There is an easy way to calculate profitability and that is this – the last two rooms in a 5-bed or 6-bed are your profits. Anything less than 5 bedrooms is usually a waste of time because the rents won’t add up to much more than a single let after you take into consideration utility bills, added expenses for conversion (such as fire safety) and Council Tax. And personally, I feel even a 5-bed is a waste of time as it costs virtually the same to run as a 6-bed.
If you really want to maximise returns, you can go bigger. Certainly, if you’re looking to finance on a Commercial mortgage, you need at least a 7-bed property to do this (though there are a few ‘Semi-Commercial’ options for 6-8 beds) and something larger such as a 15-bed would surely maximise your profits. The answer to that is a yes, theoretically and it all comes down to how you plan your HMO.
If you’re going to go above 6 letting rooms then 9 is a sensible number to go for. Over 10 rooms and you’ll need a second kitchen (though kitchens shouldn’t where practicable be more than one floor away from the rooms anyhow so townhouses can be a challenge). Depending on your target tenant type too, you’ll be looking at increasing conversion costs such as En-suites / Off-suites for each room or making sure there are additional bathrooms available. Utility usage will go up of course as you add more people, as will costs such as broadband (because you’ll need stronger Wi-Fi to reach every room and potentially another line or even two to make sure everyone can realistically use it productively).
The real problem with ‘super HMOs’ though, is people. Because when people have to share resources too much, tempers start to flare. The house becomes less pleasant to live in and you will find if your HMO has not been planned out well, that your tenants will bicker and therefore start to churn. Which means voids and time spent on finding new tenants, plus operational time expended in trying to resolve issues.
What many landlords often forget is that people want to live in the nicest places they can afford to. And if you cram people in to spaces that become too small, friction will build. History shows us that wars often start when fighting over the same resources and sadly, you’ll have a war in your kitchen too if tenants can never wash their clothes because there is only one machine and one selfish tenant leaves their clothes in all day. Or they can’t get to cook because the 4-ring hob doesn’t offer enough space for others to use in parallel, or at least have a microwave to heat up some pre-prepared food. Or the sink has no draining board for their washing-up, the shower is always occupied, the bins fill up too quickly and are never emptied…it doesn’t take long before tempers flare and if you’re the sort of landlord who ignores these issues, your tenants will walk.
So, the key to having a profitable HMO is simple and can be summarised as thus:
- Aim for a 33% operating margin (the last two rooms are your profits in a 5 or 6-bed HMO)
- Utilise all the space wisely
- Provide enough facilities for people to use comfortably
- Make sure that people see value for money by having a communal cleaner once a week, good strong Wi-Fi, a reliable boiler and hot water / heating and maintain the property as you would a hotel
Some of the points involve spending a little more – but you will reap the savings with the reduced voids and quick tenant check-ins from people who want a nicer home to live in.
And my last point on this – be very, very careful if looking to operate as a Rent-2-Rent landlord. Twenty or thirty years ago, this was a viable strategy if not perhaps, an always ethical one. However, tenants expect more from their properties now and you simply cannot spend enough on an existing house or apartment to make it more desirable if you are only renting it. You can’t put in extra bathrooms, or re-do the kitchen because your capital expenditure would be wasted (unless your margin is sky-high in which, good luck to you!). And unscrupulous ‘sourcers’ and landlords who sell on R2R deals know this. That is not to say R2R doesn’t work because it can work – but I have rarely seen it work for HMO’s, instead hearing tales of woe as people who thought they were going to make an extra £500 a month to top up their income actually accrue losses. Maintenance, Fire and Safety, tenant well-being, utility costs…it all adds up staggeringly quickly and if you have a void rate of 15% on a 6-bed property or 20% on a 5-bed, you will not make any money with R2R (but the landlord will!). You will ONLY make money on these types of deal if you can secure 100% funds every month – and to do that in an increasingly competitive world, you need to be better than the competition. Which almost always involves capital expenditure which you can’t do.
So, if you want to be profitable, make sure you have the best HMO and always think like Jeff Bezos of Amazon did and ask yourself ‘what do my customers want?’. Get the answers to that right and you will undoubtedly succeed.