Now, if you’re looking to make your money work harder, or in fact, if you’re looking to make somebody else’s money work harder than you can do worse than consider investing in an HMO.
Welcome to this week’s edition of Money Matters because after all, money does matter.
What, I hear you ask, is an HMO? Well, an HMO is typically a regular house, could be a flat, and it’s where you’re not letting the property by the month to a family, you let in a room by the week, typically, to individual, maybe a couple. And they want they want the bills included, gas water, electric, Wi-Fi, council tax, so you’re getting a flat rate for the room. So if you like the idea of maybe increasing your cash flow, but still just buying normal properties, how can you do it? Let’s have a look first at why you would do that. Well, let me give you some real numbers. We’re just buying one at the moment here in Doncaster. I could give you all sorts of figures. I’m going to give you the easy figures from where we operate because that’s what I know. We are buying a three bedroom, three bedroom, two reception terraced property.
Now, there’s all sorts of rules and regulations that came in in October 2018 that made investing in HMOs more difficult. If it’s got five or more bedrooms in England and Wales. Scotland, three. Which means in England and Wales, you want to get your first one, get one with 4 bedroom.
Now, why am I buying a three bedroom house, and I’m going to use it as a four bedroom HMO? Well, I’ve got four bedrooms, sorry, I’ve got three bedrooms, but then I’ve got a lounge and a dining room. So I can have the three bedrooms as bedrooms, and then I can use one of the downstairs rooms as, one of the reception rooms, as another bedroom which is fine because the kitchen’s nice and big, they can share the kitchen, on top of that, we’ve got an upstairs bathroom, and in addition to that, there’s a downstairs toilet. For four people, that’s good, isn’t it? Four people sharing a house, sharing the kitchen, sharing like a public room, a lounge, so they can all watch TV together or whatever else they want to do. Chat and whatever, catch up. And then, okay there’s only one bathroom, but at least there are two toilets so it shouldn’t be too congested of a morning. How much does all this cost, Paul? Well, the offered we had accepted on this particular property is £65,000.
Now, okay that’s a good deal. But let’s say even that you paid £70,000 or £80,000, which is probably more like what we should’ve paid, but we’ve been doing this a while and we got good networks and whatever. We know how to get properties direct to vendor, but let’s say for the sake of this example that you spend £80,000, but you get a four bed HMO. Now, this particular property, if it was let as a single let, you’d be getting £550 a month. And if you do the figures based on, say you bought it for 80, say you got a 60 thousand mortgage, say it was 2%, £60,000 buy-to-let mortgage, well 2% of 60 thousand is £1200. £1200 a year divided by 12 months is £100 a month, so you can do the figures. It works all day long as a buy-to-let, but if you take the same property and instead of renting it out for a few hundred pounds per month to a family, or something, you let the individuals rooms out for £80 to £85 a week, what do the numbers look like now? Get a piece of paper, write it down. So if you got 80, let’s be conservative, £80 a week times four is £320. Four eighths of 32, so four times 80 is 320. 320 times four, because you got four weeks in a month, is 1280. Oh, that’s a lot of money, isn’t it? But it gets actually a little bit better than that because there aren’t four weeks in a month, there are 4.2 weeks in a month. Because as you know, I’m sure some months have got weeks, and some weeks, some months have got five. The average through the year, it’s 4.2.
So you got 1280, but if we add on the 0.2, you’re actually closer to 1350. So instead of getting a rent of five, 600, you’re now getting a rent of 13, 14 hundred. But you got to pay the utilities. You got to pay the Wi-Fi, you got to pay the council tax. Now, add those all together, you’re talking £300 a month for a property like that. So take your 1350, take off £300 for utilities, you’re back down to 1050. What else do you get to make allowances for? Well, what we do is we like to keep all of our properties in tip top condition, so we allow 25% for let in fees, for our agent’s fees, for voids, for maintenance, for all of this stuff, so let’s drop the £50, let’s say the £50 covers your insurance. So you’ve now got £1000, take off 25%, so it takes you to 750, now take off your £100 mortgage, its £650 per month profit after all costs. On a £65,000 to £80,000 property. You can’t do that with a single let. So the returns are much higher. So if your first HMO, I’ll be saying something different if you’re an experienced investor. I’d be saying get a bigger HMO because it’s more efficient, and more of that on another day. This is just to get you looking at your very first HMO. You’re going to avoid having to comply completely with the vast majority of the HMO regulations if you’ve only got four rooms. You still need to keep an eye out for local authority council requirements like minimum room sizes and stuff like that, but essentially, if you come and do a two day course with us, we can teach you the ins and outs of how to do all this, and very quickly you can be buying houses to turn into four bedroom HMOs with zero spent.
Now, if you add to that the little twist of if you buy it for 65, but get it revalued up to 80, 85, you can pull your money out, so we can do this and get all of our money out, and I can teach you how to do that too. And the final thing I’d say to you is to make sure you’re not clobbered by all the anti-landlord legislation, don’t buy it in your own name, set up a limited company, we can teach you how to do that as well, and buy your HMO in a limited company. So to summarize my top tips for your first HMO, number one, make sure it’s an affordable property, number two, make sure you’ve got somebody really good to manage it for you, number three, make sure that you’ve got a basic understanding of the ins and outs of both national HMO regulations, but also the local stuff, and a couple of days will kill that for you. Number four, do a limited company, and fifth, enjoy because if you can start picking up properties where you can recycle your money out and make £600 a month, how many of those do you need for complete and absolute financial freedom? £5,000? £3,000 a month profit? £10,000? £6,000 a month profit? 20? £12,000 a month profit?
You get the right training, you get the right support, you get the right education, come check us out at Touchstone, come and see us. Come on one of our free courses, just come and check us out. Do a webinar with us. Learn how to do this. Most people, right application, right knowledge, right support, completely and absolutely financially free within a year. [Click here to watch full episode]
If that sounds good, I’ll love to work with you on it.