HMO Void Periods: What 2020 Taught Me About Cash Flow
November 8, 2021
An HMO can produce a good monthly income and still have a very difficult year. I know that because, when I reviewed three of my personally owned HMOs in November 2021, the cash-flow figures looked very different from the numbers I’d expected before the pandemic.
The interesting part wasn’t simply that rents had fallen. Different properties were affected in different ways, and their costs determined how much damage the missing income caused. At the same time, my estimates of their values had increased. That created a useful lesson about the difference between an investment looking wealthier on paper and having money available in the bank.
This is a historical case study of those three HMOs during the 2020–21 period discussed in the video. It isn’t a summary of my entire portfolio, a current rental forecast or a claim that every landlord had the same experience.
You can also watch my original HMO cash-flow and voids review on YouTube.
Why tenant demand disappeared in one market
Two of the properties were in Didcot. Part of their appeal had been demand from people working in the area’s scientific and research economy, including people coming from overseas. That had been a useful source of tenants, but the pandemic disrupted it.
The problem wasn’t that the houses had suddenly become poor accommodation. The people who would ordinarily have rented the rooms were no longer arriving in the same way. A strong local employment story didn’t protect the income from a sudden change in how that employment generated housing demand.
That’s an important distinction when choosing an area. I don’t only want to know that there are employers nearby. I want to understand who rents, why they need a room and whether several apparently different tenants are actually dependent on the same underlying activity.
Six tenants can look like six separate sources of income. If they all rely on international travel or one employment sector, some of that risk is shared. An HMO spreads the effect of one person leaving, but it doesn’t automatically diversify the local economy behind all the rooms.
The six-bedroom Didcot property’s difficult year
For one six-bedroom Didcot HMO, I’d originally projected approximately £22,000 of annual profit from the early performance. That was an annualised expectation, rather than a complete previous year’s achieved result. In the period reviewed, it instead made a loss of roughly £3,000.
There was a spell of about three months with only one tenant. That is a very different situation from having the occasional empty room between tenancies. Most of the income had gone, while the property still existed and the bills still needed paying.
The rent level also changed. I described average room rents falling from around £650 to about £500 during the difficult period. By the time of the video, the house was full again and bringing in approximately £3,600 a month, compared with a previous peak around £4,200.
Being full was encouraging, but full occupancy didn’t mean the old income had automatically returned. If the achieved rents are lower, the property’s position remains different. That’s why I would track both occupied rooms and the money actually collected, rather than treating a full house as the only measure of recovery.
A £3,000 loss also needs to be understood in context. It doesn’t mean every month lost the same amount, or that £3,000 was the only cash pressure during the year. Timing matters. An annual total can conceal several months when money has to be put in before income improves.
The second Didcot house held up differently
The other Didcot HMO had five bedrooms. I’d owned it since 2018 and described a more normal annual profit range of roughly £14,000–£18,000. During the period under review, it produced only about £2,000.
That was a substantial reduction, but it remained positive. Its lower costs, including the financing position, helped explain why it behaved differently from the six-bedroom property. Similar local demand doesn’t necessarily produce the same financial result when the underlying commitments differ.
This is one reason I don’t compare HMOs simply by the number of rooms or the gross rent. Two houses can serve a similar market and have very different amounts left over. Purchase price, borrowing and ongoing costs can make a large difference to how much income each needs before it breaks even.
If you’re assessing a property, work backwards from the costs as well as forwards from the rent. How much collected income is needed to keep it running? How many empty rooms would remove the surplus? What happens if you have to lower rents at the same time?
That calculation is more useful than assuming that an extra bedroom always makes a house safer. An additional room can help, but its contribution has to be considered alongside the money committed to acquiring and operating the property.
Why Sheffield was affected without being a student let
The third HMO was in Sheffield. Its annual profit had previously been around £9,000, and in the period I reviewed that had fallen to approximately £3,000. It wasn’t directly let to students, but it was still affected by changes in the wider room-rental market.
When fewer students needed accommodation, rooms elsewhere became available. That extra supply could compete for other tenants. A property doesn’t have to serve the disrupted group directly to feel the effect of accommodation being offered to the rest of the market.
This is a useful reminder that tenant categories aren’t sealed boxes. Student accommodation, professional rooms and other shared housing can influence each other. If one part of the market weakens, landlords may change their target tenants or prices, affecting the alternatives available to your customers.
