HMO Yield Calculator

How HMO yield is worked out

Yield is a year's income from a property divided by what the property cost, written as a percentage. An HMO is let by the room rather than as one home, so its income starts from the rooms: the number of lettable rooms, times the average rent per room per month, times the months in a year. That is the gross room income, and divided by the price it gives the gross yield.

Gross yield flatters an HMO more than it flatters a single let, because a shared house carries costs that a single let usually passes to the tenant. The landlord of a bills-included HMO pays the gas, electricity, water, broadband and often the council tax. Rooms turn over more often than whole houses, so voids matter more. Management of a shared house is more work, and agents charge for it accordingly. Most HMOs need a licence from the council, and many need communal cleaning and extra fire-safety maintenance.

So the calculator works down to a net figure in this order:

• Collected rent: gross room income less the void allowance you enter.
• Operating costs: bills, letting and management (taken on the rent actually collected, not the full rent), maintenance, insurance, the licence spread evenly over its term, cleaning and anything else you add.
• Net operating income: collected rent less operating costs, before any finance or tax.
• Net yield: net operating income divided by the purchase price, and again by your total money in (price plus refurb and purchase costs).

Showing the yield both ways matters for HMOs in particular. A conversion often costs a large sum on top of the price, and a yield quoted on the price alone ignores money you have actually spent. If you entered your annual mortgage interest, the result adds one line for net income after finance. It is not a finance model; the deal analyser does that.

Worked example

These figures were produced by running this page's own calculator on the inputs shown, so the arithmetic is the calculator's, not ours.

A 5-room house bought for £300,000

The rooms let at an average of £600 a month each. The landlord also spends £20,000 on conversion work and £18,000 on stamp duty and legal costs, allows 5 per cent of the rent for voids, and pays an agent 12 per cent of the rent collected.

On the purchase price the gross yield is 12.00% and the net yield is 6.27%. On the total money in, £338,000, the net yield falls to 5.56%. Each room earns £3,759.20 a year after costs.

Quoted the way HMOs are often advertised, on gross rent and the price alone, the same house shows 12.00%. The gap between that and the net yield on the money actually spent is the cost of running a shared house.

Common mistakes

• Comparing gross with net. A gross HMO yield set against a net figure for a single let makes the HMO look far better than it is. Compare like with like, and use the rental yield calculator for the single let.
• Leaving out bills. In a bills-included house the bills are often the largest running cost. Add a full year of every bill, not a typical month.
• Charging management on the full rent. Agents charge on rent they collect, so empty rooms reduce the fee as well as the income. The calculator takes management on rent collected.
• Ignoring the licence and the conversion. A licence fee covers several years and a conversion is money in. Spread the first and include the second, or the yield is overstated.

What this calculator does not cover

• Income tax, Section 24, corporation tax or capital gains tax. Use the Section 24 calculator, the capital gains tax calculator and the deal analyser.
• Mortgage payments, loan-to-value or lender stress tests. Only the annual interest you enter is taken off, for one extra line.
• Stamp duty. The stamp duty calculator works it out; enter the result as a purchase cost.
• Council-specific HMO licensing, fees, planning permission or fire-safety works. These vary by council; enter your own figures.
• Rent growth, capital growth, a sale, or anything beyond one typical year.