Do you know the lifetime performance of your HMO deals? Doing this exercise will help you plan ahead and make an informed decision on how to analyse your deals moving forward.

In this blog post, we’re going to analyse my very first HMO deal! I’m really excited to share this with you as I haven’t shared this sort of case study before. 

Read about the lifetime deal analysis of my very first deal below or listen to the full episode on The HMO Podcast.

The Numbers and Brief Context

When I looked back through the archives, I was pleasantly surprised about the performance of my first HMO deal, so let’s get started by looking at what I’ve made on the deal since I bought it. I purchased this deal back in 2009, and it was up and running as a student HMO in 2010. 

Over 12 years, I have made £282,159 through net rental income and capital appreciation. I think we can all agree that that’s a pretty staggering figure! That equates to an average of nearly £22,000 every single year, which is close to the current average UK salary of £25,971.

I bought the property for £109,500. This was right at the bottom of the market after the recession. I didn’t realise this at the time, but in retrospect, it’s become apparent that I bought it at the very best possible time. A key part of the deal’s performance is the timing.

Of course, I wasn’t able to recycle all of that capital out the following day. It’s taken time to get that value up. In fact, my last valuation from 2021 was £275,000, which is what I’ve based the numbers on here.

When I bought the property, I got a mortgage from The Mortgage Works. The rate was just over 4%, and I put a 25% deposit down, which was about £27,000. The bank then loaned me the rest.

Looking back on this deal really shows the importance of just getting it done and getting stuck in. I remember how nervous I was about the purchase. I had no experience, and we were in a recession. A lot of people were telling me to be careful as property values had slumped. There were a lot of question marks, but looking back, I’m obviously so glad I did it!

The Refurbishment and Improvements

The property was a three-bedroom semi-detached house and was previously owned by the local authority. I did a refurbishment on the property, which cost about £31,284. It needed a lot of work. I did mostly cosmetic work, but some building work was needed as well. For example, we took out a wall and put in a new kitchen and a second bathroom downstairs. 

There already was a large detached outbuilding in the garden, so we made that habitable. But overall, with the refurbishment, I focused on improving the condition of the property by painting, decorating, and adding some new doors. I still left the wallpaper on and didn’t strip everything back, which saved a lot of time and money. 

Looking back, I did a good job for then, but it’s definitely not the sort of project I’d share on Instagram now. This wasn’t an all singing, all dancing HMO like some of the incredible projects we see nowadays. This was very much a well-functioning HMO, but it wasn’t led by design. 

In 2017, I spent just over £7,000 on improvement works. It was primarily cosmetic, furnishing, and redecorating. The original kitchen, bathrooms, and flooring have held up. However, the furniture and decorating didn’t last, so that’s what I focused on improving.

The Lower Barrier to Entry 

The barrier to entry for this property was relatively low. At the time I bought it, there was no Article 4 direction, and it didn’t need a HMO licence. There also wasn’t any stamp duty due.

With the most recent re-evaluation of £275,000 and having retained a 25% deposit on that, the mortgage I have now is for about £260,000, and the residual deposit I have in the property is £68,750. 

My new interest rate is 1.74%, which is an amazing rate and the lowest it’s been over the last 12 years. At the moment, my mortgage repayments are about £390 per month. 

It was really easy to buy the property, even though I was a first-time landlord. They didn’t really care that I was planning to use it as HMO, and I didn’t have to jump through many hoops. Buying a HMO now is different. There are a lot more hoops to jump through, and lenders have more stringent criteria and stress tests. 

The Performance Across 12 Years

Let’s talk through the performance over the last 12 years. I’ve tried to be as accurate as possible here, but I had to fill in a few gaps. And an important consideration is that I’ve predominantly self-managed this property, so I haven’t incurred management costs. 

In the first year 2010/11, I netted just under £11,000. The following year I earned just over £11,000, and incrementally, almost every single year over the 12-year period, my net rental income increased.

We’ve been able to push the rent up, get better at managing the property and keeping maintenance lower, and also interestingly, my mortgage repayments decreased. Over 12 years, the net rental income has come to £155,423. 

That boils down to an average of £12,952 every single year. If you divide that by 12, that can give you an idea of the performance every single month, and it comes to just over £1,000 per month. Today, I always want to achieve at least £250 net per room. When I was first getting started with this deal, I wasn’t achieving that, but now it far exceeds that. 

In terms of equity gain, that’s come to £126,736 over the last 12 years up to when I refinanced last year to £275,000. So, I’ve made slightly more on net rental income than capital growth. 

The Importance of Rental Yields AND Capital Appreciation

When it comes to HMOs, you should be investing for yield as the first priority. You need to get that right. And if you get that right, you have strong rental confidence, and your margins are good, you’re never really going to have a problem.

But it’s still really important to buy in areas where you can earn capital appreciation! With the equity gain I’ve earned on this deal, I’ve been able to gradually pull-out equity, which has helped me build my HMO portfolio and business. 

If there was no capital appreciation during that time, I’d have missed out on all of that capital growth, and that has been absolutely critical to what I’ve been able to do in the rest of my business. 

It’s important to have a balanced portfolio with properties that perform both really well on a rental basis and with long-term capital appreciation. I also make sure to buy the types of properties that tend to go up in value over time. I focus on a semi-detached or detached houses with driveways and gardens.

Concluding Thoughts

The numbers are clearly great on this project, but when I zoom out and look at why I started investing in the first place and still invest in HMOs, it’s all about freedom of time and choice. That made me think about how much time my team and I spent running this HMO. Over the lifetime of this project, it has taken an average of around only an hour a week!

So, if you look at the metrics, I’ve averaged about £2,000 per month on both rental income and capital appreciation over 12 years. That is the real magic here, and that’s why I invest in HMOs. I hope this case study inspires you to see what’s possible, and I hope you’ve found value in looking at the performance of one of my deals over its lifetime. 

When investing in HMOs, everyone should be thinking about this. Don’t just think about what performance will be like on day one once you’ve done the refurb and refinance, but what will the performance be in two, five, 10, and 20 years down the line?

If you want access to resources and tools to level up your HMO property investment skills and ultimately scale your portfolio, become a member of The HMO Roadmap today!

About the Author:

Andy Graham is the founder and the lead trainer at The HMO Roadmap! He is also the co-founder of The HMO Mastermind and Smart Property, a specialist HMO property investment and management company. He writes as a regular columnist in different magazines about a variety of HMO topics and is the host of The HMO Podcast! Follow Andy on Instagram!