The Ins And Outs Of Financial Planning For Your HMO Business (Including Helpful Strategies To Implement)

Photo by Wilson Finch Properties

While financial planning may not be the most glamorous side of any HMO business, it’s an essential part of what we should all be doing, yet so many of us fall short in this area. But don’t worry, you don’t have to be an accountant to get your head around this!

As it’s an often overlooked but crucial part of any business, let’s dive into the ins and outs of financial planning, and I’ll also provide some practical strategies you can adopt – no matter whether you’re a seasoned HMO investor or just starting out.

Read below or listen to the full episode on The HMO Podcast for an introduction to financial planning, in addition to simple steps to help you start building a framework straightaway!

I can almost guarantee that if you implement these strategies, you’ll find that your business is almost immediately more profitable. You’ll have more cash available to re-invest, and you’ll be able to build and scale your HMO business much more quickly. 

The Basics of Financial Planning

Let’s start by talking about the basics of financial planning and what it can help you do. The purpose of financial planning is to:

  • Monitor and measure the financial elements of your business
  • Identify possible opportunities and problems
  • Ensure that you can grow and build a stable business
  • Manage the financial risks 

I know this is a drier topic, but financial planning is so important if you want to build safeguards into your business. I always talk about the importance of having written policies and procedures that you and anyone you bring into your business can follow, and with the financial side of things, this is no different!

The HMO investment model is so sensitive to small changes to occupancy, room rates, and the cost of bills and interest rates. But if you’re managing your revenues and costs and minimising the potential for losses, you can build a better and more stable platform to build your HMO business from. 

1. Setting Financial Goals

To kickstart your financial planning, you need to set targets, which will become the bedrock of this process. Setting financial goals will help you have something to work towards, and it will allow you to hold yourself to account. 

When setting goals and objectives, you should use the SMART methodology, meaning they should be specific, measurable, attainable, relevant, and time-bound. Be really detailed and clear on what your targets are and over what time period. And you also need to lay out how you’re going to achieve them!

For example, you could set a goal to increase the size of your business or boost your revenue by a certain percentage within a defined period of time. Once you set a goal, you’ll need to constantly review them to see how you’re progressing. This will help you see where you’ve done well and where you need to improve, and you can then tweak things accordingly. 

2. Budgeting Your Income and Costs

Budgeting is something that’s done every single day by business owners and accountants. When you make estimations on your variable and non-variable costs and create a budget, you can then start to forecast things out in your HMO business.

It’s really important to categorise and track your income and expenditure for each property. You should also look at allocating budgets for specific expenditures like your mortgage payments, property insurance, maintenance, utilities, and management fees across your whole portfolio.

You can then build those into very simple models, creating the basis for a really good financial management tool. This should also help you understand the importance of setting aside funds for unexpected costs, which can really impact the revenues and bottom line in your business. 

As a HMO investor, you need to be prepared for whatever costs come at you, so creating a budget so you know what to expect for most of your fixed and variable expenses and income is really important.

3. Cash Flow Management & Forecasting 

Cash flow management allows you to manage the cash in-flow from rents and out-flows from all of your expenses. You can build these into your financial planning model, allowing you to forecast out how much income your properties should be generating. This will help you figure out where you’re going to be at the end of every single month, quarter, and year.

Once you have this, you’ll be able to start planning the bigger decisions in your HMO business. It will help you predict where you’ll be at a certain point in time, and that might be when you can buy your next property or when you can pay yourself or an investor.

You can really start to project out the growth of your business, and this works hand in hand with the financial targets you’ve set. You can start to marry the two together to ensure your targets match up with what’s actually happening in your business!

To effectively do this, project your cash flow out on a very realistic basis as there are some assumptions you’ll have to make. But you can still factor in unpredicted elements to a degree. Keep in mind that if you’re too optimistic, by the time you get 24 months in, any small margins that you’ve been out by every single month can really add up!

The cash flow forecast will give you a really good indication of when you can start the process of buying your next property. And you can continue to do this property after property. This will really help you see the pattern and value in cash flow forecasting your business. 

