How Much Profit Does an HMO Make After Expenses?

A professionally managed five-bedroom HMO in South East London generating £57,000 a year in rent could retain approximately £32,820 after operating costs, before mortgage payments and tax. In this worked example, a £1,500 monthly mortgage payment would reduce the landlord’s pre-tax cash profit to approximately £14,820 a year, or £1,235 per month.

This is an illustrative example rather than a guaranteed average. How much profit an HMO makes depends on its room rents, occupancy, energy consumption, property condition, management fees, borrowing costs and unexpected repairs.

For help managing your HMO in South East London, speak to the Sturstons team.

HMO income and profit are not the same

The total rent collected from an HMO is its gross rental income, not the landlord’s profit.

An HMO may generate more rent than a conventional single let because the rooms are rented separately. However, the property will usually have higher running and management costs. Depending on the tenancy arrangements, these can include utilities, council tax, broadband, cleaning, repairs, licensing, safety compliance, insurance and management.

When assessing performance, landlords should distinguish between:

• Gross rental income: all rent due before costs are deducted.
• Operating profit: income remaining after operating expenses and budgeting allowances, but before mortgage payments and tax.
• Pre-tax cash profit: the amount remaining after operating expenses and mortgage payments.
• Post-tax profit: the final amount retained after the landlord’s tax liability.

This article focuses on operating profit and pre-tax cash profit because the tax position varies according to ownership structure, financing and the landlord’s other income.

Five-bedroom South East London HMO profit example

Consider a five-bedroom HMO in South East London, with each room producing an average rent of £950 per month, including bills.

On these assumptions, the property generates:

• £57,000 in gross annual rent
• £32,820 after operating costs
• £14,820 after the illustrative mortgage payment
• Approximately £1,235 per month before tax

The mortgage figure is illustrative. A landlord with a smaller mortgage would retain more, while one with higher borrowing costs would retain less. A mortgage-free property would retain the full £32,820 operating profit before tax.

This calculation also excludes the original deposit, purchase costs, refurbishment expenditure and major improvements. These should be considered when assessing the overall return on the money invested.

Estimated HMO operating costs

The £24,180 operating-cost estimate can be divided as follows:

These are estimates for this particular worked example, not fixed prices or a universal HMO average.

Maintenance reserve

The £3,600 maintenance figure is a budgeting reserve, not necessarily an amount spent every year or a fixed £300 monthly bill.

Some months may involve no repairs, while another could bring a boiler breakdown, plumbing issue or appliance replacement. Allowing for maintenance provides a more realistic long-term profit forecast than assuming nothing will go wrong.

Unspent reserve money still belongs to the landlord. However, it should not automatically be treated as available profit because it has been allocated towards future property costs.

Void allowance

The £2,850 void allowance is also a budgeting provision rather than a regular payment. It represents 5% of the property’s potential gross annual rent.

If all five rooms remain occupied and every tenant pays in full, the landlord may not lose this amount. However, accounting for empty rooms, changeover periods and possible arrears prevents the profit forecast from relying on perfect occupancy.

Licensing and compliance

An HMO occupied by at least five people forming more than one household will generally require mandatory licensing. Councils can also operate additional licensing schemes covering other HMOs, so the landlord must check the rules applying in the property’s borough.

Licence fees, renewal periods and local requirements differ between councils. The figure in the table spreads estimated licensing and safety-compliance costs over several years; it is not necessarily paid in equal monthly amounts.

For a fuller breakdown, read our guide to the cost of running an HMO.

How mortgage payments and tax affect HMO profit

Mortgage payments can create the largest difference between an HMO’s operating profit and the cash its owner retains.

In the example, a mortgage payment of £1,500 per month reduces the annual amount remaining from £32,820 to £14,820. The actual result will depend on:

• The outstanding mortgage balance
• The interest rate
• Whether the mortgage is interest-only or repayment
• Mortgage arrangement and broker fees
• Whether the property is owned personally or through a company

With a repayment mortgage, part of each payment reduces the outstanding loan balance. Although the whole payment affects monthly cash flow, the capital element builds equity and is not purely a cost in the same way as mortgage interest.

Tax must be calculated separately

The example excludes tax because the liability depends on the landlord’s circumstances and ownership structure.

Individual landlords cannot generally deduct residential mortgage interest from rental income in the same way as an ordinary operating expense. Finance-cost relief is normally restricted to the basic rate. The treatment is different for properties held within a limited company.

Landlords should therefore obtain advice from a qualified accountant before relying on projected post-tax figures.

Not sure whether your HMO is producing the return it should? Sturstons can review its rents, occupancy, operating costs and management requirements to identify where income may be lost.

What is a good HMO profit margin?

There is no single profit margin that makes every HMO a good investment. The property’s value, financing, condition, location and the amount originally invested must also be considered.

In this worked example:

The first percentage measures the property’s performance before financing. The second shows the proportion of rent remaining after the illustrative mortgage payment, but before tax.

These percentages should not be viewed in isolation. A property might produce positive monthly cash flow while providing a poor return relative to the deposit, refurbishment costs and other capital invested.

Landlords should consider:

• Annual pre-tax cash flow
• Return on cash invested
• Gross and net rental yield
• Current property value
• Future refurbishment requirements
• Expected compliance expenditure
• Time spent managing the property
• The financial effect of voids and major repairs

What affects how much profit an HMO makes?

