GOLDEN GLOVE EXTRA (Rev 25/08/09)

 HMO Daddy has limited investing resources so he can't take advantage of all the fantastic deals that he is being offered so he has decided to share them with other investors.

WHAT IS IT?

HMO Daddy has adapted his Golden Glove Mentorship for the credit crunch by offering to assist clients using his experience in sourcing, renovating and letting properties in his own and or the client's area not only in the traditional manner but also using:

• Lease Options
• Rent to Rent
• Vendor Finance

These strategies allow investors to acquire property with little money down and without the need to obtain finance and could suit those who are unable to obtain finance.

In other words HMO Daddy can help you to get started by acquiring for you your first or even a portfolio of HMO properties. HMO Daddy has also produced ready made packaged deals for investors to buy. (See later)

Lease Options and Rent to Rent work the same way: you rent the property for an agreed period, usually to make it worthwhile, more than 60 months. However, with a Lease Option you have the right to buy the property in the future, normally this will be at a pre determined price. The assumption is that once confidence has returned to the market, finance will become more easily available to purchase the property, especially if it is let as an HMO and showing a good income. Alternatively as the deals are so phenomenally profitable the investor may be able to purchase the property out of income.

The investor should be aware that with lease options there is no guarantee that finance will be available or that the rents will maintain current levels. However, over the long term rents are expected to increase.

Vendor Finance is where the seller provides the finance, or another way to look at it is that you are buying the property on hire purchase. With vendor finance you have agreed to buy the property .

Why will sellers dispose of their properties this way?

Sellers who are unable to dispose of their properties in the traditional way are open to other ways to dispose of their properties and are receptive to the above strategies. These strategies do not mean that you do not need to put any money into the deal; some funding is always needed, and the more you can invest the more opportunities we can offer you. Nearly all the deals I have come across require funding to bring the properties up to a lettable standard, and pay the rent/instalments to the seller while the property is empty. 

Ready Made Deals

NB: HMO Daddy can source similar deals in his area or in your own area which may be cheaper than the ready made deals if you do some of the work. Ready made deals are already set up and I have already taken the risk in acquiring the property and letting it.

•1.      Lease Option Background - Handsworth

This was an existing HMO where I agreed a 120 month lease in February 09 and a 60 month option to purchase both run concurrently. I pay the owners tracker mortgage, currently £200pcm, for the first two years and thereafter the rent would be fixed for the remainder of the ten years at £700pcm. The purchase/option price is £165k for the first three years and £175k between year four and year five. I have spent £40.5k renovating the property and the expected income is about £2,900pcm gross less expenses estimated at about £300pcm. The tenants pay for their own electricity via card meters. The landlord pays for the council tax, gas, water rates and insurance. I have just started to let the property and demand has been good.

Offer- Handsworth

An investor can purchase this option for our standard fee of £12k plus the renovation costs of £40.5k and legal costs estimated at £1,500. A total of £54,000 and HMO Daddy will manage the property, if required, for 20% of the gross rental income. The investor will have the right to purchase the property at any time in the first three years for £165k or for £175k between years four and year five.

The projected income from the property is:

*not allowing for any voids and rent defaults

       ** For the first two years which then increases to £700pcm £8,400pa for the final 8 years.

Your initial investment of £54,000 could, if you self-manage the project, earn over the remaining 9.5 years of the option £280k, without taking into account re- investment income and rent increases.

Key Facts - Handsworth

Capital required                                   £54,000       (or as little as £13,500, see Payment Options below)

Purchase price/ option price                  £165,000      (after 3 years, £175k)

MV (Valued as HMO)                             £301,500*    RICS

Cash out at 70% LTV                           £ 46,050*

Net income (fully managed)                   £22,700 pa**

Net income (self managed)                    £29,760 pa**

Return on investment (fully managed):   42%**

Return on investment (self managed):    55%**

*assumes income valued at 8% yield with £3,200 deducted for expenses and 25% deducted for repairs, voids etc.

**  for the first two years not allowing for any voids and rent defaults and assuming interest rates do not rise

All figures subject to approximations and assumptions and are not guaranteed.

From previous experience, the property would value on income at £301,500 which at 70% LTV would mean you cash out £46k less costs on exercising the option. I have a RICS valuation to support the valuation but the buyer should be aware that their lender may require their own valuation.

•2.      Lease Option Background - Oldbury

An existing HMO comprising of 4 studios refurbished about 4 years ago to a good standard producing a gross income of £21,840 pa. The tenants pay for their own electricity and heating leaving only council tax, water rates and communal utilities to be paid. A 12 month option was agreed in May 2009(which could possibly be extended) to purchase for £100k and a concurrent rent to rent for 60 months at £200 per week.

