Things to Consider When Valuing Your HMO
There are big rental increases across HMOs in the UK for various factors and this, of course, is good news for the landlord.
But does it automatically mean that your HMO is worth more when it’s sold?
We use ’gross yield’ as the easiest way to initially group together locations and tenant types and use it as the main factor to assess an HMOs sale value but how the gross yield is interpreted is what really matters.
How investors analyse their numbers, personal return on investment (ROI), and net yields doesn’t reflect the true valuation of their HMO property.
This is why rent increases, despite increasing the gross rent and making the HMO look more appealing on paper, doesn’t always mean the value goes up, especially in the circumstances surrounding current increases.
Recent properties we’ve sold or appraised
A 6-bed, 6-bath HMO in Greater Manchester
Traditionally, the rental income here would be around £500 per room (or £36,000 PA gross) and with the local selling yield of 13% in play, this would return an asking price for sale purposes of £275,000.
The 13% gross yield looks like it’s very simple to calculate (and it is) but it’s been stress-tested against buyer demand over several years.
What 13% gross yield gets you is a quality, newly developed HMO and, crucially, with around £25,000 ‘premium’ to pay above the level that the lenders will lend at.
Buyers are happy with that. The deal works and we’ve sold dozens of them.
That’s the real reason why you see the gross yields that you do, because the calculations used make the net yields stack.
Here is a similar property with a gross rental of £42,000.
Current demand for rooms has pushed rents up by 15%, and at 13% gross yield, this HMO would now sell for £320,000.
However, the deal changes for the potential buyer.
They will now have to pay around £70,000 extra cash into the deal to get a mortgage and this, aside from it now not being palatable to pay such a premium, leaves the ROIs and ROCEs off.
Some agents will whack the HMO on Rightmove for 13% still, they’ll sell it to a buyer who remarks “I can get commercial lending, don’t worry” and then the sale will fall through when the inevitable £250,000 lending level is hit.
A lender is going to get doe-eyed over the increased rents when they know full well operating costs are going up, including their own rates.
how much should be added for the increased rents?
The property is performing better so deserves more value?
The answer lies in analysing the ‘net’ and keeping this figure as stable as possible, factoring in the energy bill increases, the cash levels needed to complete the purchase, and the sustainability of the rents.
In this property’s case, it was valued at £285,000 or 14.7%.
The landlord has gained £10,000 from the current rent increases and the buyer isn’t over paying either.
£320,000 was too much and now our job shifts to making the landlord understand the changes.
“Hang on, the HMO down the road sold for 13% gross yield and mine is better”
In other examples, we’ve added value in for rents going up but deducted value off again to balance out how much of this increase is just mitigating extra running costs, lending costs or management costs.
Don’t be surprised to see gross yields drift up slightly in this market which will make the HMO sales near you seem like they are reducing in value but in reality it will be to level out nuances as outlined above and, more importantly, the money value of the HMOs are going up but just not as fast as rents.
This is more pertinent in the ‘North’ where the 15% rent increases makes too much of a gap between yield and bricks and mortar values but in high value areas we still look keenly at operating costs.
The message to landlords looking to sell
You won’t sell your HMO for less but you can’t benefit from your full rental increase without acknowledging that some of the increase is to stabilise the viability of your HMO as an investment.