Investment properties – deal or no deal?

We often get asked to advise on a property purchase. While we are not investment advisers and are not regulated to give investment advice, we can give advice on if a deal makes sense in the sense would we buy it for our own portfolio.

One type of property investment that appears on our radar via this approach is the “ready made HMO”.

This is typically a fully refurbished house that is sold based on a set yield. My view – as an investor – is these rarely stack up.

To give a good example, take a look at the current hot investment – a typical five bed conversion in Kensington (L7). A recent sale was a five bed student house, on the market at £200,000. This cropped up via and agent.

What is the yield? The quoted rent was £95 per person per week, which equates in a student market to £22,641 per annum. The yield then at a purchase price of £200,000 is 11.3% gross.

For what is a high risk investment, this is too low a figure. Once you deduct management (anywhere from 10% to 12.5%, +VAT), utility bills (around £2,500 PA approx on a five bed), as well as finance costs, your net income is hovering around £10,000 PA. This is only a 5% net yield, which is marginal at best for a HMO, and is less than £1000 per month net income. Given the above figures do not include certification or HMO licenses, it is easy to see that a property like this can give you worries if it does not let.

The true value in an investment like this is to be the one converting. Buy at open market value (say £70,000, needing work), invest to bring it up to standard (anywhere up to £60,000 for a standard conversion to a five bed), and opt to moderate your refinance to balance your cash commitment with your ongoing repayments. That way you have flexibility of you sell, and have lower debt costs and therefore in a slightly better position if rates start to climb or you experience voids, or have to switch strategies to the professional market. Or, do the conversion above, and sell as a turn key to other investors and buy lower risk properties.

We do recommend you look at the market and get a measure for what is being let and what is not being let.  We generally recommend that landlords avoid buying larger HMOs in the L6 postcode and parts of L7.  However smaller (5) bed properties do currently work in the L6 postcodes, depending on the road it is on.

So, what does work really well?

See our next blog post!

Published by: Simon Topple on August 7, 2018