For
this latest article I have been asked to talk about
HMO’s. As many of you will know my portfolio
is quite diverse, I have LHA tenants, HMO’s,
Lease options, commercial properties just to name
a few, so we thought it would be quite nice to tell
you about a HMO project a recently did and how it
turned out.
The
reason we thought this particular article may be of
interest or useful to some readers is that I actually
practice what I preach. Personally I think there is
too much theory out there and not enough active investors.
I
network quite a bit and it always amazes me when I
speak to people who have been property investing for
2 or 3 years and have still only got one or two properties
but have signed up to mentor programs costing thousand
upon thousands of pounds. Hopefully this will show
people that property is not that hard, you don’t
need to spend thousand of pounds to have your ego
massaged and there is no magic formula that makes
me more successful than any one else. Its all about
having the guts to go for it
This
particular project was quite profitable and continues
to provide a generous positive cash flow each month.
My staff are hardly ever there and we never hear from
the tenants because we refurbed the property.
The
Project
I bought my HMO project in April 2008 for £117,000.
It was in terrible condition, it had already been
used as a HMO by the previous owner but when the regulations
came in with regard to licensing, it was 6 rooms,
he basically kicked a few tenants out or just didn’t
replace them when they left so eventually he had just
three tenants paying £60 per week.
The
initial plan was to get planning permission and turn
it into 3 flats and sell them on. We got the planning
permission after a battle with the council (over where
the wheely bins were to be collected, I kid you not)
but by then the bottom of the market had fallen out
and there was no way I could sell the flats. So I
had to adapt and keep the property as a HMO and give
it a much needed refurb.
The
Refurb
The property hadn’t had any decoration or new
kitchens etc since the mid 1970’s. The state
of it was unbelievable. At one point we had 15 layers
of wall paper to take off. The property was built
around 1810 and had some great features, 14”
skirting boards, decorative mouldings, huge entrance
doorway, so I wanted to keep as much of them as possible.
We
really went to town on the refurb. We put in either
a small kitchenette in the rooms or where there was
a separate room for a kitchen we replaced it. We also
built ensuite shower facilities in 4 of the 6 rooms
and the other two rooms that already had their own
bathrooms we simply replaced them. The reasons for
such a high spec will become apparent later in the
article. The whole building was rewired and re-plumbed
to conform to new standards and hard wired fire detection
was also fitted. It was a costly process but once
it’s been done you feel safe in the knowledge
you shouldn’t be getting leaks or lights going
out for at least a few years as well as knowing you
have conformed to all legal requirements. We also
put down laminate flooring in all the rooms as I feel
it much more hard wearing and for the market of tenant
I knew we would get, it was by far the best option.
Hard wearing brown carpets were put on the stairs
and the communal areas, and still looks brand new
to this day. In addition, we gravelled the small front
garden and tidied up all the guttering or replaced
it where necessary. We wanted as little maintenance
for us as possible.
I
always wanted it to be of a higher standard than other
HMO’s in the area, as you are never short of
tenants and you will also achieve higher than average
market rates. If things are slow you can always lower
the rent to market rate (not a bad position to be
in).
The
entire refurb cost me around £25,000 but as
I have my own construction company you could probably
put that figure up to around £40,000 if we were
to do the job for some one else.
|
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month after month, having money deposited
into your bank account, with almost no chasing
the rent and little tenant support—ever.
What an easy way to earn a living that would
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If
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in 2012 and you have LHA tenants, you will
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|
The
Tenants
Bearing in mind I've put all my hard earned cash into
this property and even dabbled with a bit of painting
myself, what sort of tenant do you think I put in?
No prizes for guessing ... it was LHA tenants!
The
property was always going to have LHA tenants in as
the market is too huge to ignore and the returns that
are possible are too great. As with any LHA tenant,
there are checks and procedures to follow and providing
they come up trumps, then there is no reason as to
why they can’t be one of your tenants.
Because
the property was finished to a high standard and the
council were very happy with it (they actually said
it was the highest standard of HMO in Cleveland),
the council even put forward a couple of prospective
tenants, of which two are still my tenants today.
I
can not stress how important it is to keep the council
on side at all points of the process, the planning,
the building, the regulation, the checks etc for that
little extra paperwork and time that they require,
the benefits and reputation you receive are far greater.
LHA
If the tenants have their own cooking facilities and
washing facilities they qualify for the single person
rate, which is around £90 per week per person.
I always ask for £10 top up to take it to an
even £100.
Another
advantage of this is the council class these as bedsits
and therefore the tenant is responsible for paying
any council tax and not the Landlord, but as the tenants
are DSS, they do not pay their own council tax. This
increases the cash flow even further. The only downfall
is if you have any voids then you are responsible
for paying the council tax, so make sure you are proactive
and don’t have any.
Another
good point is that the majority of people who are
prepared to live in bedsits (in my experience) and
who are on LHA are young to middle aged men with a
vulnerable status i.e. debt or drink problems. This
is an ideal way of getting paid direct from the council.
The
Remortgage
I remortgaged the property using commercial finance.
The set up fees are more expensive but the value of
the property can be increased greatly. The basic way
to work out a valuation, is the gross yearly rent
is approx 10% of the value, which is £312,000
The
bank who remortgaged the property took a further 20%
off the valuation for voids, management charges and
repairs which I thought it was a bit steep but I’m
not going to argue, leaving a valuation of £249,000
I
was then able to remortgage at 70% of the valuation
which meant (after fees) I received £170,000
less my refurb costs and initial mortgage meant I
had £28,000 for my troubles.
My
payments are £1300 pcm and my rent is £2600pcm,
after all bills etc I’m receiving around £1000
per month.
The
area that I have the HMO in is a slightly run down
area and there are quite a lot of HMO’s (albeit
to a much poorer standard) so I will be doing a couple
more like this but certainly not flooding the market.
The
Figures
- Initial
Purchase Cost £117,000
- Refurb
£25,000
- Annual
Rent £31,200
- Commercial
Valuation £312,000
- Less
20% for Costs £249,000
- 70%
LTV £174,000Profit (minus 4k costs) £28,000
- Mortgage
– Repayment over 15 years £1300
- Rent
(minus utilities) £2300
- Cashflow
£1000 pcm
Regards
John
Paul
John
has written a fantastic e-book on LHA detailing everything
you need to know on how to get paid direct, get paid
in four weeks or less and loads of other great tips
and tricks, a real must for any landlord with LHA
tenants. It is available HERE
