately so, in some cases.

I think your calculation for yield is incorrect, BTW. Why would you divide the rental income by the whole of the purchase cost and associated costs plus the whole renovation cost, to calcluate one year's yield?? You are bound to come out with a negative number.

[developer215]

Hello pla,

Separate from yields, running HMO's isn't for the faint hearted. As a rule of thumb more people per property equals more income, but also more aggro, particularly if you operate in the bedsit sector of the market.

Tenants are more transient, and live in HMO's more by necessity (usually financial) then by choice, which manifests itself as more frequent voids as they pack up and leave when their circumstances alter (regardless of tenancy agreements).

Licencing has introduced more red tape and whilst it's designed to sift out the bad guys it's another set of hoops to jump through.

Similarly, LHA cuts, in various forms, make renting to DSS tenants less attractive.

It is said that landlords in the HMO market tend to get "burnt out" more quickly than other areas of renting.

You can expect a greater input on a number of levels and you should consider aspects other than just yield.

I hope this helps,

John

[Scrungy]

Hello pla,

Separate from yields, running HMO's isn't for the faint hearted. As a rule of thumb more people per property equals more income, but also more aggro, particularly if you operate in the bedsit sector of the market.

Tenants are more transient, and live in HMO's more by necessity (usually financial) then by choice, which manifests itself as more frequent voids as they pack up and leave when their circumstances alter (regardless of tenancy agreements).

Licencing has introduced more red tape and whilst it's designed to sift out the bad guys it's another set of hoops to jump through.

It is said that landlords in the HMO market tend to get "burnt out" more quickly than other areas of renting.

I disagree with all the above.
It does not always follow that more people equals more aggro - it depends on who is managing the home.
If you are ill-suited to managing people, it doesn't matter much how many people are living at a HMO.

I have found that by far, the most important element in a successful HMO is getting like-minded people together, which often boils down to energy levels, lifestyles and occupations.

Almost all tenants are transient, either to a home or to being tenants, so this isn't strictly true of only HMO tenants.
I have found a lot of HMO tenants choose to share a house for the main purpose of meeting people, especially those who are new to the area or country.
Tenants leaving at a whim regardless of tenancy agreements and giving a LL voids says more about the LL not taking care to select the right tenants than it does about how HMO tenants behave.
People who rent whole properties also behave this way.

I agree with you that the greater amount of red tape/legislation makes it more work for a LL, but if you have 50-75% rent coming in (and at higher levels than a whole property pro-rata) than 0% rent while you find another tenant for a whole property, which one do you prefer?

The greater wear and tear and "aggravation" of HMO is greatly exaggerated in my view and often comes from people who don't operate in that market or from those LLs who are not well suited to this market.

I have more than 20 years experience with HMOs and have never had hassles that make me want to stop and walk away.

I only wish I could have more to be honest.

[developer215]

Hello Scrungy,

Our differing views will give pla plenty to think about. I note your location is USA. Is that where you operate your HMO's?

[Scrungy]

No. My HMO is in London. I manage everything from the USA, although viewings is the one problem area that I need to find a permanent solution for.
I don't need to use a letting agent but I might have no choice.
I tried looking for viewing only agents but haven't found anyone willing to do this.

[developer215]

Hello Scrungy,

I've had a dig through your previous posts now and I can see my HMO's are different to the one you own.
I own bedsits with their own facilities (though some share bathrooms). My tenants are either DSS or low income professionals that can't stretch to one of my flats or houses. They aren't lifestyle matched because they don't share the same living space, other than passing on the stairs occasionally (though many do develop friendships of course).

The callouts I get are greater per HMO than the flats and houses, due to there being more people per property - that was my point.

It's financially rewarding but you have to want to be in that market and have the correct aptitude to deal with problems that inevitably arise when a bunch of strangers share a converted house.

[Snorkerz]

PLA - sorry for taking this off topic...
No. My HMO is in London. I manage everything from the USA, although viewings is the one problem area that I need to find a permanent solution for.
I don't need to use a letting agent but I might have no choice.
I tried looking for viewing only agents but haven't found anyone willing to do this.Scrungy - I'm fascinated to know how you get around the s47 rules and tax issues if you don't have an agent? Who hands the keys over & does things like inventories and the requirements of the 2006 Regulations?

[Scrungy]

But usually there's the same number of people in a house/flat in a whole property let compared to a HMO, so the wear and tear is about the same, isn't it?

The fact that the other tenants are unknown to each other doesn't by itself lead to greater wear and tear, unless your HMOs have more than 4 people per home, which is the about the ceiling for the number of people in a whole property let (at least as far as the tenancy agreement is concerned, I believe?).

How much experience do you have with HMOs?

Bedsits, flatlets & studios are areas that I have never operated in so I can't comment on those.

[Scrungy]

PLA - sorry for taking this off topic...Scrungy - I'm fascinated to know how you get around the s47 rules and tax issues if you don't have an agent? Who hands the keys over & does things like inventories and the requirements of the 2006 Regulations?

I am flattered that you are fascinated by my personal financial affairs!
I do have a UK address for service and handle my own tax matters without any difficulties.
I have a reliable person to hold keys (for maintenance) and during tenant changes, my inventory clerk hold onto keys between tenancies.

