The Surveyor Who Loved Me

If you are looking to invest in property, the experts will suggest you have a clear strategy from the outset. Once you have mastered a particular investment strategy, then you can start to diversify. Sometimes it’s best to just focus on one strategy and become an absolute expert. As they say: practice makes perfect.

A particular property investor decided from the outset that his BTL strategy was Household of Multiple Occupation (HMOs). At the time we met in September 2014, he was in the process of buying nine properties simultaneously. His investment model was as follows:

Step 1: Purchase properties in a designated area typically near where you live.

Step 2: Purchase properties that can be converted into at least six bedrooms. The first four bedrooms cover mortgage costs and bills, bedrooms five and six is profit.

Step 3: Refinance the property and use the extra capital to buy more HMOs.

Step 4: Surveyor values property on a commercial basis, i.e., based on the property’s rental income as opposed to a bricks and mortar valuation.

Step 5: Buy similar properties within the same catchment area as the last purchase to ensure you create comparable precedents and the surveyor produces a commercial valuation report similar to the last property they valued for you.

Step 6: Watch the rental income roll in, employ someone full-time to manage your property portfolio in order for you to spend more time with your family.

Let’s look at steps 4 and 5 in more detail:

Purchase a three bedroom terrace house for £110,000, that can be converted into six bedrooms

Obtain a 75% LTV mortgage = £82,500

Spend £40,000 converting from three bedrooms to six bedrooms

Property is rented at £80 per week or £347 per month x 6 bedrooms = £2082 per month

Annual rent is £2082 pm x 12 months = £24,984 per annum

Remortgage 1: Let’s assume that the value of the terrace house has increased to £140,000 as a result of its conversion to six bedrooms. An investor could then remortgage based on the current value of the property (bricks & mortar valuation).

Therefore: £140,000 x 75% = £105,000

£105,000 – £82,500 = £22,500 additional capital to fund next HMO purchase

The majority of BTL landlords capital raise on properties using this refinancing model. There is also a slight flaw with this model; there is no guarantee that spending £40,000 on a property will create an uplift in it’s value from £110,000 to £150,000. The example stated an uplift of £30,000, i.e., £140,000, to re-iterate this point. However, my HMO investor doesn’t bother with bricks and mortar valuations as he refinanced using a commercial valuation model.

Remortgage 2: Let’s assume that the value of the terrace house has increased to £140,000 as a result of its conversion.

Property is rented at £80 per week or £347 per month x 6 bedrooms = £2082 per month

Annual rent is £2082 per month x 12 months = £24,984 per annum

This time the property is assessed on its commercial value, i.e., the annual gross rent. The surveyor uses an income multiplier which is based on the property type and its location.

The surveyor was currently working on a multiplier of 10, but according to my HMO investor, they have been known to go as high as 12. For now, let’s work with a multiplier of 10 x gross rent.

£24,984 (annual gross rent) x 10 = £249,840 commercial valuation

£249,840 x 75% = £187,380 (25% deduction to cover void periods)

Lender advances 75% of £187,380 = £140,535

£140,535 – £82,500 = £58,035 to fund next HMO purchase

Bricks & Mortar remortgage capital raise: £22,500

Commercial Valuation remortgage capital raise: £58,035 i.e. £35,535 more.

Once the surveyor produced the valuation report for this property, my investor looked for an identically priced property within the same area as his last purchase and of course applied to the same lender/lenders that use the same surveyors whom he knows will apply an income multiplier of 10 x gross rent. My investor did not purchase a property outside his designated investment area, because his research has confirmed the numbers are not as generous. Other areas may have a lower multiplier and possibly more expensive properties so the yields are not as high in comparison to his designated area.

This is how savvy HMO landlords are rapidly increasing their property portfolio and if structured correctly, using none of their own funds. All the money to fund the deposit, refurbishment, and conversion for new HMO purchases is coming from the remortgaging of existing properties and, because they can potentially raise more cash, they are able to buy up to nine properties simultaneously.

I asked the investor: How do you get the higher multiplier of 12?

He looked at me, smiled and said: I really don’t know how they do it.

Oh, before I forget, the above financing example is based on one lender’s criteria; other lenders work as follows:

£24,984 x 10 = £249,840 commercial valuation

£249,840 x 70% LTV = £174,888

Lender advances £174,888

£174,888 – £82,500 = £92,388 to fund next HMO purchase

You get the picture with the commercial valuation model: Leverage and more buying options.

Commercial Brokers

Use whole of market mortgage brokers that specialise in arranging commercial mortgages. If you feel your broker is not giving you more options to expand your property portfolio, then we can refer you to an experienced broker that specialises in HMO finance.

Email: info@mortgageintellectual.com with the headline: need an experienced commercial broker.

Mortgageintellectual.com is not recommending that you invest in any specific property. You must conduct your own due diligence before investing in property. Property prices can rise and fall in value and past performance of the UK property market is no guarantee to future performance.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE

The Financial Conduct Authority does not regulate most types of buy to let mortgages, bridging loans, development loans and commercial loans.