Will a tenanted HMO go up in value?
We resell HMOs for numerous clients.
For some, an HMO purchase-then-resale is a 2-3 year cycle, selling for positive or negative reasons triggered by circumstance, bad or good management, other opportunities, or often running out of steam with HMO ownership.
So we have quite a high volume of repeat business from clients who were originally buyers but now they are our sellers.
Nothing will go up in value if you don’t look after it
Let’s assume that an investor bought their HMO tenanted in 2019 and the property has been well maintained and managed.
For this HMO property to go up in value, a few things must have happened;
- It was bought at bricks and mortar value initially. It’s the easiest way to get capital appreciation thereafter. Lower yield, quality South East HMOs fall into this category along with others, that’s why they are popular.
- Yield compression locally has happened by external factors going in their favour, for example the introduction of Article 4 or ‘City’ status being granted.
- If they bought the property based on the income it produces (Sui gen or higher yield HMOs predominantly) then the income has increased over the ownership period sustainably and beyond the level needed to mitigate the current extra running/operational costs.
- They made positive changes to the amenities, management structure (that’s now a transferable asset), running costs optimisation significantly beyond the level that was there when they purchased.
- They have addressed planning, licensing, LDC issues that limited initial value.
What surprises our new selling clients at this point is just how many positives are needed to increase an HMOs value (particularly ‘northern’ high yield HMOs) over this short time period.
They see capital appreciation in their area and apply the same % increase to the price they paid for their HMO, forgetting that they probably paid £50k above bricks and mortar so all that the increase in values for the residential market has done is potentially closed this gap, not gone beyond it.
Furthermore, they likely pushed for a commercially-based valuation for their new HMO and lenders have become more cautious in this market – can their new buyer lend at the same rates or value that they achieved in 2019?
If not, the value could even go down for the HMO!
Decrease in value
Rents are up, even demand from buyers may be up, but costs are higher, lending is higher and all you have done by running a tight ship for the last 2/3 years is collect good rent, protect your asset and stop it FALLING in value when many other assets around you are.
Values will go down if;
- Badly managed
- Rents are stagnant
- Maintained badly
- Lending level has reduced in this market significantly
- Your local area has become saturated with HMO sales
You overpaid initially without realising it!
This gets lost on many selling landlords because there are multiple exit options on offer in the HMO sales market;
- An abundance of buyers not requiring lending
- Supported living and fund buyers paying high prices
- Specialist sales agents maximising exit prices
- International buyers taking advantage of better buying conditions
Some can even convert back to residential and make the most of the lack of family stock in their area, which are usually South East properties.
Of course, many others buy and hold for much longer periods where it’s easier to rely on rent increases and capital appreciation to increase values wherever the HMO is in the UK.
But if you have purchased your HMO within the last couple of years and are now looking to sell, go through the checklists above and be honest about your expectations (or do all you can to mitigate the variables that may pull your value down).