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Carving the deal

19th November 2019

There is a property for sale in Wembley; it’s a semi detached house on a popular, wide tree lined road.  In any other market it would have been sold by now.  It is not excessively priced at £550K.  However, even after three months of marketing it has not sold.

The property has planning for a 6 metre extension and a loft conversion.  The plan was to execute both planning permissions and turn it into a House of Multiple Occupation (HMO), consisting of 6/7 rooms.

This makes a lot of sense, as instead of the current rent roll of £1,800pm you would be looking at £675 per room.  This equates to £4,050pm for a 6 room HMO, and £4,725pm for a 7 room HMO.  The conversion cost has been quoted at £80K.

The cost of handling 7 tenancies as opposed to one obviously increases the operating cost.  However, even if we work on the assumption of a 25% cost, you would still be left with an expected income of £3037pm.

This amounts to a 19% recurring income on an investment of £80K.

The above is very interesting.  However, what’s even more interesting is whatever money is put into the deal can be refinanced back out, so there is no cash left ‘trapped’ in the property.

The existing owner is happy to stay in the deal.  The incoming investor will need £400K cash to pay off the existing loan and to do the works.  Once this has occurred the property can potentially be refinanced and the £400K can be extracted based on an expected valuation of £650K.

The refinancing rates we have managed to source are exceptional.  For an HMO the rate is 1.97% per annum.  Furthermore, this rate will be fixed for 5 years.  Therefore, the interest payment on £400K at this interest rate will be £7,880 per annum, fixed for the next 5 years.

In a nutshell, the idea is: you put £400K in.  You get £400K out in a few months.  Then you get a solid income for the rest of your days.

This is almost like it was back in the days of abundant credit.  When you could purchase property with no money in your pocket, using the lenders money in full.

Ok, there is a slight anomaly in regards to the time period, you cannot get your money out of a deal in 24 hours.  Instead you are looking at 6 months.  But the point is you can get it out and with a firm passive income and an exceptional rate.

In summary this deal requires £400K cash for 6 months.  The idea is for this to be returned by way of refinance, with the investor left with a strong passive income.

It has been rumoured that Brent Council will be looking to stop HMO applications in 2020.  This means any existing HMOs should have a premium attached to them, as the supply in Brent now becomes fixed.

We envisage this deal to be gone shortly.  Do get in touch with the office if it is of interest.

Suresh Vagjiani

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