Hello Medway Property News Investors,
In last week’s blog I looked at how to calculate the ROI of an HMO investment; this is an extremely important exercise when comparing different investments and measuring their return.
In addition to calculating the ROI of an HMO investment, a question I regularly get asked by investors is how to value their HMO. As investing in an HMO is different to investing in a single let, it is valued differently, and you do not necessarily get the same benefits of appreciation.
When valuing your HMO, the first point to consider is whether the property has been developed to an extent that it can no longer be valued as bricks and mortar and should now be valued as commercial property. This is an important factor as it will define which method is used to value your asset; your lender will be able to advise on this.
Bricks and Mortar Valuation
A bricks and mortar valuation is fairly common where the property is a standard (C3) residential dwelling.
This type of HMO will be viewed by a surveyor as a residential property that happens to be let to multiple occupants.
The valuation includes the points you would usually cover such as:
- The condition of the property
- The size of the property (including number of bedrooms and square footage)
- Recent sold prices of comparable properties
A commercial valuation is less common than a bricks and mortar valuation and selecting this option often depends on the lender’s criteria.
A commercial valuation tends to be higher than a bricks and mortar valuation and can be beneficial to investors in that they can release more capital or lower their mortgage repayments by achieving a better Loan to Value ratio.
Investors cannot simply choose to have their HMO valued on this basis, however. There are certain criteria to meet and it is normally required that the investor provides evidence of this to the lender.
Investors may be able to opt for a commercial valuation based on a range of factors including, but not limited to, the following:
- Planning Permission (i.e.: C3, C4 or Suit Generis)
- Which surveyor is chosen
- Property location
A good example of a strong case for a commercial valuation would be a commercial property that had been converted to a 10-bedroom HMO. In comparison/a four-bedroom house in the middle of a residential street would be a harder case to prove.
To calculate the value of your HMO on a commercial basis, you need to factor in:
- The total rent charged
- Operating costs
I need to give credit to the HMO Hub for providing the following calculation at this point as, whilst I have an in-house calculator, the formula below is particularly clear and helpful.
To calculate your Commercial HMO Valuation, the following formula can be used:
(Gross Monthly Rent – Reasonable Operating Costs) * 12 / Yield
Annual Net Rent / Yield
Below is an example calculation based on a ten-bedroom HMO with a yield of 8.5%.
(£6,000 – £1,200) * 12 / 8.5% = £677,647
Again, the HMO Hub has an extremely helpful resource which includes an online calculator where you can complete your own commercial HMO valuation.
Why This Is Important to Investors
Knowing how to value your HMO is a vital skill for an HMO investor as it will not only help you verify the details that your lender provides in the event of remortgage, but also, if you come to sell (or purchase) an HMO then you will be able to assess the details of the investment.
In addition to this, financial planning is crucial to how you plan and operate your business. By correctly knowing how to calculate the value of your investment, you will be able to ensure that you do not over-leverage and can plan the release of equity for future investments.
I trust that you found this article helpful! I am excited to be running a landlord seminar on 26th March where I will be covering several crucial points about how to get the best out of your HMO investment during 2021.
This seminar is a must for all investors, and you can find full details here. If you book with promo code SUPER before 13th February, you can grab your ticket for just £5!