If you need help building an Excel document for cash flow management and forecasting, become a member of The HMO Roadmap! We’ll soon be adding a downloadable template you can use to create your own spreadsheet.

4. Finance & Investment Planning

The next step is finance and investment planning, and that’s all about figuring out what you don’t have and what you need to meet your targets and how you’re going to fill those gaps. Now that you have a forecast and can see into the future of your business, it’s important to identify any issues that are keeping you from meeting your financial targets.

You can rework your goals and objectives if you need to be more realistic about the resources you have available. But it may also be crucial to change the way that you approach your business and what you’re doing. 

For example, you may find that you need to bring more private finance in to inject into your business that you can work and recycle back out, and that could ultimately allow you to buy another asset that is cash-flowing. 

When building a property business, you’re going to have to do a lot of finance and investment planning. This allows you to identify what needs to happen for you to get to where you want to be. That’s why we do all this, so that we can easily identify what we need and when we’re going to need it. And that allows you to take action to make it happen!

5. Risk Management & Contingency Planning

Following that, you need to get into the details of risk management and contingency planning. What measures are going to be put in place if everything were to go sideways, if there was a recession, if you had a major issue with rents, or if you had a big problem with one of your properties?

A lot of property investors, particularly new HMO investors who get a bit carried away with getting their first or second property off the ground, fail to see and identify some of the major risks associated with investing in HMOs. 

More so than at any other point in the past 10 years, we all need to be contingency planning. The COVID-19 pandemic and recent economic and political uncertainty should have taught us all we need to be prepared for anything! And we just cannot rely on best-case scenarios.

Costs are going up, and they’re going up faster than rents are going up. So, actually most people’s properties are becoming less profitable as we speak! And that means, a lot of things need to be changed and adjusted. 

So, you really need to be thinking about a number of things, including the following:

  • What happens if you get a down valuation that’s so significant you can’t pay an investor back?
  • What if the market actually does turn upside down? 
  • What if some of your tenants all of a sudden can’t pay rent?

Any of these could leave yourself open to major damages, losses, and that could really impact your HMO business. And in some cases, it will bankrupt people! This is serious and has happened thousands of times to investors all over the country. So, the key thing is to make sure you’re prepared and that it doesn’t happen to you. 

You should know exactly what your business looks like now and what it would look like in all of these potential hypothetical worst-case scenarios. Yes, we’re going to make less money than we did in previous years. But we need to be ready to absorb any shocks, and better still, we need to take advantage of some of the collateral damage along the way.

This is really important, so you need to identify the potential financial risks to you, plan realistic scenarios around what you would do if certain things happened, and design plans to mitigate them, such as having a financial buffer or diversifying your portfolio (not having just one particular market, location, or tenant demographic).

6. Using Financial Tools and Software

Lastly, let’s talk about some powerful financial tools and pieces of software out there that can help you easily plan, implement, and manage all of this on an ongoing basis – whether you have one or 100 properties. These products are made really simple and user-friendly nowadays so people like you and I can actually do this very effectively!

These tools can be so useful to your HMO business and are often well worth the investment. Some of the most popular accounting software are Xero, QuickBooks, and Sage. These allow you to: 

  • Manage all of your HMOs from one dashboard
  • Track your income and expenditure for each property and across your portfolio
  • See how costs differ for different properties
  • Manage all of your invoices and receipts
  • Link with bank accounts, providing a real-time look at your income and expenses
  • Produce financial management reports, such as a Profit and Loss Statement

With all of this data and reports, you’ll be able to project your business forward and compare it to previous periods. And at the end of the year, you can give your accountant access to your dashboard, so they can then do your accounts. 

These tools can save you loads of time and provide easy ways to improve your financial management and planning. I use these across every single one of my businesses – no matter how big or small they are.

I hope you found this guide on financial planning for your HMO business useful! That is how to get the most out of your business financially. These are all really simple strategies, and it won’t take you that long to implement any of this. So, I hope you go away and start implementing this into your own business right away!

If you want to take your HMO business to the next level, sign up for The HMO Roadmap today! And if you have any questions about financial planning, join us over in our free Facebook Group The HMO Community.

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!