I’d therefore want to look beyond the current occupants of a particular house. Who else supplies comparable rooms? What would those landlords do if their usual demand disappeared? The answer can reveal a connection you wouldn’t notice by looking only at your own tenancy agreements.
What the three properties produced together
Adding the three results gave approximately £2,000 of cash profit: a £3,000 loss on the first Didcot house, £2,000 profit on the second and £3,000 from Sheffield. That was a very small result compared with what I’d expected from those investments.
The comparison range discussed was roughly £45,000–£49,000, but it combined the first property’s projected annual figure with the other properties’ more established performance. It shouldn’t be presented as a fully achieved prior-year total for all three houses.
Even with that qualification, the change was significant. The properties had not stopped being investments, but they weren’t delivering the level of spendable income I had planned around. If I’d needed every pound of the expected surplus for household spending, the pressure would have been much greater.
This is where a reserve becomes part of the investment rather than spare money sitting around without a purpose. It gives you room to deal with a difficult period without assuming you can immediately sell, refinance or find a replacement tenant at the old rent.
My article on how property millionaires can go bankrupt looks at the wider issue: owning valuable assets doesn’t remove the need to meet obligations when they fall due.
The values rose, but that didn’t pay the bills
Alongside the weaker income, I discussed higher estimated property values. The first Didcot house was estimated to have moved from about £500,000 to £525,000. The second moved from roughly £350,000 to £425,000, and the Sheffield property from about £100,000 to £140,000.
Those estimates imply an increase of approximately £140,000 across the three properties. In the video, I also used a rounded £100,000 illustration when discussing the broader point. These were estimates of capital growth, not sales proceeds or cash that had already been withdrawn.
That distinction matters because it’s tempting to say the growth made up for the income shortfall. It improved the estimated asset position, but it didn’t itself provide money to cover an invoice. You still need a route to turn some of that value into cash.
Selling would involve its own process, costs and tax considerations. Refinancing would depend on lender criteria, valuation, rental coverage and the borrower’s circumstances. It would also create or increase debt. The equity isn’t automatically available just because a spreadsheet applies a particular loan-to-value percentage.
I want to see capital growth and cash flow together, but separately. Growth can contribute to long-term wealth. Cash flow supports the ongoing investment and may provide income. Calling both of them profit without explaining the difference can hide the practical problem you’re trying to solve.
What this changed about how I assess demand
In the video, I contrasted those difficulties with my experience in Northamptonshire locations such as Corby, Kettering and Wellingborough, where the tenant base appeared more varied. That was my experience of those properties and markets, rather than proof that a whole county is immune to voids.
The lesson I take is to investigate the source of demand. A large employer or specialist cluster can be attractive, but it can also concentrate risk. I’d want to understand how many different reasons people have for renting locally and whether those reasons are genuinely independent.
I’d also test the finances with more than one change at a time. A simple empty-room allowance may be too gentle if the same event causes both longer voids and lower rents. The difficult combination is less money arriving while many costs remain unchanged.
That doesn’t mean I expect the pandemic to repeat in exactly the same form. It means the experience exposed a weakness that a normal-year forecast didn’t show. The useful response is a more resilient plan, not pretending we can predict the next disruption precisely.
Keep the operating and tax figures clear
When I discuss profit in this case study, I’m describing the historical operating results presented in the video. Those figures shouldn’t be assumed to equal taxable profit or the final amount an individual could spend after tax.
Tax treatment can differ from the way an investor informally tracks cash. HMRC’s guidance on working out rental income explains the relevant distinctions around receipts, expenses and finance costs. The correct calculation depends on the ownership and circumstances.
For my own decision-making, I want an honest view of collected rent, recurring costs, repairs, finance and the reserve needed for the property. Then the tax position can be assessed properly. An attractive gross rent doesn’t answer all of those questions.
The number I wouldn’t ignore
The most useful number in this review wasn’t the estimated increase in value. It was the small amount of cash the three houses actually produced during a difficult period. That showed me how far income could fall and why resilience matters.
HMOs can still be useful investments. But I want the plan to survive some empty rooms, changing demand and costs that don’t politely disappear when tenants do. A realistic property investment plan should account for that before the income is committed elsewhere.
If you’d like to discuss how an HMO might fit your plans, book a free 30-minute call. You can also explore the Starter Club or find out about Done For You.