This was an 11-bedroom illegal HMO (i.e. it needed a licence and one was never applied for, therefore should never have been an HMO) that had been operating for many years in this way. It had changed hands a couple times and fell into disrepair and was subsequently vacant.
The property was bought in an SPV (Special Purpose Vehicle) with investors as shareholders of the company.
The original plan was to convert the property into 5 individual flats with a plan B of creating a larger, and legal, HMO. Pre-planning advice was sought with the council and feedback was good so planning went ahead. Unfortunately they then changed their minds on the basis that the flats would home less people than the previous HMO (even though it should never have been an HMO), and it subsequently wasn’t granted. Plan B was instigated and then approved for a 14-bed, very high-end HMO with most rooms fully self-contained with en-suites and kitchenettes.
The property was bought in September 2015 for £2m, the estimated GDV at the low end, using £1400 per month per room as the rental income, is approximately £4.4m. Taking all costs and fees out this should equate to a pre-tax profit of around £1m, generating a return on capital employed (ROCE) for investors of approximately 80%.
Early indications from local letting agents after they had viewed the show room is that the double rooms could be rented out for £1600 per month, and the single rooms at £1400. If this proves to be correct then that would push the GDV towards £5.4m.
There are two main exit strategies in play for this project, both are dependent on the actual rental incomes achieved. If the GDV is towards the lower end then the primary strategy would be to sell the unit and take the profit. If however the GDV is towards the higher end then selling is still an option, but another option comes into play which is refinancing the property on a commercial mortgage, paying back investors all of their initial investment, and holding onto the property for 3-5 years to achieve good capital growth. The strategy will be decided early in 2018 when the development is complete, fully tenanted, and generating a substantial income.
UPDATE FEBRUARY 2018:
This project is now complete and ready to be marketed. The plan is to run the majority of the property as an HMO with a handful of rooms going to a company for a long term corporate let. This strategy should provide enough of an income to refinance the property for somewhere near the region that would allow all shareholders to withdraw their initial capital, and then have the option to retain their profit within the property for the mid term capital growth, or to sell their shares to realise the profits straight away. Take a look at my quick tour of the property to give you an idea of the novel design and the quality of the finishing that this HMO has achieved – it really is something special and unlike any other HMO on the market today.
UPDATE JULY 2018:
Following a slight change in the lettings market, a decision has been made to lease the property out on a long term contract to a serviced accommodation provider. This will provide a guaranteed and steady long term income for any prospective buyers when we exit this project.