10:59 AM, 25th January 2016, About 6 years ago 19
I have recently seen an advert for a HMO for sale offering a 12.2% gross yield. As someone who operates several HMOs, I felt that this is perhaps not a very good yield at all, and I wondered what other landlords on here thought would be a reasonably good gross yield?
My reasoning for dismissing the advertised 12% gross yield is as follows:
As a HMO has huge running costs, and higher turnover of residents, the “gross” yield is not really very useful when calculating the net profit from a property.
For example, I have some properties that produce more than a 100% gross yield (i.e. the rental income from the rooms is more than double the rent*/mortgage paid out each month), but to establish the actual net profit (before tax) you need to factor in the other likely costs, e.g. utility bills, council tax, furnishings, repairs, damage, wear and tear, rent arrears, void periods, HMO licence, letting/advertising costs, legal costs, maintenance, time spent visiting the property and doing admin, etc, etc. When all this is taken into account, the 100%+ gross yield drops to perhaps 20-30% net yield.
Although I operate in a different sector of the market, so my costs may be considerably higher than the costs on the particular property I saw advertised, nevertheless, I don’t think a 12% gross yield would generate a positive net yield. Therefore, any potential investor should be aware of these costs and would need to factor them in to their calculations of potential net running profit, and when this shows as being low or negative, then they should perhaps base their investment more on the potential increase in capital value of the property rather than the gross yield.
Gross yield does NOT = net profit.
* In my case I lease the properties from owners and then sublet them, so I do not pay a mortgage, I pay a rent each month, and my gross yield is the difference between income coming in and rent going out. (My net yield (before tax) is the income coming in minus ALL the costs going out).
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