Are you being too optimistic?
It’s ok to be optimistic on one little thing, isn’t it?
When running the numbers on a potential HMO BRR conversion, you’re allowed to be optimistic.
📈 Have a look through spare room and see a few hundred adverts for rooms between £600-750 PCM so you put your rooms down at £795 “because you’re creating the best HMO in the town”…
👷🏻 Compare notes with other developers who say that they have had site issues and delays meaning that their project cost £200k to deliver but these issues won’t affect you so you add in £120k with a generous £30k contingency…
🤞 Hear stories of end values between 13-15% gross yield but have one friend from 2022 that refinanced at 12% gross yield so you go with that on your GDV calculator…
It’s only a little bit of optimism 🤷🏼♂️
The trouble is, I see a “little bit of optimism” applied to most moving parts of a potential HMO conversion quite often and these small oversights or little bits of over ambition can compound to create huge problems.
Usually, the people that I see who are most optimistic are the ones that are more focused on ‘spending money’ than waiting for the right deal.
💷🔒 If someone has saved up £300,000 from their non-property ventures (high paid job, other businesses, etc) then they are very likely to be much more pessimistic and gun shy over spending their hard earned capital. They nail down the numbers and work on worst-case scenarios until the right deal comes along.
🤝💸 If someone has done a great job of convincing a neighbour or associate to lend them this £300k on a fixed return then their main focus is spending this money as soon as possible.
I’ve seen it time and time again over the years.
One lady came to me asking for a property with very strict criteria once and I thought, “that’s good, she really knows her area and what she wants and won’t accept anything other than the ideal deal”.
After a month or so of not finding the perfect deal, she came to me and said, quite unbelievably, “I really need to spend this money now or my angel investor will want it back, have you got anything that’s available right now?”.
In this market of high interest rates, expensive materials, planning delays, a scarcity of quality builders and nervous lenders, I would very much be taking my time and being the opposite of optimistic (I believe that’s called pessimism?).
The ‘room rate optimism’ is a slow burn. You will fill your new rooms at the top rents in the first year but you’ll probably find them fall back slightly after that – either by carrying voids or having to reduce to keep full. One way or another your initial spreadsheet will start to look like outdated optimism.
Your GDV expectation is also one to be cautious over right now. I’ve had 3 messages this weekend asking for my help to find comps for an appeal, “I was expecting 11% gross yield but the valuer came in at 13.6% and it’s cocked up ny numbers”. If your numbers can work at 13.6% and you end up getting a better yield then, bingo, you’ve pulled more money out than you expected but if you’re basing the whole deal working on pulling all of your money back out (actually, let’s call it ‘their money’, because it isn’t yours) then that’s a very thin tightrope.
It goes back to what I said before, if it’s your capital from your own savings, a ‘down valuation’ at refinance stage isn’t the end of the world…
Lastly, I’d double your build quote. Play it safe, treble it, actually.
Obviously, that’s an exaggeration but I would certainly be very over cautious of this phase. Expect delays, budgets over running and the odd builder doing a runner.
The initial spreadsheet WILL get ruined by at least one set of people. It’s the people that make property hard. The builder, your JV partner, the tenants, the managing agent, the deal packager, the planning officer, the valuer, the underwriter, yourself…
