Commercially Valued HMO Conversion?

HMO Case Study

We don’t believe it is prudent to rely on a commercial valuation in your typical HMO conversion projects in a non Article 4 area for a project under seven bedrooms. It’s a fact that is worth repeating so that there is no confusion – our HMO projects assume bricks and mortar valuations for the final financing.

We tell all our clients to use a bricks and mortar valuation when they calculate their figures – it’s better to be pleasantly surprised if you do get a commercial valuation than depend on one.

When you talk to our client relationship team, they tell you to anticipate leaving money in a HMO project – a typical amount would be at least 40,000 pounds, and to work out your return based on leaving that money behind. Lace Market Mortgages and Insurance will tell you the same thing.

This case study is one of the HMOs we built for a client we met for the first time at a Discovery Day in September 2016. We converted a Victorian house in Derby which is not under Article 4 Direction.

Before

Purchase price: £128,000

 

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This house was quite unnattractive to put it mildly. The interior needed a lot of help and it required major reconfiguration from a three bedroom home to work as a HMO. It’s great location appealed to our buyers – it’s a stone’s throw from the centre of Derby. Major employers like Rolls Royce, Bombardier and Toyota are also just around the corner.

After

Final valuation: £200,000

 

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The end result was a six bedroom HMO with two shared bathrooms. We made a great place for six professionals to call home. The market agreed, and the rooms were all snapped up quickly once the project was staged and furnished.

Perhaps the best part was the financing in place after the property was filled. The valuation was not typical for the area, and indeed better than we had anticipated at £200,000. Though we had anticipated a bricks and mortar valuation, this seems to us to be a bit of a premium based on the commercial nature of the building! This allowed our investor to recycle more of his capital than a bricks and mortar valuation would have, and he has been on to purchase another four HMOs and is now working on his sixth project with us in the last 14 months.

We believe that Derby may well experience the introduction of an Article 4 Directive – effectively adding a barrier for future HMO conversions, and helping to crystalize values of existing HMOs. This can only be a good thing for our clients who have already started on their portfolio here.

Financials

Purchase price: £128,000
Renovation: £42,300
Gross monthly rent: £1,905

Bedroom 1: £325

Bedroom 2: £368

Bedroom 3: £281

Bedroom 4: £281

Bedroom 5: £325

Bedroom 6: £325

Time invested: A trip to meet the team in Nottingham at a Fossey Taylor Discovery Day.

If you want to ramp up your monthly rent roll, we can steer you on the correct way to approach a HMO conversion. The East Midlands provides a healthy balance of tenant demand, investment yield and capital growth.

We run a free monthly ‘Discovery Day’, on which we take you through what we do and how we do it, and make sure that you’re well informed on what real valuations are possible. We run through case studies, take you to physically see some example properties, and let you probe our business.

Ask all the questions you need to figure out if HMO investment is right for you.