Everyone likes professionally shot photographs of immaculate interiors. Yet there’s more to running a HMO than having an eye for interior design and the ability to take a well lit photograph. Most people can’t wait to share photographs of their newly renovated show homes, but it’s much rarer to hear about the property a few months down the line once the tenants have moved in.
It’s exactly the day to day warts and all details that will help you as a new investor understand what running an HMO looks like in the long run. With that in mind, we’ve decided to lay bare the details of our 9 bedroom commercial to residential HMO project, Churchgate, over the course of a year since our first tenants move in last July.
Our approach with initial viewings is to start them about a month before the house is finished. Churchgate was no exception. The slight challenge was that it was back when I neither had a lettings manager, nor project manager on our team. Amidst arranging viewings and tenancy agreements, I was trying to fit flooring and bathroom tiles.
The schedule was running over so I focused on finishing each room in the order they were reserved. The first housemate moved in on 14th July 2017. When the last one moved in 4 weeks later I was still finishing bits off in their room in the morning. Nonetheless, the house was full. That gave us 6 months before we needed to worry about voids, right?
Within a few weeks we had an awkward situation with a housemate and decided it was best for them to leave. The room was filled quickly, but nevertheless a hassle we didn’t envisage.
A few months down the line our first experiment with a couple sharing a room backfired after their relationship ended. You can email me until you’re blue in the face about joint and several liability, but despite our best efforts we were down to receiving 50% of the rent on the room. It was time for another changeover within the first 6 months.
Things settled down after that, until the 6 month fixed term tenancies were up. At this point we lost another 3 housemates due to an issue with parking (see below). We were less than half a year into our biggest HMO to date and we’d lost over 50% of our housemates.
You can see from the details we share on the financials that despite a high turnover, our rent collection averaged out to a reasonable 92% of potential for the first 12 months.
Ideally, I’d have wanted this figure to be in excess of 95% like we achieve on our other houses. However, with the most recent 6 months trending higher than the first 6, it looks like we’re on the right track.
Income and expenses
It’s wise to track the financial details of any project. Not only does it make life much easier when submitting your tax return, it also means you can keep an eye on trends and spot problems early on. In joint venture like this project, it means both parties can clearly see how things are going.
We use a pretty simple spreadsheet for tracking the high level figures. It shows the total rental income, management fees, mortgage costs and other expenses on a monthly basis.
The average rent we collected over the first 12 months at Churchgate was £4,648.32, compared to our total potential rental income of £5,060 (92%). This was in a small part due to unpaid rents, but mainly down to void periods — particularly around February when we lost a few housemates at the same time.
Our highest grossing month was January, in which we took in £5,805 and our lowest was February at £3000. It’s common for January to show up as the highest because a lot of December rents due at the end of the month don’t tend to show up until early January.
As for expenses, our management fee is fixed, as well as our monthly mortgage payment of £1,451.56. Our other expenses fluctuate quite wildly, depending on what’s happened in that month.
We also include all of our running costs like utilities, cleaning and Netflix, as well as any maintenance costs.
So far maintenance has been pretty minimal, but we have still had some outlay over the year. This included rebuilding our entrance steps after removing a wasp nest, repainting the communal space ceiling after a shower tray flooded and some garden maintenance.
The remaining big factor in these costs has been utilities as British Gas seem incapable of billing accurately. Almost every month there has been a dispute with them. One month we were charged £600 for gas usage, which contributed to one of our least profitable months to date. However, the following month when we got a refund our figures looked extremely healthy.
It’s so important to look at these things over the long run rather than at one point in time. By keeping an eye on all of your finances you can spot irregularities and get them resolved quickly.
Over the course of the year our average expenses were around £1,000 (or 20% of our rental income). When you add in our mortgage costs and management fees, our total expenses were approximately 50% of our gross income, giving us an average monthly net profit in excess of £2,000.
DO: under promise and over deliver
After some unfortunate circumstances during the first few months, under promise and over deliver is the motto that stuck with this house.
The biggest (and still ongoing) issue with this house is by far parking. We expected a seemingly minor parking issue to be sorted after a couple of weeks and told our prospective tenants as much. They moved in and tolerated some hassle from neighbours for a while, but 6 months later the issues still weren’t resolved. The tenants were understandably reluctant to renew their contracts.
We ended up losing 3 tenants after the first 6 months because of this lack of parking. Lesson learnt: never promise anything you can’t 100% deliver.
With all the viewings since those first housemates moved in we’ve been totally transparent about the parking situation. We explain we’re trying to resolve the situation but that for the time being we can’t make any promises that there’s parking with the property.
We’ve still managed to keep our rooms filled with this less optimistic approach, (and have less fall-out as a result of not over promising).
DON’T: let to couples without understanding the risks
Despite being a 9 bedroom house, we applied for a license for 10 people. One of our rooms is more like a studio, which we felt was perfectly suited to a couple. Also there were no additional amenity standards for an extra person.
The room let quickly and for record rents. It achieved £700 per month, which as far as we know is unheard of in Stockport. Unfortunately though that was pretty much the end of the good news.
The relationship came to an end after a few months, which meant the rent dropped by 50%. Despite a joint and several tenancy, we expended a lot of time and effort pursuing the arrears from both parties and ultimately settled for a part payment.
It was enough to put us off renting to couples again. The rent premium isn’t enough to offset the additional risks and issues that come with managing the relationship. Keeping housemates happy can be challenging enough, but keeping a couple happy is a different ball game entirely.
Is it worth all the hassle?
It has been 12 months of ups and downs running our largest HMO, (thankfully leaning more towards the ups than the downs).
There seems to be a period after the renovation is complete where the real work of managing a house begins: new occupiers, new relationships and a healthy dose of snagging to keep on top of.
Perhaps that’s why after we’ve shared the glossy pictures we move on to talking about the next project so quickly, rather than focusing on the day to day realities of HMO management. Fingers crossed, up until now, things have always settled into a manageable routine after a few months.
There’s no doubting that HMOs are a handful to manage, yet with an annual net profit of almost £30,000 from a single house, I wouldn’t hesitate to try repeating this success again.
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