Please help with my overheads estimate for an HMO

Also account for:

a high level of wear and tear;
unpaid rent;
legal fees e.g. if a 4 bed HMO then calculate legal fees for at least 4 x the amount you would if it was an AST to a family;
court fees (if not counted as part of the legal fees);
cost of administration time (x however many tenants in your HMO);
cleaning costs;
HMO insurance (more than BTL insurance);
malicious damage;
debt recovery costs;
garden maintenance (nobody in a HMO will take responsibility for this, so treat it as a maintenance cost for the landlord);
extra keys & lock changes & door repairs;
furniture and white goods (frequent replacement due to extra wear and tear, thefts, damage, etc);
high turnover of residents, so more voids (so no rent for the empty room during the voids);
fire safety equipment;
HMO regulation compliance (e.g. fire doors, closers, hard wired fire alarm system thumb turn locks, etc, etc);

These are just a few of the extra costs you are likely to encounter when letting as a HMO.

Gilli - your figures seem fine. Why though are you intending to pay the utility bills and council tax in your shared HMO house? These should be paid by your tenants, just as with the single-let approach. If you intend to offer individual HMO tenants a bills-inclusive deal, if they claim this helps them manage their budgets, you should simply add these costs to the rent; they should not be treated as business costs at all because whether it's an HMO or single-let property, the tenant pays one way or another. In my experience the costs are much the same overall, whether it's an HMO or a single-let property.

As someone who's been letting HMOs since 1992, the key plusses and minuses are:

Good: if you suddenly lose one HMO tenant or she becomes a non-payer, you are still receiving a regular income from the rest of the tenants. With a single-let house, however, if your tenant stops paying or suddenly moves out, you could be in trouble with your cashflow because you are receiving nothing.

HMOs are significantly more affordable than renting a flat or house on your own, because all the bills are shared. They are therefore attractive to good-quality steady-earning graduate tenants who want to live cheaply and peacefully and save a deposit for a house, whilst potentially finding ready-made friends amongst their housemates and having the flexibility to move out easily when their circumstances change (new job, graduate degree course or partner). If you focus on that sort of tenant, and have good transport links, good access to a supermarket, and/or plenty of parking, you're unlikely to fail. Anyone who rents their HMO to undergraduates or benefit claimants is a braver person than me.

Bad: wear and tear tends to be higher, and it is much harder to enforce claims for damage (it's always one of the other tenants' fault).

You may need occasionally to sort out disputes between the tenants, and crack the whip a bit over keeping the common areas tidy. A threat to impose a cleaner on the property at their expense generally does the trick.

There is also more work with tenant-finding, as people come and go, but if you are in a good area and have kitted out the house sensibly, there is usually steady demand for places.

I wouldn't obsess too much about your running costs; choosing the right property is much more important in the long run.

Reply to the comment left by "Tony Atkins" at "13/10/2015 - 14:26":

All good advice, but in relation to Council Tax, it is the landlord who is legally liable to pay this to the council, so that is why it needs to be factored in as a running cost. However, as you point out, there is nothing to stop the landlord increasing the room rent or service charge to cover this cost.

Reply to the comment left by "Robert Mellors" at "13/10/2015 - 14:23":

Robert's list of potential costs also applies to single-AST lettings too; in my experience HMOs are no more expensive than single-lets to run, except for wear and tear. I find insurance costs are the same for either type of property, unless you are talking about a really large HMO of more than 5 people. Garden costs - single-AST tenants don't do gardening either - they will at best cut the lawn. In my HMOs I supply a mower just as I would for a single-AST property and tell the tenants they can either mow the lawn themselves, or I will employ a gardener and add the cost to their monthly utility bill.

I find I have fewer voids with an HMO, not more. Occasionally a room is free, but I'm still getting 75-80% of the regular rent and bills, whereas a single-let property can sit for weeks and weeks until it finds a tenant, with nothing coming in. My only large losses due to unpaid rent have been from a non-paying family, whereas non-paying HMO tenants have never owed me more than a few hundred pounds before they moved out.

Wear and tear by families with children can also be much more than from sober-sided single graduate tenants, who are more concerned about polishing their cars and practising their squash strokes than having wild parties . . .

I'd put up your estimate for insurance but most others look OK. There are some advantages to including utilities as tenants then use the dryer instead of draping wet clothes everywhere and damaging surfaces. You could put a cap on what you will pay and (if you have set a sensible limit) most will keep to this. Wear and tear - who knows? We have had students who really look after the place and families who appeared to have taken a hammer to the walls, or ones who left so much food waste we got mice and rats. Check them out carefully but be prepared for the bad ones. In an HMO, including a weekly cleaner for communal areas may give you a bit of advance warning of problems.

I believe a landlord is not required to provide an Environmental Certificate if there are individual tenancy agreements in place.
http://www.thetenantsvoice.co.uk/advice_from_us/legal-protection-for-hmos-and-tenant-rights/

Reply to the comment left by "Tony Atkins" at "13/10/2015 - 14:26":

Dear Tony

Can you recommend any broker offering good HMO insurance? I have been using someone called "Rigsby" and I sense they are about to jack up the premiums.

Many thanks if you can help

Simon Williams

Hi Simon,

Our insurance team can offer HMO insurance as well so please feel free to fill in the contact form here >> https://www.property118.com/insurance-landlords/

Thanks Neil. I have filled in that form actually (on the weekend). Hoping for a call back. Simon