[developer215]

Hello Scrungy,

A house divided into bedsits is an HMO as is your house. Mine are 3 story houses with between 6 and 7 bedsits per property. All fully licenced, certified and council inspected.

I do have houses, flats and studios so I am able to speak from experience about the greater input required to manage the HMO's vs the others.

Wear and tear isn't an issue particularly (it's accounted for in the significantly greater return), it's more to do with tenant turnover, tenant disagreements, bad payers, change of circumstance from employed to unemployed etc.

I'm trying to avoid generalising about it being the bottom end of the PRS market, but..........

Sorry Scrungy, I forgot to anwer the question about experience - I bought my 1st HMO 17 years ago.

[developer215]

pla - here's an extract for you - back on topic at last.


Many buy-to-let mortgage lenders will only lend up to 80% of the property value, so you'll need to put in some money yourself - which of course has a cost too!

Once you have deducted all these costs from the rent, you end up with your net expected rental income.

If you divide this into the value of the property, including all the costs associated with buying it, you have the 'true' or 'net rental yield'.

So, if net rental income is £10,000 and the property cost £200,000, the net rental yield is simply £10,000 divided by £200,000 which equals 0.05 or 5%.

Once you do the maths, you may find that the net rental yield figure is less than the cost of your mortgage, leaving you with a shortfall. However, if you have bought well, you should expect the rental income to creep up over time - plus you should see some capital growth too.

Courtesy of Rightmove

[Scrungy]

it's more to do with tenant turnover, tenant disagreements, bad payers, change of circumstance from employed to unemployed etc.

Which is mainly to do with the selection/assessment of each applicant by the LL (or an agent if you use one), the attitude of a LL towards who they will accept and what state their finances are in.

The issues you mention have not featured across my experience.
Also, I am not wealthy and when I have had a doubt about someone, I have preferred an empty room.

[developer215]

Which is mainly to do with the selection/assessment of each applicant by the LL (or an agent if you use one), the attitude of a LL towards who they will accept and what state their finances are in.

These issues have not featured across my experience and when I have had a doubt about someone, I have preferred an empty room.

Absolutely right - I also leave empty rooms rather than rent to anyone.
I advertise for over 30's (though there are exceptions), non smokers and never ever take a tenant without a deposit (it's a measure of means).

I know landlords who take anyone and I've seen what they offer in return - I like to sleep at night.

[pla]

Hello,
Thank you for your feedback. I understand that they are a lot of issues around HMO's and that the yield is just one of them. Saying that it is good starting point when reviewing an investment opportunity.

I would like to quote an abstract of an article I found in Property Investor News:

“The issue of yields is the one which will probably be of most interest to the investor. In comparison to a rental property occupied by a single person/family most commentators agree that HMOs typically provide greater income. Some very impressive claims are made for HMO yields. With yield figures of 17-20% or more often being suggested. Although in the current volatile market it is of course essential for investors to make their own detailed calculations.”

Do your HMOs achieve these figures?

[developer215]

Hello again pla,

I can't quote meaningful yield comparisons for my HMO's as they are virtually unencumbered, however the calculation is there for you to compare an HMO to house/flat.

Only you will know the area you are looking in and therefore the expected rental income to divide into the purchase price.

I should add also that you should be wary if 17 to 20% is being quoted by someone trying to sell you something - smoke and mirrors etc.

[Scrungy]

I would like to quote an abstract of an article I found in Property Investor News:

“The issue of yields is the one which will probably be of most interest to the investor. In comparison to a rental property occupied by a single person/family most commentators agree that HMOs typically provide greater income. Some very impressive claims are made for HMO yields. With yield figures of 17-20% or more often being suggested. Although in the current volatile market it is of course essential for investors to make their own detailed calculations.”

Do your HMOs achieve these figures?

I am sorry to tell you but people who think that getting 17-20% in a low interest, low activity & nigh only depression era economy are quite simply deluded and are prime prey for being deceived.

If these were true and reasonably achievable figures, everyone would be cashing out their life savings and other cash investments and piling like mad into BTL properties, which as you know isn't quite what is happening.

This life is riddled with traps, tricks, deceptions, thieves and confidence tricksters who know very well that there will always be someone who comes along that has less sense than money and who are happy to relive such a person of theirs.

My response to hearing of some great scheme, idea, investment is:

If X is that good, why would the proponent not be investing in it themselves like mad - why do they need to rope others into their scheme?

If you had a formula that could net you 17-20% yield on anything, would you really be telling everyone else?
Would you instead not already be fully committed with your own money, and perhaps borrowing more but not saying a peep to anyone?

Unless you know & trust someone very well, I would stay away from anyone peddling or even suggesting such an investment.

There's nothing for nothing.

[byterider]

It really depends what part of the country you are in and what type of HMO you have. I strongly believe that you should be aiming for 20% or near abouts. Having just filled my second HMO today I am on 18.4% for one house and 13.7% for the other one. My basic rule is if you can get a house where each bedroom costs you less than £20,000 then you get a very tastey yield. Obviously this rule is area specific to my location (Nottingham).