HMO deal analysis

[jitsy]

Hi everyone,

I've got a few single lets where we've used the BRRR strategy and am now venturing out to my first HMO - however I'm struggling to assess whether it is a good deal!

We've agreed a purchase on 3 bed terrace in the NW and we are looking to convert it to a 5 bed all ensuite. We know there is demand in the area we are looking at and are quiet confident that the rooms will be filled.

The 'return on money left in' the deal once refinanced is suitable for what we are after and gives a reasonable cashflow. However, the biggest stumbling block for me is that the purchase price + fees + refurbishment cost is a fair amount greater than what the property will be valued at once the works are complete.

What this effectively means, if we were to sell the property after the works we will lose money.

The intention is not to sell. However, when we analyse our single lets one of our exit options is that we don't lose money if we had to sell the property after completion of works. This exit option wouldn't exist here due to the larger refurb cost associated with the HMO.  

I just wanted people's views on this - is this fairly common for those that have created their own HMOs? 

Thanks

Jitsy

 

 

 

 

[Mark Rocks]

Hi there @jitsy

This is quite common with HMOs, because by reconfiguring the house to be suitable for an HMO (especially a 5 bed, which will presumably need licensing), it makes it less attractive for owner occupiers. It's not like adding value to a family home for instance - there's a lot more technical work to do around hard wired alarm systems, emergency lighting, fire doors etc. that you just wouldn't want in a family home.

As a second exit, our invest team would normally recommend looking at other creative options. For example, if you couldn't rent out all the rooms as you expect to be able to either to students or professional tenants, could you rent it to a company for social housing? There are companies will rent out a whole house and pay a % of market rent, then they take on the void periods, tenancy issues, bills etc. That could be a good fallback!

[jitsy]

Thanks for your reply Mark. Yeah, that's what I thought as with a 5 bed, you will probably only get a bricks and mortar valuation, so just trying to get my head around the perceived 'negative equity' because of the higher refurb costs and other people's experience.