HOT BRRR DEAL – or is it?
HOT BRR PROPERTY DEAL
Hi, I’m a property sourcer and I will search Rightmove for 3-bed terraces in non-article 4 areas in the ‘North’ and put in an offer £2,500 below asking price with the estate agent
Once ‘secured’, I will package this terraced house up as a 5-bed HMO conversion showing an excellent 15% gross return and the ability to leave ‘no money in’ by way of a commercial valuation.
I will charge a £5,000 fee, with £2,500 payable to ‘secure the deal’.
The room rates I’m recommending are £125 (or even more) per room, per week, meaning I’ll advertise the final gross income at £32,500.
The purchase price is £100,000, the refurb is £25,000 and the total initial outlay will be less than £150,000.
The commercial remortgage will be at 8x gross rental so you’ll get it valued at £260,000 and at 75% LTV, you’ll be able to pull all of your money out.
The property will be ‘hands-off’ as we have a local managing agent who can undertake all tasks and never call you but always remain 100% pro-active and diligent – you’ll need this as you live in London and you’re time poor.
All you need to do is sit back and enjoy the £2,000 profit (sic) your bank each month.
PROPERTY DEAL ‘REALITY’
Room rates in the ‘North’ are often £90 – £100 per week where terraces C3 houses still cost £100k…
You won’t get a commercial valuation…
You will leave money in this type of deal…
Your HMO won’t be full all of the time…
There’s about 10,000 ‘HMO conversion’ deals on Rightmove right now where the ‘numbers’ will work on a spreadsheet as a 5-bed HMO…
The build costs will be double…
Don’t assume a property sourcer will make a good project manager…
HMOs are never 100% hands-off and you’ll probably change managing agent 3 times in the first 2 years (or wish you did in hindsight)…
Brand new HMOs take ages to get the tenant harmony and house ‘balance’ right – the first 5 tenants might not necessarily gel…
Never pay an upfront fee just to ‘see a property’s full address’ – this basically means that the sourcer isn’t D2V and isn’t mandated othewise there’s no issue disclosing the address…
You’ll end up calling someone like me after 18-months to help you sell the HMO when reality bites (hopefully not if you take the correct advice in the first place)…
ADVICE
Ask the opinion of more people other than the local ‘sourcer’ who tells everyone that ‘their City is the best’ – every local sourcer says that their location is best, they can’t all be right!
Look into actual occupancy levels of similar HMOs and look at the costs of local studios and 1-bed apartments too when doing your room rate DD.
Think about the tenant demographic and the local area and build your HMOs to suit the tenants – not every HMO needs to be a boutique vanity project.
Nice, fancy new HMOs stay ‘fancy’ for the first few tenants and then they require investment to keep them fresh – either that, or your room rates and occupancy will fall.
If you want to refinance all of your money out (which can be done), look at larger HMOs, article 4 areas, high-demand areas, or ways to add significant value – turning a 3-bed terrace into a 5-bed HMO won’t cut it.
Choose a managing agent that understands HMOs, how to manage them and how to fill them.
Think of your alternate exit – what happens if you want to sell and you’ve refinanced way above bricks and mortar?
What happens if you can’t refinance high enough in the first instance?
What happens if your target tenant type suddenly disappears (factory shuts, Uni builds purpose built acc, etc)?
HMOs work as an investment for about 50% of the people who go into them – too much optimism, urgency to spend ‘JV finance’ or not doing enough DD on a deal sourcers deal sheet are some of the main reasons people come unstuck – not knowing the area you’re investing in is a big one too.
There’s loads of free advice out there and ‘good eggs’ willing to offer their support for free – don’t rush!
