Would you invest?

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    Would you invest?

    Dear all,

    Next week I am exchanging contracts on a fully tenanted 10-12 bedroom HMO.

    Under council legislation it is supposedly subject to 'mandatory HMO licensing', however the property is unlicensed. Furthermore the property is listed and in area of conservation. The only reason it is allowed to carry on as an HMO is the fact it has been used in this manner for 30+ years.

    However, there is no certificate of lawfulness of existing use. There is no indemnity clause in contracts.

    I have emailed the council and recieved this:

    "Thanks for this information regarding the historic use of the property from which I am satisfied, on behalf of the City Council, clearly demonstrates from the town planning aspect, that the property has been used for multiple occupation from 1960's or shortly thereafter and has continued as such to the present day.

    As I have previously advised our system does show a number of individual dwellings within the property but not how many. However, I can confirm that the City Council is not aware of any breaches of planning control which would necessitate any Enforcement action being taken.

    If you wish to have formal confirmation of the lawful use then you will need to apply for a Lawful development certificate as indicated in my previous email"



    I have taken this as proof enough that I will be able to formally get a certificate following purchase as well as apply for a license and continue lawful use as an HMO.

    Would you exchange on this property? I have put a decent amount of legwork in and expect (6-8% gross yield)


    If not, what actions would you take?

    Thanks

    #2
    Have you checked that ALL the deposits have been correctly protected within the correct time limits and prescribed information given to all parties?

    Are any tenants getting help with their rent from the council?

    Are there any arrears?

    Have any S21's or S8's been served to anybody?

    What is the reason the seller does not have a liicense of lawful use?
    I offer no guarantee that anything I say is correct. wysiwyg

    Comment


      #3
      Thank you for replying -
      1/ all deposits accounted for
      2/ Not sure about council help, possibly - will chase up
      3/ I dont think there are arrears, presume local council searches will identify?
      4/ No s21 no S8 to my knowledge, what are these? notice to leave?
      5/ reason is has been doing it 30 years, never needed to get one, has always been used as HMO, I have an email from the council to this effect to, however no formal certification

      Comment


        #4
        Originally posted by Brucedickinson View Post
        Would you exchange on this property? I have put a decent amount of legwork in and expect (6-8% gross yield)
        Are you asking for a personal opinion on this aspect?
        "I'm afraid I didn't do enough background checks apart from checking her identity on Facebook" - ANON

        What I say is based on my own experience and research - Please don't take as gospel without first checking the gospel yourself.

        Comment


          #5
          If the property is listed then you may not be able to do any works required to meet the licence conditions.

          Comment


            #6
            1. You must be insane buying this as a first project.
            2. 6-8% for a property of this type is completely ridiculous as this is a very high risk property with loads of management issues.
            3. Jesus just realised this is gross, this must be London. Again probably quite risky in so many aspects

            Comment


              #7
              hech123,

              1) From my brief experience, not many lenders would lend to a first time LL on a HMO and definitely not one that has to ask what an s21 is.

              Comment


                #8
                Originally posted by hech123 View Post
                1. You must be insane buying this as a first project.
                2. 6-8% for a property of this type is completely ridiculous as this is a very high risk property with loads of management issues.
                3. Jesus just realised this is gross, this must be London. Again probably quite risky in so many aspects
                I am not insane. There is significant economies of scale and tax advantages for going big on number 1. I am a cash buyer and will borrow when the time is right.

                Not a london property. Mgmt is fully delegated at a decent rate. Cash flow near certainty due to location and strong rental history

                8% is in line with market? This is not in the north and is high quality building with resi potential in future.

                My background is investment. Not aviation!

                Thank you all for input so far.. I dont think its fair to naysay that i dont know what an s21 is? Looked it up, why would a new LL know that??? My investment background gives me access to competitive financing and credibility / track record is strong.

                What would you do differently with nearly £1m cash?

                My bet was property with cash flow. Correct me if i am wrong?

                Comment


                  #9
                  Originally posted by Brucedickinson View Post
                  I dont think its fair to naysay that i dont know what an s21 is? Looked it up, why would a new LL know that?
                  Erm, actually my question would be "why wouldn't a new LL know that?

                  You'd be perfectly correct in thinking that plenty of new landlords don't know what an s21 notice is, however they absolutely should. It's a very basic and essential part of property letting and I think it's fair to say that the ability to be able to use it is crucial to the success of buy-to-let as a business model. If you don't know what it is, you probably also don't know that you can very easily invalidate it by making elementary paperwork errors as a landlord; furthermore, it demonstrates that you are probably unfamiliar with an awful lot of other stuff about being a landlord. Remember, as with so many things in life, it's a case of knowing what you don't know...

                  So many people seem to view buy-to-let as a route to riches without appreciating that there are potentially many pitfalls along the way, that can seriously damage your wealth (or even your liberty). I'd suggest going away to read up all you can on the subject, and then, if you're still keen, buy a single property to rent out as a unit and see how that goes for a bit.

                  Personally, I've been letting for about 15 years now; very successfully thank you very much, but always small non-HMO properties. The prospect of taking on a property like the one you describe would fill me with terror, to be frank.

                  Originally posted by Brucedickinson View Post
                  My background is investment. Not aviation!
                  Oh, so not that Bruce Dickinson then! So, you say your background is in investment. What advice would you give to someone who says he's going to invest £1m in stocks and shares, but questioned about the dividends on the shares he's considering buying, replies "What's a dividend"?

                  Comment


                    #10
                    Brucedickinson,

                    Property investment is not like other investment, the management of the property and the behaviour of the tenants make it very real and day to day.
                    Big HMOs are massive things to manage.
                    If you're happy that the fully delegated management is going to do all the work, that's a good thing to have covered off.
                    They're going to be working very hard for a relatively small amount of money though, so you need to be sure they'll perform as expected (as anything that they fail to do or get wrong you answer for - you get fined/imprisoned not them - or at least more likely you).

                    More worrying, because you don't appear to know what they are expected to do (hence the s21 comment) how can you possibly manage/monitor their performance?

                    As an example, there are specific right to rent checks that a landlord is required to carry out for every new tenant.
                    Unless you specifically agree in writing with your agent that they are responsible for the checks, you remain liable for any non-compliance, even if you never meet a prospective tenant and the agent promised to "handle everything".
                    Most agency agreements are years old and don't cover this kind of thing.

                    Basically, if you don't know what your responsibilities are, how can you delegate them to an agent?

                    And some things are not delegable to an agent - they can't appear in court if you want to evict a tenant, it's you or a solicitor.

                    Competitive financing is a good thing.
                    With £1m in cash I'd buy a number of 2/3 bed properties in the west midlands (or anywhere else you know better).
                    Round that way, you'd easily get four and probably 5 or 6 in reasonable areas.
                    Call it five, each paying £750 a month, assuming 10 months rent a year (a month's void with no tenant and another's month rent in repairs maintenance) you'd have just under 4% return, with another 4/5% from a growth in the property value over time (although that's not certain).

                    Hech 123 would call that low (and he's right, but the work is harder where the margins are higher.)
                    For that big an HMO I'd want 12-15% return (probably before agency fees, though).

                    If I was pursuing a huge payout, I'd buy more with mortgages and take less income now against a greater capital growth.
                    It really depends on your situation in life and plans.
                    When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
                    Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

                    Comment


                      #11
                      Bruce - At 6-8% your not even going to be breaking even in real terms. By the time you include voids, damage, non payers, legal fee's, repairs, advertising, safety checks, bills?, furniture, maintenance, etc.... you will not actually be making any money. Now add in to this the lost opportunity of investing that money in another safer bet with a lot less risk. For a HMO such as that I would probably be looking at 20%+ as a gross yield for such a property but in all honesty I would not buy one as these kinds of property are for people with very little money who want to do a lot of work, take a lot of risks and try and maximise what little capital they have.

                      There may be advantages going big on number 1 but there are also many disadvantages especially for a new landlord who is taking on a very difficult to manage property. Using the shares analogy it is like someone coming on to a trading floor who has no experience of shares and say they want to plunge £1million directly in to a small company that no one has ever heard of being listed on the alternative investment market, he then asks what is a profit and loss account?

                      This property is not a starter property and if you do have £1million in cash I would be extremely careful about putting it in to something like this as there are so many rules and regulations involved it will be difficult not to make mistakes.

                      With £1million in cash I would spread it about in different investments probably with a mixture of commercial finance trying to get returns of about 25%+ on safe assets in different locations. I would look to add value through a mixture of good buying and projects to which this can be done but I have been doing this for many years and like in any industry you work your way up. Having some finance would also vastly increase my upside when the market goes up as I would be holding a lot more property, it would also be a lot more tax advantageous as I could claim a huge amount of the initial spend as a taxable loss. I could also off set loan and banking costs.

                      Your bet was property with cash flow - If I was you I would look at what people are telling you and then think is it possible that everyone else is wrong and I who am new to this am right. You would be buying a property with very little upside and a massive amount of downside. I look for a huge amount of upside with zero downside or very close to zero. I do admire your go large or go home attitude though. There is just no return in this property except capital growth, its a gamble but understand there are very real risks in managing property and something like this has a huge amount of them. I have been doing this nearly 20 years and I stay well away from them.

                      Comment


                        #12
                        jpkeates,

                        Thank you for that - great reply and informative to read.

                        I am not challenging your point on view but wouldnt x5 flats and the transaction costs / stamp duty / legal fees be more costly that running one decent hmo? The risks are similar, the actual admin is the same but theres higher profit? In university towns a big house is attractive to groups of students who want to get away from hall like residence? Plenty of groups of 5-6, afew of 8 maybe one or two of 10. Theres always the possibility of splittingbinto flats.

                        From my side i could earn 60k a year gross with about 10k in costs (all expensable) for an initial outlay of around 850k, fully managed. Compared to a bank account this is a good deal. I dont feel like i am being overly wreckless or badly ripped off, especially given the strong track record of the mgmt agent and the property itself.

                        Once i gear up against it and add a few flats (i expect quite a few bargains to come to market following budget) i will package each flat into an spv and sell off in 5-10 years. Using cheap finance. Thats my plan, and i really believe the market is moving towards spvs where you can still expense debt and there is a higher degree of transparency and attractiveness to international investors.

                        Can you recommend any great source of info for me? I am quite hands on and not afraid of the studying

                        Comment


                          #13
                          Originally posted by Brucedickinson View Post
                          wouldnt x5 flats and the transaction costs / stamp duty / legal fees be more costly that running one decent hmo? The risks are similar, the actual admin is the same
                          NO!

                          I haven't done any sums, but the costs you mention are one-offs (which will be allowable against CGT when you eventually sell up) and don't relate to the running costs at all. As regards risks - you have to be kidding! For a start you are spreading risk over 5 properties rather than putting all your eggs in one basket; secondly, you are likely to have much 'better' tenants in those flats than any who will live in the HMO. The amount of hassle generated by each of the two options will be incomparable.

                          Comment


                            #14
                            But if i do five more of these i will achieve diversification
                            Management is fully delegated

                            Ill let you know how it goes

                            Fortune favours the bold

                            Comment


                              #15
                              You do have to laugh. If I had a pound for everyone who asks for expert opinion and then does the opposite..................he has probably exchanged by now. Management may be fully delegated but responsibility and liability is not unfortunately and it is yours only. Fortune does indeed favour the bold, but unfortunately not the stupid. I did not see one landlord who supported your initial idea, I did see quite a few very negative comments and some really worrying posts explaining this was not a good idea.

                              I do not usually ask and just usually chuckle to myself but in what part of this did you glean the knowledge that it would be a good idea to progress regardless?

                              Comment

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