From previous experience, the property would value on income at £192k which at 70% LTV would mean you cash out £34k less costs on exercising the option. This means, if you can get finance, you could own this property, no money in and clear about £13k! I have a RICS valuation to support the valuation but the buyer should be aware that their lender may require their own valuation.

Offer- Oldbury

An investor can purchase this deal for £12k plus about £1,500 legal costs and £7k spent on repairs, fixtures and fixings. HMO Daddy can fully manage the property if required for 20% of the income received.

The projected income from the property is:

* Not allowing for voids and rent defaults

Key Facts - Oldbury

Capital required                            £20,500 (or as little as £5,125 see Payment Options below)

Purchase price/ option price           £100,000            

MV (Value as HMO)                              £192,500 RICS

Cash out at 70% LTV*                         £34,500

Net cash out                                     £14,000

Net income (fully managed)**               £5,772 pa

Net income (self managed)**                £10,140 pa

Return on investment (fully managed):   28%

Return on investment (self managed):    49%

* assumes income valued at 8% yield with £1,300 deducted for expenses and 25% deducted for repairs, voids etc.
** not allowing for voids & rent defaults 
All figures subject to approximations and assumptions and are not guaranteed.

•3.      Vendor Finance - Bloxwich

A lovely 2 bedroom 1970s terraced house in need of renovation (at an estimated cost of £10k) which would have been worth £90k pre 2008, I have a RICS valuation which values it today at £75k. The property is mortgage free and the owner is prepared to sell it for an initial payment of £9k with an additional £72k to be paid over 10 years, at a total cost of £81k. She will provide the finance interest free over 10 years at £500 per month for the first 5 years and £700 per month for the final 5 years. The monthly payments to the seller are to pay off the interest free loan with the seller. I would expect to get a gross income of £10,140pa with the tenants paying for their own gas, electricity and council tax.

Offer- Bloxwich

An investor can purchase this deal for £12k plus the £9k down payment, the estimated renovation costs of £10k, and legal costs estimated at £1,500 - a total of £32,500. HMO Daddy can fully manage the property if required for 20% of the income received.

The property is expected to produce an annual income of:

*This assumes only a small rent increase over the ten years.

** Not allowing for voids and defaults

Key Facts - Bloxwich

Your initial investment                      £32,500 (or as little as £8,125 see Payment Option below) 

Net income (fully managed)**           £9.484 pa

Net income (self managed)**            £11,980 pa

Return on investment (fully managed):   29%

Return on investment (self managed):    37%

**after ten years, not allowing for voids & rent defaults

All figures subject to approximations and assumptions and are not guaranteed.

Note that although the average return for the first ten years is only 9.5%, this is an excellent long-term investment where after 10 years you own a mortgage-free property producing an estimated £10k pa fully managed. How many of these would you need to fund your retirement?

Management Fee

A 20% management fee might look high when you compare this with the rates for single-let properties but when you consider what is involved in managing an HMO and how much is included in the 20% fee (rent collecting in person, regular cleaning, disposing of surplus rubbish, evictions, gardening, minor repairs etc.) then this represents good value. Please ask for a full specification if required.

Payment Options

0. Payment up front
0. 50% down and 20% interest on the balance spread over your choice of period
0. 25% down and 40% interest on the balance spread over your choice of period
0. Joint venture: pay 50% of the costs and get 50% of the profit
0. Your suggestion - contact HMO Daddy to discuss

NB: For options 2 to 4 the property will usually need to be managed by HMO Daddy.

Payment Options - More Details and Figures

•1.   Payment Up Front

You pay the full costs up front with no further obligations to HMO Daddy.

*after first 10 years

•2.   50% Down with 20% Interest on the Balance

You pay 50% of the normal initial payment and then pay the other 50% over your choice of period.

Let's look at a particular example in a bit more detail: say you invested in the Handsworth property (fully managed), putting 50% down and paying the balance monthly over 10 years. For the first 10 years your net annual income would be £22,700 - 12 x £493 = £16,784. That's a 62% return on your initial investment.

•3.   25% Down with 40% Interest on the Balance

You pay 25% of the normal initial payment and then pay the other 75% over your choice of period.

•4.   Joint Venture

You split both the initial costs and the net profits 50:50 with HMO Daddy.

*after first 10 years

•5.   Your Suggestion

If you want to adapt one of the options so that it is better suited for you, contact HMO Daddy to discuss your suggestion.