A Heap of HMO Mess
“A heap of HMO mess”
BRRR can cause issues and it’s worth me running through some of the ones I see weekly as I perform my job.
Picture the scenario…
You bought a 3-bed terraced house off-market for £120,000 in 2020 🏚️
You got an architect to design a sexy 6-bed all en-suite HMO 📐
And a build team to execute the renovation and remodelling 🛠️
By 2021, you were ready to refinance your new HMO commercially and take full advantage of the value add ♻️
House £120,000
Fees, Stamp, Architect, Renovation, Furnishing, Tenanting £180,000
Total spend £300,000 (for argument’s sake)
Rental income £4,200 PCM
Property value (according to Shawbrook) £420,000
LTV – 75%
Loan amount – £315,000
Interest rate – 2.5%
🚀💷 All money back out on refinance 💷🚀
End of story
🙌🙌🙌🙌🙌🙌🙌🙌🙌🙌🙌🙌🙌
Or is it?
The rental income of £700 per room…
Was that sustainable?
The lending costs at 2.5% are costing £650 PCM…
What happens if rates go up when your refinance is due? 📈
What happens if rents go down slightly AND rates go up?
AND utility costs skyrocket? 🚀
What scenario gets created now…
In 2021, the HMO was generating £54,400 a year and probably made £30,000 pre-tax profit (at least).
In 2023/24, as the first 3-year fixed period is coming to an end, the rents have reduced to £43,200 either as a combination of lower rents across the board (due to losing the new build premium) or by voids created by a more difficult rental market.
Furthermore, the mortgage is just about to rocket to £1,800 PCM and the bills have gone up 30%.
The property now only cash flows £400 a month WHEN FULL.
One empty room and the landlord is putting in their own money.
🏃♂️ Quick, let’s refinance on a cheaper rate❗️
Shawbrook come back round and now value they HMO at £250,000 due to the reducing rents.
😫 You need to put £65,000 back into the deal to refinance it.
How can this be on an amazing BRRR deal and what could the developer/landlord have done in advance to avoid this situation?
1️⃣ Not all new build HMOs end up with regressing rents. Quite the opposite sometimes. Make sure your DD heavily revolves around the long term sustainability of the rents.
2️⃣ It’s not all about the glory of BRRR on social media. What does over-leveraging mean to you if, as has happened, rates go up, costs spiral, rents reduce…is it really that bad to leave a bit left in to reduce your overheads and lower your leveraging?
3️⃣ Look at not just your initial refinance but your second one. Think long and hard about what a commercial refinance means. You are forgoing capital appreciation and removing yourself from bricks and mortar rises in favour of being valued by your property’s performance.
4️⃣ Make sure that the HMO is at the pinnacle of space, amenities and functionality for the tenant base to keep your property at the front of the queue – especially where there’s no A4.
5️⃣ I would say this, but, have in mind a sale exit at a good price at any time (should you need it). Often, flipping these types of HMOs on to better optimised CASH BUYERS can place what is still a very good investment into better, more appropriate hands to make it cash flow. Remove lending costs and it’s still a winner, basically.
