Estate Agents (Part 6)
We’ve been thinking about how to find our property deals and last week we began to think about HMOs. But, where can we find properties to convert to HMOs?
The answer is the same place as where we would find our buy to lets, and that’s at the local estate agents. Unless we’re looking at a sophisticated strategy such as converting an old office building or pub etc., we would essentially be looking for a standard house. So, the estate agent’s office is the best place to start.
But, would you walk into an agent’s office and say that you are specifically looking for a property to convert to an HMO? Probably not. Not wishing to disrespect estate agents, most are probably not overly experienced in this and very few are probably going to understand what it is you are trying to do. (Apologies if you’re an estate agent that’s reading this; I’m generalising somewhat).
With this in mind, I would keep it simple. I would approach local agents just as I would when I’m trying to find buy to lets. I would sift through the details of the properties, already having in mind a rough idea of where I might find these types of properties in that particular town.
However, although my approach to finding HMOs would be similar to finding buy to lets, there is one thing that I do tend to do slightly different. This may surprise you, but often, I don’t negotiate too hard on the price.
To give an example, a typical three-bedroom terraced house in the town where I have bought and created my HMOs costs around about £80,000. If these properties are on the market for £83,000, I might pay £80,000 or £81,000 etc. I don’t necessarily try to get the properties for £70,000 or £65,000, because I know that if I can get my hands on the right property in the right area – and if I do the right works – then I should be able to create a property which would refinance itself. In other words, a property which I could get all of my money back out of.
Using a commercial mortgage – the right sort of commercial mortgage actually through a commercial mortgage broker – means that a bank will value a property up using the “Income Method” of valuation. The bank wouldn’t view the property as “bricks and mortar” but instead as an income stream or cash flow. Simply put, the valuation would come out much higher pro rata than just the cost of the bricks and mortar and the cost of the conversion.
So, to give a real scenario… in round figures, an £80,000 terrace house might cost £40,000 to convert into a 5-bed HMO (all with en suite bathrooms). BUT, because the bank values the property up using the income stream, this property could be valued at around the £280,000 mark. As such, with even 70% percent loan to value, you could get all of your money back out.
It’s for this reason that in my case, I don’t necessarily negotiate too hard on price when I find a property that I know is right, so long as I’m certain that I can create an HMO which would ultimately refinance itself.
Here’s to successful property investing.
Peter Jones B.Sc FRICS
Chartered Surveyor, author and property investor
By the way, I’ve rewritten and updated my best-selling e-book, The Successful Property Investor’s Strategy Workshop, which is an account of how I put together my multi-property portfolio, starting from scratch and with no money of my own, and how you can do the same. For more details please go to: www.ThePropertyTeacher.co.uk/the-successful-property-investors-strategy-workshop