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HMO Daddy – Investment Strategy

June 17, 2015

Blog courtesy of Jim Haliburton – HMO Daddy

Investment Strategy

I have great sympathy with the new property investor of today, especially the conscientious ones who try to research the business. There is so much more information out there on how to do it. When I started there was nothing. Understanding and absorbing all the different opportunities would take ages:-UK or abroad? Which country? Which area? New or old? Flats or houses? Single let or HMO? What to believe? Who to believe? What is investment verses speculation? That is without considering the more exotic products like REITS, reversions, freeholds, leasebacks etc. The expression analysis paralysis comes to mind and I admit that I am baffled by all the choices and deeply cynical about a lot of it.

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The Strategy

It is said that investment strategy is a personal choice. The type of property, whether to go for income or capital growth, the degree of management you wish to involve yourself in etc. For most of us and I include myself when I started, we do not or did not have luxury of such choice. We do not have the capital or disposable income but we want to invest in property as we know it will double in value on average about every 10 years. Pensions are going no where and job security for most is becoming increasingly uncertain. How can you buy a million pounds of property now, survive for ten years so hopefully wake up one day a millionaire? The ten years will pass but will you be on the property accelerator?

The questions for the investor with little capital to answer are: firstly, how can you obtain the finance for the property and secondly, ensure that the mortgage and other expenses are paid for the next ten years. For most people they would be happy just to own a million pound property portfolio providing it does not cost them anything or involve too much time, but even better if it also brought in a surplus. Just a little tip here which will save you a lot of hassle, never buy leasehold unless you buy the freehold as well.

Cash out and rental profit strategy (CORPS)

What used to work very well only a couple of years ago is what I call the Cash out and rental profit strategy. It is nigh on impossible to use this strategy in todays economy and who knows if those days will ever return, but I will mention it anyway

A purchase must cash out within the immediate future i.e. 6-12 months and will still make a profit on the rental income (also known as a passive income)even after paying the increased interest on the extra loan from cashing out. ëCashing out means you get all your initial capital back i.e. the 15/30% deposit, renovation, legal and other costs and still have money left over. Anything that will do that I will buy, but at present, usually only HMOs work for me and the occasional BMV (below market value) properties

Making a profit on the rental income is very difficult to achieve in the short term, long term with rental increases, this is often feasible but rarely to start with. Investors, I feel, often delude themselves on the cost of running a property by assuming everything left after paying the mortgage interest is profit. In reality when voids, bad debts and renovation costs are accounted for they are
running at a substantial loss. The situation is made worse by having a repayment mortgage which costs 42% more than an interest mortgage. The profit is only in the capital appreciation which is substantial when the property is highly geared.

The advantages of HMOs

An HMO can have a number of meanings, I am referring to where you divide the property up and charge by the room instead of charging for a whole property. The property does not have to be anything special, I have successfully† used two bedroom terraced houses as HMOs. You also have the advantage that you can use properties which would not let as a house and are often cheaper
to buy than a house of the same size as an HMO, for example an old pub or offices. The rent received by doing this can be as much as three times the rent achieved letting the property as a whole to one tenant. However, there is usually a lot more administration and regulations involved when letting a property.

Cash flow is king

Cash flow is the main thing you need to bare in mind in any property purchase. If the property is paying its way you can afford to keep it for as long as it takes. Property is kind over the long term and will substantially increase in value but you have to ensure you can afford to hold on to it. Again this is why I like HMOs, the income is substantial compared to single lets even after discounting the extra costs, administration and bureaucracy.

I shy away from projects where I have to rely on selling the property or where I do not make a profit on the rental income because I consider these too risky. What if I cannot sell? I would then be stuck with a property and still have to pay the mortgage and may also have money tied up in the deal which will stop me going forward and buying more property. From bitter experience trying to sell an investment property at anywhere near its market value is very difficult. There are just too many investors out there looking for a bargain! The sale process usually takes a long time, three months or more and a high proportion of sales do not complete.

I have found buyers withdraw for numerous reasons, for example: I have changed my mind, I cannot find a lender and surprisingly, they do not have the money or the valuer or solicitor finds something that upsets the buyer. A recent instance which happened to me, where a buyer withdrew from a sale is where the environmental report showed an ex rubbish tip about a mile away, this put the buyer off.

During the selling period it is difficult to let property, tenants dislike the uncertainty and move out and as the owner you are de-motivated to do anything with it the property.

The buying price

This is how I decide if a property is worth buying. I add to the purchase price the cost of improvement works i.e. what is necessary to bring it up to HMO standards, and see if it will value up sufficiently to get all my input money back and still generate sufficient income to pay all the costs and make a profit If it does then I buy .

Gone are the days when I would buy a property, not quite, I still occasionally buy the odd gem on a whim, and just hope the property prices will increase and allow me to apply for a further advance or re-mortgage to release my input capital. Now the deal has to usually stack up when I buy.

To find out more about running your own HMO, get your FREE copy of Beginners Guide To HMOs And Multi-lets at www.hmodaddy.com



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Telephone: 0115 939 4606
Email: simon@optimiseaccountants.co.uk