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I wanted to seek some advice on a potential HMO investment that I am looking at.
A bit about me: I co-own a letting agency that manages over 200 HMO rooms in properties ranging from 5 - 30+ bed, as well as over 150 single let properties on behalf of landlords. We are a bonafide company with offices, ARLA regulated, and we do things properly. We have experience in maintenance and refurbishments on behalf of our landlord clients and take a belt and braces approach to everything we do. We’ve got a good reputation locally and we don’t cut corners - if anything, we are overly anal about doing things right.
The downside for me personally is that aside from my own my house I do not currently own any other properties. I also don’t have huge cash reserves sitting around to cover the cost of purchasing and refurbishing the property in question. Where I would add value is via the sourcing of the HMO, providing a team of contractors to complete the refurbishment, project management of the works and then free ongoing letting and management based on our 5+ years experience.
Brief figures are as follows (I have a much more detailed spreadsheet with income / expenditure costs broken down and figures based on mortgages etc):
Total purchase costs: £213,100
Refurbishment costs: £50,000 (excessive but allowing for contingency - probably get away with £40k)
Other costs: £7,000 (Furniture)Total Costs: £270,100
Gross Monthly Rental Income: £2,866.50 (conservative and including voids)Projected Monthly Expenses: £482Cash flow (profit) per month: £2,384NET Yield: 10.59%
My questions are as follows:
1. How does this stack up to a more seasoned investor? I hear talk of 20% yields on HMO’s quite frequently but rarely tend to come across actual working examples of these.2. If I were to look at doing a JV with someone (I already have a number of contacts) what would be your recommended structure for doing this such that everyone wins? Would it even work as a JV prospect where only one party provides the capital?3. Am I being unrealistic by thinking that there’s a potential deal to be had here? I have aired way on the side of caution with all the figures above - the chances are that the purchase price could be less as well as refurb costs, but I'd love to hear your thoughts.Thanks in advance for your help with this.
This thread had to be deleted and re-submitted, it was a technical issue on PTs behalf - apologies.
Please find below the responses that were on the original thread:
Depends on what your JV partner is looking for . They may have the money but neither the time nor experience in which case you're a good option as you have the experience and team behind you .Just out of interest whats the projected value after refurb ? .
Hi Simon and thanks for your response,Projected value after refurb would be around £280k, so not a huge amount in it for immediate resale purposes but from a cashflow point of view it seems to work quite well. Have you participated in JV's in the past? Id love to hear about them if so.
Hi BB88 , I don't JV at the moment but may in the future . I know people that have and it can work out well for both parties but make sure you get all the legals straight first and foremost .
Hi BB88Ok a few things1) where are these properties i.e. how much opportunity for the capital value to appreciate2) Most investors would look to recycle their money, so you need to know what the commercial valuation would be - based on a quick calc on rental i think this would be circa 210 - 220k, would the brick and mortar val be? If valued on rental then bank would lend 75% of this, so 158 - 165k leaving say 100k left in the deal. Ideal situation is to recycle as much money as you can. Also the valuation can change as it depends on the valuer and the area. I've based this on an 8 multiple.3) So assuming a mortgage of 165k @ 5.5% that would be c9k. So total costs 9k mortgage, 5.8k expenses making the total cost of 14,784. Total rental 34,398 less expenses 14,784 = 19,614 profit. Now that would be c20% ROI on the 100k left in the deal. That is what investors look for and probably why you hear 20% often. I will only invest in HMOs if above 20% ROI. Normally management fees would be extremely high and would make this deal not look to great to investor unless its handled for free from say your company.I have rounded a few number as i was doing as much as i can in my head but its pretty accurate. Hopefully that helps and i've got it right. If i havent i am sure some will correct meJas
general operations director (aka Colonel Nicaffi) - propertytribes.com
Hi Jas and thanks for getting back to me,
Capital growth in this particular area last year averaged 7% overall, and for the city as a whole 5.94% in 2016 according to land reg.
I was of the impression that a commercial valuation would be based on gross rental income but reading your reply would suggest that actually the net rental figure is what matters, in which case I would go back to the drawing board to try and negotiate a better purchase price (therefor allowing an investor to pull out more funds and generate a better ROI).
The property has 9 beds so not sure it would work on a bricks and mortar valuation basis but I may be wrong. It's a big place.
So if we were to say in theory that you were a cash rich, time poor investor and I presented this deal to you with a 50/50 profit share based on my original figures above, is it something that you would look at or am I missing something?
Whereabouts is this property and your lettings agency please? Just that I am vaguely looking for a JV partner where the costs are split 50/50. I have done a couple of very successful flips and also interior-designed a property that did very well via Airbnb. I am very interested in design and have experience of refurbishments with a friend who is too busy to do any more, and feel confident about my ability to add value, but the issue always is reliable tradesmen to complete refurbs with good finishings and quickly. Sadly, sounds as though you're not in London re limited capital growth?
You are correct in that unfortunately I'm not in London. A little more north in the midlands.
As I understand it HMO commercial valuations work off gross rental maybe PTFS or Adam Hosker could comment?
Is expenses (excluding mortgage and mgt fees) of £460 pcm realistic for a 9b house?
who would own the house and in whose name would the mortgage be?
Some clarification on the gross vs net valuation outcome would be great, hopefully one of the members you mentioned will be able to clear that up.
Based on some of our current HMO's £480pcm on bills etc isn't completely out of stretch, but there's quite a bit of room for manoeuvre in the estimated rental income as I've been VERY reserved on these (realistically I can see rooms going at £375pcm in some circumstances) and should be covered in that respect.
As far as who owns the property / goes on the mortgage my intention would be for us to both to do so, but again if that sounds way off the mark please let me know. There's a lot to think about for a first timer so I want to ensure that I've crossed all the T's etc.
i just wanted you to know that my eyes glazed over and I had a fit after seeing the sheer amount of text in your first question. Im now in hospital and will try to read it again when better.
Costs (45% of mortgages are capital repayment)
My valuations deduct 7k expenses from the gross rental income then apply a yield circa 11%, therefore £2,866.50 pm / £34,398 pa, I estimate to be £250k
ROI (pre tax)
Total Costs: £270,100 ? ( costs for bridging finance, professional fees, interest, and SDLT can be included ).
Release at 70% on 250k is 175k leaving 100k as the investment.
This is revenue only, capital appreciation ( less Capital Gains Tax ) on the asset is yet to be added
Very interesting indeed - thanks for your input.
Shawbrook Bank have this helpful video on HMO valuations:Here's some further info about valuations and other concerns:HMO considerations with Shawbrook Bank