Updating post from Reddit.
5 bed existing tenanted HMO, £335k and £27k net. I’m a first timer, in my head, I can’t get over the 25% deposit down (£85k) hassle factor and is it worth it, gut says yes but head says it’s a lot of money in a deposit to tie up. Thoughts?
So roughly 15k mortgage, so profit before tax is 12k. Budget 10% for maintenance and insurance. Additional 10% if estate agent fully manages or 7% if rent collection only service. So about 5k for maintenance, insurance and management fees.
Profit down to 10k minus tax. Assuming this isn't your only source of income and you are a higher rate tax payer then your likely yearly profit is around 6k mark or £500 per month.
I haven't added in buyers costs or stamp duty in the calculation either or adjusted this amount in the borrowing costs. That's an additional 22k borrowed so would reduce your monthly profit to roughly £400 per month.
Bank interest on your initial cash investment is about £3400 lost so subtract from profit. £112 monthly gain in real terms of you have full occupancy, no voids or significant renovations needed.
Umm not convinced it's worth the hassle unless you think the property is likely to substantially increase in value and outpace inflation in the period of ownership.
So meticulous that evaluation.
How much can you deduct from taxes? You seem to have take off taxes at the end
Rough ball park calculation the op could claim 20% tax relief on the mortgage payments. The point is the gains after mortgage costs are slight and in reality you are betting on the property increasing in value significantly to see a reasonable gain when you sell minus the 28% capital gains tax.
House prices arnt predicted to gain double digit gains anymore so it's a difficult time for any BTL LL in the present climate.
Any LL who's been doing this knows new bathroom, kitchens and boilers have a far shorter ware out time compared to owning your own home which is well looked after so you have to factor in significant renovation costs if your owning for 20 odd years. Also void periods are costly, no rent coming in, bills on property and even costs to repaint a house have spiralled even if you DIY it. Setup fees by agents typically 1 months rent each time you have a changeover of tenants plus cost of void on top.
Then you have to consider the current EPC rating and can you afford to make home upgrades to meet likely upcoming changes in the regulations this could be a few thousand to tens of thousands depending on property age and condition.
Overall it's really worth running all the numbers to see if it's worth it.
Maybe in a limited company if you had 5 properties or more you could be in acceptable levels of profit but as a single LL with one or two btl properties the numbers really don't stack up well today but that could change in the future.
Sincerely, thank you for your good advice 👍
Whats the ROI? That will tell you if its worth it
Bit tight. If interest rate rises you could be in trouble and any non payment of rent or vacancies then you could also be in trouble. How long is the hmo license with the council for? Are there any environmental health enforcement orders on it? Do not use an agent! Arrange with some maintenance people you can contact yourself instead and use Openrent collection service. Does the boiler comply? Is there an electrical certificate? These are important things to check.
Sincerely, thank you for your good advice 👍
Where is the HMO based? Whats the cost of maintenance and yearly fire alarm checks? Are you doing this under a Ltd company?
Thanks, located in a major city in the south, cost of maint is 5-7% more than the NET. Will most likely do via a LTD co but will be taking tax advice on this.
Are you sure it's net? When rentals are advertised, they normally show the gross figure.
If it is net, what has been done in the year used to get the figures? Most likely very minimal repairs and renewals, i would guess.
Yes, NET
So numbers are £255k mortgage - costs about £11k a year of interest
Budget on £3k for repairs assuming there is nothing big that you are aware of that needs doing
Then if you are using an agent to source tenants assume the same again in fees.
I figure this leaves you £10k profit which is tidy enough off £85k about 11% roi - though keep in mind there is tax to be paid on this
If the property goes up 3% in value then that’s another £10k or 11% growth on your investment - there is also tax to be paid on this if you sell
How much do you currently earn? Your tax situation can change these figures significantly… especially because the mortgage interest isn’t wholly deductible.
You could have a £6200 tax bill (even after residential finance relief) on your rent if you are higher rate
Sincerely, thank you for your good advice 👍
are all the rooms currently let and are they in good condition? Fixable but sometimes the sellers put potential let rather than actual.
Yes, all rooms are let, there are some minor things that need doing, but essentially, all good to go. Current HMO landlord is retiring.
All it would take is a few problem tenants or the government to change the rules again and this could soon become a complete nightmare and not profitable.
Sincerely, thank you for your good advice 👍
Would not consider an HMO unless the gross yield was above 10% at the very least.
Net yield is around 8%, gross around 13% before tax.
It'll make you super popular among your neighbours. While on paper you might make more money, people are getting so sick of HMOs. Speaking as a landlord of a 5 bed property that could well have been HMO'ed, it's not worth the headache unless you're happy being the guy everyone blames for the rising crime in the neighbourhood, and will answer such flaming with a twirl of your moustache and a "Mouahaha!" cackle.
I live in a part of Birmingham that somehow has ended up with 84 HMOs just in our neighbourhood. We've organised a group to object to any more. Violent crime is through the roof here, as are vehicle thefts and burglaries, and we've got together a neighbourhood watch to coordinate CCTV surveillance. 9 times out of 10 these guys are going back to an HMO. Sick of 'em.
Short answer, yes.
Thank you everyone for some great feedback, lots of valuable opinions from everyone here, sincerely thank you 🙏