HMO Gross Yields and what is reasonable?

by Readers Question

10:59 AM, 25th January 2016
About 3 years ago

HMO Gross Yields and what is reasonable?

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HMO Gross Yields and what is reasonable?

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?net profit

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).

Robert



Comments

Neil Patterson

11:00 AM, 25th January 2016
About 3 years ago

This reminds me of a saying Mark uses:
Turnover is vanity cash is sanity.

Gary Dully

19:30 PM, 25th January 2016
About 3 years ago

Hello Robert,

I would not view a gross margin of 12% adequate in a HMO.

The costs as you have already indicated can be excruciating as I already have 6 of my own running and we need a minimum margin of about 21% to provide liquidity when things go wrong and I usually find that they do, when you least expect it.

I have previously been warned to expect 1/3 in maintenance costs at times and although not annually hammered for this amount, the wear & tear on HMO's in general appears to be very high.

I see that you are utilizing rent to rent or Lease Option, we'll done!

My HMO's are on mortgages, but thanks to Clause 24, this is no longer viable and I will now be utilizing a different strategy, possibly yours.

How are you looking forward to mandatory licensing for all HMO's in the new Housing Bill?

Chris Byways

20:13 PM, 25th January 2016
About 3 years ago

There are many areas where 12% would be very good. A friend has this at 11%

http://www.rightmove.co.uk/property-for-sale/property-50809898.html

The best houses do is about 5% gross. Which ain't much after costs. This is in the window, once at 150k, a faded picture, again at £140k, so it hanging around, and also for rent at £495pm barely 4.25%. You have to go much further afield for viable returns.

http://www.mccartneys.co.uk/pdf.php?vars=propertypdf-sales-mccrps-PRL080009

Then you have Sequre offering up to 18.4%.
http://www.sequre.co.uk/property-deals/uk/new-liverpool-apartments-returns-up-to-184-yields-up-to-98

Sounds too good to be true, and probably is. What's the catch(s)?

Justin Brooks

20:56 PM, 25th January 2016
About 3 years ago

Don't quite understand why your not satisfied with 12% GP. I've had a block of 6 flats which have no mortgage and valued at £200k. The rental income is in excess of £25k and net out at £21k. Over the last 12 years I've probably had a couple of months of none occupancy. Yes, I've had the odd problem tenant but that's life. I do all the management and maintainance which is very easy given the structure and fabric of the building but do try to set a high standard which attracts good tenants. As I approach a time in life when I MIGHT consider selling and investing the sale proceeds I have to take a look at the stock market and think how good this investment really is. Where can you get regular income, capital appreciation and, on average, 4 hours work a week. Great return and a good living to compliment other interests.

Robert Mellors

21:49 PM, 25th January 2016
About 3 years ago

Hi Chris

These are self contained properties, not HMOs. Therefore, a much lower gross yield is okay because there is much less work and much less voids and less damage or rent arrears etc. Certainly an investment which involves little work and gives returns of 5%+ may be quite good, and 11 or 12% would be an excellent yield on self contained properties, but HMOs are very different, as Gary recognised.

Robert Mellors

21:54 PM, 25th January 2016
About 3 years ago

Reply to the comment left by "Justin Brooks" at "25/01/2016 - 20:56":

Hi Justin

Again these are self-contained apartments, so a small yield for just 4 hours work per week is fine, but this is not the same as the level of work involved with running a HMO, or anything like the same costs involved. I think 12% on a straightforward investment property, i.e. a self-contained property let on a standard AST would be a very good return, but a HMO involves so much more than this.

Chris Byways

22:03 PM, 25th January 2016
About 3 years ago

Reply to the comment left by "Robert Mellors" at "25/01/2016 - 21:49":

They are actually HMOs as they are three or more floors, or because the council's says it is - to get licence money. I'm the right side of the border, so all though the council insist it is, it doesn't need a licence, and is a struggle to get 7.5% but that's OK by me.

Robert Mellors

22:09 PM, 25th January 2016
About 3 years ago

Reply to the comment left by "Gary Dully" at "25/01/2016 - 19:30":

Hi Gary

I agree that 12% yield on a HMO is not really viable. As you say the costs are higher, as is the workload, so a higher yield is needed. I don't know what type of tenants you have in your HMOs, but in my opinion the yield needs to be commensurate with the type of tenant, so those people who house professionals may need a lower yield than those who house DSS/LHA tenants.

Personally, I house a lot of DSS/LHA tenants, many of whom have other issues that add to the risks and workload, so my gross yield is huge, but by the time all the costs have come off then the actual net yield is not that much.

Yes, I utilise the rent to rent process, and have done since 2004, and this seems to satisfy the property owners as they have very low risk and virtually no work they have to do, for their 5 - 7% yield (excluding any increase in capital value). I do not benefit from any increase in capital value, so I am instead solely reliant upon the rental income.

I try to avoid Mandatory Licensing if possible by having a maximum of 4 residents in each property. I don't mind the fee so much (just another "tax" on landlords), it is the bureaucracy involved in the process that I dislike, so I hope they don't bring this in, but if they do then I will adapt as required.

Robert Mellors

22:14 PM, 25th January 2016
About 3 years ago

Reply to the comment left by "Chris Byways" at "25/01/2016 - 22:03":

Hi Chris

I may be wrong, but I think the 3 or more floors rule applies to a single self-contained unit, e.g. a 3 story house. I'm pretty sure it does not apply to a block of flats (assuming they are all self-contained) as each flat is only one story. - I would definitely suggest looking this up or seeking some legal advice on this (not from the Council).

Gary Dully

23:22 PM, 25th January 2016
About 3 years ago

Reply to the comment left by "Robert Mellors" at "25/01/2016 - 22:09":

Hello Robert,

I know you try to avoid mandatory licensing, we all do everything to avoid any regulation, but the new Housing Bill aims to put a stop to that.

That being the case, what are your plans?
Especially as in Liverpool the council asked us for details of our mortgage provider and roll number for our license application.

I have had 3 properties looked at elsewhere, one by Cheshire East, one by Lincolnshire and one by Flintshire Environmental Health, which has resulted in the 3rd bedroom in each being taken out of use (Box Room).
Which is a bit annoying as the estate agent said they were bedrooms when we bought the properties.

Apparently ex council houses we have converted are under scrutiny also, which is a bit of a cheek considering they were perfectly okay when the council architects designed them and we're happy to charge rents on them.

Due to the Gross Margins of about 23% it was possible to do so and as the post was asking about a 12% margin, such action would have made each one totally unviable, unless I viewed it as a hobby, which I don't.

As for wear & tear my HMO's tend to get hammered with damage, equipment misuse, theft of dryers, fridges, freezers and washing machines etc.
I now rent a lot of white goods as they can be renewed when made faulty by the tenants.

I am hoping that Clause 24 causes a reduction in rental property in those areas as the competition is fierce, but the increase in the rent a room allowance creates more problems with competition.

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