What if I said that more than half of the investors fail to understand how to arrive at few very important metrics that an investor has to live and die by when it comes to HMO property investment?
There are a few important parameters every HMO property investor has to know, in order to define if a deal is really a deal or not.
Often though, the emotions and urge to build their HMO portfolio quicker gets better off the investment community leading them to accept a deal that in reality becomes a liability later than an asset.
So how do you ensure you don’t fall into that trap?
By understanding how to calculate the very basic metrics that define a deal that you are investing in.
Here are four such basic metrics explained.
Gross yield is the one that you usually hear from estate agents when you wish to buy an HMO and is simply the annual income you can earn on the property divided by the purchase price of the property.
Gross Yield = Annual Rent / Purchase Price
It usually is a percentage ranging between 4% to 8% in London and being able to achieve higher if you are investing outside of London.
The issue with this is, it does not take into account any of the expenses you will incur on your investment on a monthly basis.
Net yield, on the other hand, takes into account the costs you will incur on an annual basis and will give you a yield return post those expenses.
Net Yield = (Gross Annual Income – Costs Per Annum) x 100/ Purchase Price
Here is the thing:
The whole game of property investment revolves around being able to successfully taking out the money invested in the property and refurbishment in the form of refinancing.
Question though is:
Would you be happy as an investor to assess an HMO deal based on just the yield and not worry about how much money you are leaving in the deal?
If you would not, then you need to be able to assess your returns on the investment you made.
Return On Investment
When you offer on an HMO with an intention to take out all the money you invested in the form of refinancing or just leave as minimum as possible within the deal, you will want to know what is the return you can get on the money you are leaving in the deal.
This is where ROI or Return on investment comes into play.
Return On Investment = Net Profit x 100/ Total Investment
It’s simply your net profit (i.e. Rent – All Expenses) divided by the total money left in the deal (or simply your investment).
A typical percentage that the wider investment community looks at is to achieve anything from 15% to 35% on ROI whilst the more you can get the better.
The single most important metric you will have to measure each and every month for pretty much every property unit you purchase with a view to let is Cashflow.
How much have you spent on the property in a particular month versus how much income have you earned, just gives you the profit you have earned on the property.
Cashflow = Total Income – Total Expenses
If you don’t earn cashflow on an annual basis on the HMO taking all expenses into account, that isn’t an asset anymore and hence a unit that probably needs to be sold out.
Needless to say, the more you are able to earn on the HMO as income the better will be all the metrics above.