Oftentimes we get asked about how much it should cost to renovate an HMO, or how much you should pay to buy an HMO, but rarely do we get asked what I think it the right question – how much should I be spending in total on an HMO bedroom?
The total cost, including the purchase price of the building, plus the renovation costs, plus any additional fees like planning permission, conveyancing etc, is the number that really tells you about the success or otherwise of a HMO project.
And despite most investors overlooking this critical number, it’s the first one we focus on during our early stage analysis of a potential HMO, and we take it even further by breaking it down into a target ‘total cost per room’ that we can use as a very easy metric for assessing the viability of anything we view.
What is a total HMO cost per bedroom?
What I mean by this, is a figure that tells us how much we can afford to spend per bedroom for a finished, up and running, ready-to-tenant shared house.
The number should include all costs associated with the project (purchase, renovations, and other costs), and can then be multiplied out by the number of bedrooms you’ll be able to fit into any given property to tell you what your total spend can go up to whilst still making an acceptable profit.
Let’s look at an example…
In the area we invest, I know before walking into any viewing that if we can bring the whole project in for £40,000 per room, we’ve got a good investment on our hands.
Let’s say a building is on the market for £140,000 and with the space available we could comfortably convert it into a 5 bedroom HMO. Without even opening our deal analysis spreadsheet, I know that as long as we can complete the conversion for £60,000 or less then it’s worth pursuing as it’ll meet our ROI targets.
5 bedrooms at a cost per room of £40,000 = total available budget of £200,000
It doesn’t require us to break down the renovation budget to any real level, so long as we’ve got a rough idea of what the costs will be. If it’s well below £60,000 we’re on to a sure thing. If it’ll be close then it requires a bit more number crunching before making an offer. And if it’ll cost a lot more then we walk away without wasting any more time on it.
How to calculate how much you can spend per HMO bedroom
Your total cost per bedroom will be different than ours, depending on where you invest and what your acceptable levels of return are.
You can calculate it based on gross yield, net yield or ROI (although frankly I think gross yield is a waste of time), and we have a handy excel/google sheets calculator you can use to help.
Access our free HMO Cost Per Bedroom calculator here:
Simply speaking, you need to know what your average monthly rental income per room will be for your area, and your desire yield/return on investment. If you’re looking at net yield you’ll need to know your expected net profit percent as well (we aim for 50%), and if you’re looking at ROI (our preferred metric) you’ll need a few other bits of information explained in the calculator template and the video at the top of this page.
The rental income less your running costs, divided by your target net yield percent will tell you exactly how much you can afford to spend per room to achieve your targets.
Return on Investment
If you also add in your end value (either commercial valuation or bricks and mortar) and mortgage LTV amount, you can calculate how much you can spend to hit your target ROI (minimum of 20% for us, but ideally 30%+).
What’s the point of calculating this figure?
We use this figure during our first viewings on a property, and even beforehand. By calculating the cost per room we can afford to spend for an HMO that meets our investment targets, we know immediately based on how many rooms will fit into the building whether or not that particular property has potential.
If the combined purchase price and renovations are significantly higher than our target cost per room, then we move on without wasting time.
If they’re close to or under our target total cost then it moves to the next stage of our appraisal process.
It has another advantage though, as you can use it to determine whether particular works are a valuable investment.
For example if we know a room that costs us £40,000 brings in a return on investment of 25%, we can better assess any works that would add additional bedrooms.
If we were looking at a property for sale at £120,000 that required £60,000 spent on it to create a 4 bedroom HMO, that would give us a total cost per bedroom of £45,000.
Using our metrics, we’d rule out the deal at that point and move on to the next one.
But… if we also knew there was potential to convert the loft into 2 further bedrooms, and the dormer conversion would cost £40,000, that would give us a 6 bedroom HMO for a total cost of £220,000. Our total cost per bedroom would then only be £36,667 and we’d be rushing to get an offer accepted.
Adding bedrooms for less than your target total cost per bedroom not only gives you the extra space, but also reduces your average total cost per bedroom across the whole building.
Knowing how much you can afford to spend to create space is just as valuable as knowing how much you can spend to convert it!
Still not convinced?
I promise you this is one of the few metrics we rely on all the time, so download the spreadsheet, watch the video at the top of this post, enter your figures and I’m positive it’ll become a handy detail to keep up your sleeve for quick appraisals in future. You can thank me later (or tell me I’m a fool if you’re still not convinced).
Access our free HMO Cost Per Bedoom calculator here: