If you’re a landlord who started investing in Houses in Multiple Occupation (HMOs) a few years back, then you’ll be familiar with the concept of maximising income by increasing the amount of rentable rooms. Capital growth was not a short-term priority.
Gone are the days when you could buy an affordable four-bedroom property and convert the garage and reception room into the fifth and sixth bedroom. And, if your default criteria on an online property search is a minimum of four bedrooms for a maximum of £300,000, then the most likely result you’ll find (albeit depending on your location) is the following: ‘Sorry, no properties match your current criteria.’
The time has come, therefore, for landlords to broaden their horizons, start thinking about things differently and be more creative.
Looking for smaller properties is your first step. There is no reason why two or three-bedroom properties would not work as high quality HMOs for young professionals and getting six, or even seven, bedrooms from this type of property can actually be quite simple.
The key is to think outside the box and if you’ve previously used your own knowledge and experience to draw up the revised property plans yourself, you should consider investing in professional advice from an architect. They can give you more ideas to help you optimise the space that could increase your returns dramatically in the long run.
Many Partners have already proved that buying smaller is a strategy that works. Take one of our Partners in Orpington for example. They bought a three-bedroom semi-detached property for £335,000 and wanted to create a seven-bedroom HMO. By adding a two-storey extension and moving the stairs, they were able to create an additional 9sqm of rentable space, which in turn generated an additional £2,160 of rental income. They were able to create a more appealing property for their tenants. Not only would every bedroom now be accessed via a hallway and not a communal space, but the bedrooms would be bigger.
Taking into account a refurbishment cost of £121,000 (including the relocation of the stairs), and a revaluation after the work was complete of £500,000, our Partner achieved an increase in the bricks and mortar value of £44,000 and that doesn’t even take into consideration the increase in the yield.
By putting on their ‘developer hat’, our Partner was able to achieve a Gross Development Profit of 8%. Now, a developer would laugh at this number and would usually aim for 15-20%, but you have to remember that you are a landlord. You’re not selling the property, but by achieving an increase in capital value as well as maximising rental income, you can reward yourself ten times over for a job well done.
So, an extension is a great way to add value, and don’t be afraid to go for a two-storey. It can often be cheaper than a larger single-storey extension as there is less ground work. And the potential doesn’t just apply to three-bedroom semi-detached properties.
For example, you could look at two-bedroom bungalows and see if there is precedent for an extension. What are the neighbouring properties like? Are the scale, mass and height of the work in keeping with other properties in the road? Also look at properties with big plots – as well as going up you could also go out the back, and this could even be the case with an end of terrace property.
All that said, you need to be aware of what you think the house will be worth when you have done all of the work. You can’t just make a house bigger and hope it goes proportionally up in value. There’s always going to be a ceiling value depending on the location, the road, the amenities and whether it’s a detached or semi-detached. Speak with the local estate agent or even pay a surveyor for a formal valuation forecast.
But how else can you be creative? Well, you don’t have to build! You could find a really run down property and do it up. As long as it’s structurally sound, you could find yourself with a very profitable property.
Another one of our Partners in Bournemouth turned a squalid three-bedroom property into a lovely five-bedroom HMO which actually improved the look of the whole street. They bought it for £178,000, spent just £35,000 on the refurbishment and had it revalued at £250,000 – an impressive development profit of 14%.
Hopefully this provides you with some inspiration going forwards. Remember, buying smaller and cheaper properties can give you the scope to increase the value and the income and it’s been proven to work as this blog has demonstrated.