So Rob and Aiden, what do you think are the biggest opportunities in today’s market?
Landlords have been hit hard by the Government’s housing policies introduced over the past few years. Mortgage tax relief is in the process of being phased out. The Government is also proposing the scrappage of Section 21 eviction notices, making evicting tenants more difficult. As a result, many amateur landlords and landlords who own property in their personal names are finding owning property is less attractive and profitable than it once was. Many BTL landlords therefore have become motivated sellers themselves, and wish to liquidate their property portfolios quickly. As professional property investors who treat owning property as a business, we see this as an opportunity to take advantage of.
In November 2018 changes to HMO licensing was introduced meaning that all HMO’s (5+ bedrooms) regardless of number of stories, need to be licensed. This means that licensing standards such as minimum room sizes, fire safety and sound insulation requirements, etc., came into force across the board. 6 months on, there are many HMO landlords who are only just becoming aware of these changes and the cost implications of bringing their properties up to a licensable standard. For those landlords who didn’t foresee these changes coming, they may now be left with HMO properties that are no longer viable investments. Again, for professional HMO landlords who are aware of the new rules and regulations, there are opportunities to be had in taking advantage of the situation many landlords now find themselves in.
Furthermore, we have found that there is a huge demand from overseas buyers for purchasing performing assets such as HMOs. We sold an HMO on a yield based valuation, to an overseas cash investor earlier this year. We believe this to be the easiest flip on the market today.
And what do you see as the biggest threats?
One of the biggest threats is the possibility of an economic downturn. Many are predicting a 10-20% fall in house prices in the near future. This is obviously a concern, especially when doing short-term buy-to-sell projects. We are in the process of selling a property in Chester currently. Even with there being a shortage of housing stock and it being a seller’s market, I am praying for a quick sale! Generally however, we invest for the long term. We protect ourselves by making the money when we buy, by buying BMV (below market value). If you are expecting a 10% fall in house prices, then buy your properties 10% cheaper! If a recession does hit, then that will breed more opportunities.
A downside to market uncertainty though is the potential for down-valuations when purchasing and refinancing. We have experienced one down valuation recently on refinance which taught me that valuers aren’t only valuing the property as it is today, but predicting its value over the next few years and over the course of the mortgage. Brexit is contributing to this uncertainty of course! Down valuations obviously impact the equity you can release on refinance, and therefore the funds that can be reinvested to grow the portfolio.
With it being difficult times, for some an ROI (return on investment) reality check may be needed. Though you may have accepted nothing less than a 50% ROI 12 months ago, a realisation that the market has changed may persuade you that a 30% ROI is a good result in today’s climate. Perhaps in 12 months from now, the market will be more buoyant and a 70% return on your money will be more achievable.
Another threat that we’ve identified is that of councils individually banding council tax on HMO rooms. I’ve heard of landlords being hit with this and it is a worry. I know landlords who have taken the council to court and won, and I know other landlords that have taken the council to court and lost. If it did come into effect in the council areas where we invest, then it would impact the profitability of our HMOs. Some landlords say they aren’t worried as they will simply pass the cost onto the tenant, but one has to realise that there is only so much HMO tenants can afford, and affordability is one of the main attractions of HMO’s for tenants.
You’ve quickly entered the HMO market, how have you grown your portfolio?
We have managed to grow our portfolio in a relatively short space of time by being selective about the property deals that we do. We only do deals that give us a high return on investment, where we are certain that we can release a large amount of equity in order to replace our initial capital. This means the funds can be recycled and reinvested in to future deals that allow us to grow the portfolio. We also raise finance from private investors which allows us to do more deals.
Has Brexit had an impact on you?
Yes, I would say Brexit has definitely impacted us. The down-valuations mentioned previously were no doubt a consequence of market uncertainty which Brexit is contributing towards. There has also been times we have approached investors to get involved in our projects and they have been reluctant because of the market uncertainty.
Tell me about your latest projects?
Our last few projects have been mixed-use developments. We have recently finished a 6 bed HMO conversion above 2 hairdressing salons that we also own, in the Wirral. Our current project, which is being featured on ‘Homes Under the Hammer’, is a 6 bed/6 bath HMO above a 1-bedroom apartment, and shop. Both Aiden and I really like the high levels of diversified income that these projects give us.
What’s next for you both?
We will continue to buy the smaller stuff (BTL’s and HMO’s – as that’s our bread and butter), whilst progressing into larger commercial to residential conversions. We invest primarily in Merseyside at the moment, but with us both being Manchester lads, it would be nice to get a few deals closer to home!