Room rents

Small differences in rent can have a significant effect when multiplied across five or more rooms. Increasing the average rent from £900 to £950 across five occupied rooms would add £3,000 to potential annual income.

However, rents must remain competitive for the location, room size, facilities and property standard. Overpricing may increase void periods and ultimately reduce annual income.

Occupancy

One £950 room remaining empty for two months would reduce annual income by £1,900 before advertising, cleaning or changeover costs.

Maintaining consistent occupancy can therefore be more valuable than always pursuing the highest advertised rent. Accurate pricing, good photographs, prompt responses and flexible viewing arrangements can help reduce void periods.

Utility consumption

Where bills are included, energy consumption directly affects the landlord’s margin. Large properties, inefficient heating, inadequate insulation and uncontrolled usage can make budgeting difficult.

Clear fair-usage terms, suitable heating controls and sensible energy-efficiency improvements can help manage consumption while maintaining a comfortable home.

Property condition

A recently refurbished HMO may initially require fewer repairs. An older or poorly maintained property might generate similar rent but require a considerably larger maintenance budget.

Deferred repairs can also become more expensive. Minor leaks, ventilation problems and early signs of damp should be addressed before they create larger remedial costs.

Tenant turnover

Frequent turnover may generate additional advertising, referencing, cleaning, administration and room-preparation costs. It can also cause lost rent between tenancies.

Responsive management, good communal facilities and clear tenant communication can help suitable tenants remain for longer.

Professional management

Management fees reduce the rent retained before other costs, but the fee should be assessed alongside the service provided and income protected.

Effective HMO management can assist with pricing, marketing, tenant selection, rent collection, maintenance, compliance and reducing void periods. The cheapest service will not necessarily produce the highest net return.

For a detailed breakdown of typical charges and services, read our guide to how much HMO management costs.

How can landlords improve HMO profitability?

Improving profit does not simply mean increasing rents or cutting maintenance. The aim is to protect income while controlling costs and maintaining a safe, attractive property.

Landlords can:

• Review each room’s rent according to its size, condition and facilities.
• Record vacant days and identify why rooms remain empty.
• Respond quickly to suitable applicants and viewing requests.
• Budget for repairs rather than relying on emergency spending.
• Review utility, broadband, cleaning and insurance costs regularly.
• Deal with maintenance promptly to prevent larger problems.
• Monitor arrears and rental payments consistently.
• Maintain clean and functional communal areas.
• Review actual income and expenditure every month.

Accurate reporting should show rent due, rent received, arrears, room occupancy, operating costs, maintenance spending, reserves and actual cash remaining. Without this information, strong gross rent may disguise an underperforming property.

Frequently asked questions

Is HMO business profitable?

An HMO business can be profitable where room rents, occupancy and operating costs are managed effectively. In our example, a five-bedroom HMO generates £57,000 in annual rent and retains £32,820 before mortgage payments and tax. Profit is not guaranteed, and landlords must account for voids, maintenance, compliance and borrowing.

Do HMOs make a lot of money?

HMOs can generate more gross rent than single lets because several rooms are rented separately. However, higher income does not automatically mean high profit. Utilities, council tax, cleaning, licensing, maintenance, management and tenant turnover can consume a significant proportion of the rent.

How much do HMO owners make?

In our worked example, the owner retains approximately £32,820 annually after operating costs but before mortgage and tax. After an illustrative £18,000 annual mortgage payment, £14,820 remains before tax. Actual owner income varies according to rents, borrowing, occupancy and costs.

Are HMOs a good investment?

HMOs can be a good investment when the purchase price, local demand, room rents, licensing requirements and operating costs support an adequate net return. They can offer higher income than single lets but normally require more management, compliance and maintenance. Every property should be assessed individually.

How much profit does an HMO make per month?

This five-bedroom example produces approximately £2,735 per month after operating costs and allowances but before mortgage and tax. After the illustrative £1,500 mortgage payment, approximately £1,235 remains each month before tax.

Is a maintenance reserve an expense?

A maintenance reserve is a budgeting allowance, not a fixed monthly bill. The money may not be spent immediately, but setting it aside helps prepare for future repairs. Treating it as immediate profit could leave the property underfunded when significant work is required.

Should HMO profit calculations include voids?

Yes. Assuming full occupancy throughout every year can overstate expected profit. Including a reasonable void allowance accounts for empty rooms, tenancy changeovers and possible arrears, even though the exact amount lost will vary.

Is HMO profit calculated before or after tax?

Profit can be shown before or after tax, so the basis of the calculation should always be stated. This example shows operating profit and pre-tax cash profit. Post-tax profit depends on the landlord’s income, allowable expenses, financing and ownership structure.

Conclusion

So, how much profit does an HMO make after expenses? In this realistic five-bedroom South East London example, annual rent of £57,000 leaves approximately £32,820 after operating costs and budgeting allowances.

After an illustrative £18,000 annual mortgage payment, the landlord retains approximately £14,820 before tax, equivalent to £1,235 per month.

These figures are not a guaranteed average. Room rents, occupancy, utilities, property condition, management and borrowing must all be assessed using figures specific to the property.

Understand how your HMO is performing

Sturstons provides specialist management for HMOs and shared houses across South East London, including Lewisham, Greenwich, Southwark, Bromley and Bexley. We can assist with marketing, tenant sourcing, rent collection, maintenance coordination, compliance and day-to-day management.

Discuss your HMO with Sturstons or call us on 0208 108 5974.