We are currently in the process of turning a property into an HMO. The situation we are in is a fall-back position, caused by the current slug in the market in prime locations. The property is a stone throw away from Notting Hill station, one of the crème areas of London. It is only seconds away from Kensington Palace Gardens, which is reported to be UK’s most expensive street.
The block is a freehold house, formally owned by a renowned architect who built up a name for himself in the academic world. The property was bought as a probate sale, via an agent with whom we have bought several properties previously.
Prices have decreased in this borough, as with most areas in Central London. Interestingly, although the viewing numbers have increased substantially, the resultant sales agreed are only marginal. This means there is still a strong interest to purchase in these locations, but that end user buyers are using the environment to be choosier, and the investors segment are looking for opportunistic deals, where there is significant value add, or a deal to be had.
With the drop in capital values, there is only one other area to explore in regards to making this deal work in the current climate and that is the rentals; and more specifically the HMO route. There is no third way to make money in property.
Ordinarily, the rentals for this kind of property would float around the 2% mark. With the HMO model in place the yield would increase to double, which is at around the 4.8% mark. This yield does not allow for the enhanced increase in rent via short term rental, which is allowable for 90 days per room.
At one time, 5% ish used to be the standard yield one would expect when purchasing a property in London. However, as capital values have increased, rents have not kept pace, and therefore, a yield of around 2% and even lower can be expected in central locations.
The conversion costs for this property will be in the region of about £36k. We will be fitting the property with smart locks which will enable the prospective tenants to open the property with their smart phones. This ensures we will retain complete control of the asset whilst negating the need to attend every time there is a change in tenancy. Such a system is especially useful when short letting. Ordinarily, this would be facilitated by unsightly key boxes outside of the property, hanging from the rails, which is both ugly and not as secure.
My feeling on this property is it will exceed the numbers given above, when the short letting market stabilises. Short letting works off reviews, as the stars and the frequency increases so does the demand for the property. This is a good efficient system, reviewed by the end users themselves. Such a system allows prospects to book even from overseas with confidence.
Time will tell what happens with this property.
Agony Agent Is Here To Help!
This week, I thought I would give you another example of a working HMO, which we are managing for one of our clients.
Our client has a house, located in London, zone 1. It had six bedrooms and was achieving a rent of £1269.23 per week. Now, on face value this was a great income for the property. However, after looking at the layout of the property we discovered that we could achieve a greater income from this property by turning it into an HMO.
This started with a conversation with the owner. Before we spoke to him, we had already done an income and expense projection, and had all the financial information lined up. The figures showed that we could potentially increase his income by around 25%. We met up with him and discussed our ideas and the projected figures; needless to say he was happy to proceed.
We already knew the information regarding what changes were needed to the property for the conversion to an HMO, however, we contacted the council before the application was made and explained our intentions. This was done in order to create a working relationship with the council (it is best to have the council on side from day dot).
After a few basic changes at a cost of around £15K, and some additional costs for improvements, we were ready to open the door to the new HMO with licence pending (council paperwork can take its time).
We turned what was a nice family home with six bedrooms, into a seven bedroom HMO, with a weekly income of a little over £2,000 per week! This is even including a discount for the rooms, as the owner wanted them filled sooner rather than later.
Apart from the increased income on the property, other benefits include:
l When a room is empty there will be only a small dent in the monthly income, not a zero if this was one household
l The rooms move in on different days and times, so the rent will come in weekly, not in one bulk monthly rent
l There is potential to increase the rent every few months, when the room agreements renew
Now, if you would like to know if your property’s income could be increased, then please give me a call or drop me an email and we can have a discussion.
Sow & Reap