Photo by Dragon Property

This month, I want to share a case study we’ve recently completed for one of our clients. It’s a great example of how to recycle your money– and it’s interesting to see the contrast in opinions. Some investors believe this is achievable on every deal, while others think these types of deals are impossible to find!

I would say that if you know your area well, understand what a good deal looks like, avoid emotional decisions, and stick to what you know, then you will find opportunities like this.

This particular client has completed many HMO conversions in Bath. Previously, they were all six-bedroom properties, but this one was a seven-bed – which made things more complicated. She needed planning permission for Sui Generis use. Bath falls under Article 4, so all HMOs require planning regardless of size. Fortunately, our client has built a good relationship with the planning team, so she’s confident in buying properties without prior planning consent, as she understands the regulations and can navigate the process quickly.

The property was purchased for £226,000. She had a pool of funds from the refinance of her other properties, which allowed her to buy this one in cash. However, we could have lent up to 75% of the purchase price if needed. She then fully refurbished the property, including a double-storey extension to add the necessary communal space and extra bedrooms. Planning permission was approved within eight weeks, and the total build cost came to £187,300.

The Refinance

When we got to the refinance stage, the key factor was achieving the end value the client needed. While there are plenty of lenders offering large HMO mortgages, knowing which ones will value your property appropriately – and understanding the criteria they give to valuers – is essential. Many lenders do not allow investment-based valuations or won’t let you choose the valuer.

This client already had an established relationship with Shawbrook and the valuer we’d used for her previous projects. We’ve managed to achieve her target valuation on every property so far.

We chose Shawbrook again for several reasons:

• They offer a loyalty discount for existing clients – a welcome cost saving.
• For standard refinances, they typically don’t require you to use your own solicitor (just theirs). This cuts costs and simplifies the legal process, as we can manage it on your behalf. It’s also faster, which is crucial when you’re exiting a bridging loan.
• No standard requirement for ILA, no debenture needed, and the personal guarantee is usually only 25% of the loan – important considerations as you scale your portfolio.
• We can select the valuer, as long as they’re on the VAS panel.

Everything was going smoothly until the valuation came back at £650,000 – significantly lower than the figure the client had hoped for. Having completed many mortgages in Bath, I could immediately spot a few anomalies in the yield the valuer used. He’d also assumed an 11-month AST because it was a student HMO. One of the comparables he used was a property we had recently worked on, so I knew it wasn’t an appropriate comparison.

We decided it was worth submitting a challenge – something I don’t usually recommend unless there’s solid evidence. I worked closely with the client to complete the required form and submitted it… with all fingers crossed!

To our surprise, the valuer revised the figure to £705,000! That’s extremely rare – which is why I don’t typically appeal valuations.

We were able to lend 75% of the revised value – £528,750. Even with all associated finance costs, the client was able to pull out all her funds to reinvest in her next deal. The property is also generating over £3,000 in monthly profit, making it an excellent investment overall.

Key Takeaways

I’m not suggesting every deal will work out like this, and I recognise that Bath has a relatively high entry price point. However, there are some valuable lessons here:

• Build strong relationships with the key people who can help you succeed – your broker, planning consultant, and valuer.
• Know your location – learn the area and the regulations, especially in Article 4 areas.
• Don’t chase the lowest rate. Do things properly. If you can recycle your cash efficiently, your portfolio will grow faster – so always keep the bigger picture in mind.

As always, you can book a call with me here to discuss any deals or questions you may have. You can never speak to a broker too early!

About the Author:

Ellie Broadhurst is a specialist mortgage broker working at Baya Financial in partnership with The HMO Roadmap. She works with HMO property investors throughout their journey, from clients starting on their first project through to experienced portfolio landlords and developers. Learn more about Ellie here.