How To Maximise The Investment Value Of Your HMO Property

This month, I’ll be focusing on how to maximise the valuation of your investment property and the key considerations when deciding whether to realise that value. I’ve previously discussed when you can expect to achieve a commercial valuation (if you haven’t already, do take a listen at The HMO Podcast), but on this blog, I want to talk about what you can do to enhance your property to truly maximise its end value, enabling you to pull out as much as possible during the refinance.

I’ll start with a couple of important points! Firstly, you can’t get an HMO mortgage on a property that isn’t already an HMO. So, if a broker tells you otherwise, they’re mistaken! You’ll need to use bridging finance to purchase the property, and then refinance once the refurb and conversion are complete. Secondly, it’s vital to approach the right lender to achieve an investment valuation. Only three or four lenders will provide a true yield-based figure, especially for smaller HMOs.

So, what can you do to maximise your end value and increase your profit potential?

Buy a Property That Isn’t Currently ‘Mortgageable’

What I mean by this is buying a property that requires a complete overhaul. Paying for kitchens or bathrooms that are already in a lettable condition is a waste if you’re planning to strip them out and start again (the extra you overpay is directly deducted from your potential profit). The great advantage of targeting such properties is that you’re not competing with buyers seeking family homes—most people in the market for a home don’t want to take on a project, which is even more relevant in times of higher interest rates and energy prices.

Every pound you can negotiate off the asking price is profit in your pocket, so make sure you negotiate well and avoid emotional buying—this is crucial for your return on investment (ROI)!

Create Something That’s Difficult for Others to Replicate

When valuers assess whether your property qualifies for an investment value, they’ll consider how easily others could replicate your approach and what barriers to entry exist. If your project is easily replicable, it’s less likely your property will sell for a premium. So, what does this look like?

Buy in an Article 4 area or convert to a large HMO: This can be a risky move if you buy without the proper planning permissions, but it can result in a significant uplift in value due to that risk. You can mitigate this by thoroughly researching the rules in your area—plenty of projects have been successful.
Carry out a refurbishment that adds space: Whether it’s an extension or a loft conversion, adding square footage will increase value and is something others can’t easily replicate.
Add en-suites to every room: Again, this is something not easily replicated and will enhance the HMO feel of your property.

Don’t Overspend on Your Refurbishment

There will always be a ceiling price, as the investment value is based on market rent and yield. So, it’s important to be careful with your design and finishes. While you may want to add certain features for reasons like lower long-term maintenance, higher rent, or fewer voids, be mindful that these may not necessarily add value to the property itself.

Spend in the Right Areas

That said, it’s crucial to invest your money wisely.

A full renovation, including a back-to-brick conversion, a new heating system, and updated kitchens and bathrooms, will result in a bespoke property. In theory, this could make your HMO more attractive to potential buyers, allowing you to achieve a premium price. It’s a ‘turn-key’ investment, with minimal maintenance in the short term, which should help attract quality tenants paying a good rent.

This ties into the idea of making your property hard to replicate. It’s important to stress that many clients think they can add value simply by calling something an HMO, without doing the necessary work to make it a truly valuable asset.

Consider the Area You’re Investing In

To achieve an investment value, the valuer needs to demonstrate that there’s demand in the area for both room rentals and HMO sales. Therefore, it’s essential to invest in an established area where there are comparables available. Consider the local room rental rates and the types of properties available—if most rooms available for rent are in poor condition or lack en-suites, it’ll be harder to justify the higher rent you’re aiming for.

Other Considerations

When borrowing against the investment value, it’s important to keep in mind the increased costs associated with doing so. With higher interest rates, ensure that you can still extract the maximum amount from your refinance while maintaining a positive cash flow.

This is why it’s particularly useful to use bridging finance, where the valuer provides a Gross Development Value (GDV) figure and confirms that the purchase price is correct. We’ll receive commentary on the report, explaining how the surveyor valued the property (whether based on bricks-and-mortar or yield) and what they believe it will be worth. This can help you determine where to go for the refinance, saving you time and money on unnecessary applications and valuations.

As always, feel free to contact me here if you’d like to discuss a specific deal in more detail. I hope you found this information helpful!

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.