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Article > An HMO for LHA Tenants


Article kindly supplied by John Paul

www.thelhaexpert.com

www.thecastledenegroup.com

Branches throughout the North
01915274000


For this latest article I have been asked to talk about HMO’s. As many of you will know my portfolio is quite diverse, I have LHA tenants, HMO’s, Lease options, commercial properties just to name a few, so we thought it would be quite nice to tell you about a HMO project a recently did and how it turned out.

The reason we thought this particular article may be of interest or useful to some readers is that I actually practice what I preach. Personally I think there is too much theory out there and not enough active investors.

I network quite a bit and it always amazes me when I speak to people who have been property investing for 2 or 3 years and have still only got one or two properties but have signed up to mentor programs costing thousand upon thousands of pounds. Hopefully this will show people that property is not that hard, you don’t need to spend thousand of pounds to have your ego massaged and there is no magic formula that makes me more successful than any one else. Its all about having the guts to go for it

This particular project was quite profitable and continues to provide a generous positive cash flow each month. My staff are hardly ever there and we never hear from the tenants because we refurbed the property.

The Project
I bought my HMO project in April 2008 for £117,000. It was in terrible condition, it had already been used as a HMO by the previous owner but when the regulations came in with regard to licensing, it was 6 rooms, he basically kicked a few tenants out or just didn’t replace them when they left so eventually he had just three tenants paying £60 per week.

The initial plan was to get planning permission and turn it into 3 flats and sell them on. We got the planning permission after a battle with the council (over where the wheely bins were to be collected, I kid you not) but by then the bottom of the market had fallen out and there was no way I could sell the flats. So I had to adapt and keep the property as a HMO and give it a much needed refurb.

The Refurb
The property hadn’t had any decoration or new kitchens etc since the mid 1970’s. The state of it was unbelievable. At one point we had 15 layers of wall paper to take off. The property was built around 1810 and had some great features, 14” skirting boards, decorative mouldings, huge entrance doorway, so I wanted to keep as much of them as possible.

We really went to town on the refurb. We put in either a small kitchenette in the rooms or where there was a separate room for a kitchen we replaced it. We also built ensuite shower facilities in 4 of the 6 rooms and the other two rooms that already had their own bathrooms we simply replaced them. The reasons for such a high spec will become apparent later in the article. The whole building was rewired and re-plumbed to conform to new standards and hard wired fire detection was also fitted. It was a costly process but once it’s been done you feel safe in the knowledge you shouldn’t be getting leaks or lights going out for at least a few years as well as knowing you have conformed to all legal requirements. We also put down laminate flooring in all the rooms as I feel it much more hard wearing and for the market of tenant I knew we would get, it was by far the best option. Hard wearing brown carpets were put on the stairs and the communal areas, and still looks brand new to this day. In addition, we gravelled the small front garden and tidied up all the guttering or replaced it where necessary. We wanted as little maintenance for us as possible.

I always wanted it to be of a higher standard than other HMO’s in the area, as you are never short of tenants and you will also achieve higher than average market rates. If things are slow you can always lower the rent to market rate (not a bad position to be in).

The entire refurb cost me around £25,000 but as I have my own construction company you could probably put that figure up to around £40,000 if we were to do the job for some one else.

 

LHA Expert Advice

 

Imagine, month after month, having money deposited into your bank account, with almost no chasing the rent and little tenant support—ever. What an easy way to earn a living that would be! You can have that life. I'll show you how.

If you're serious about your property business in 2012 and you have LHA tenants, you will get this report, right now and read the report today!

The Tenants
Bearing in mind I've put all my hard earned cash into this property and even dabbled with a bit of painting myself, what sort of tenant do you think I put in? No prizes for guessing ... it was LHA tenants!

The property was always going to have LHA tenants in as the market is too huge to ignore and the returns that are possible are too great. As with any LHA tenant, there are checks and procedures to follow and providing they come up trumps, then there is no reason as to why they can’t be one of your tenants.

Because the property was finished to a high standard and the council were very happy with it (they actually said it was the highest standard of HMO in Cleveland), the council even put forward a couple of prospective tenants, of which two are still my tenants today.

I can not stress how important it is to keep the council on side at all points of the process, the planning, the building, the regulation, the checks etc for that little extra paperwork and time that they require, the benefits and reputation you receive are far greater.

LHA
If the tenants have their own cooking facilities and washing facilities they qualify for the single person rate, which is around £90 per week per person. I always ask for £10 top up to take it to an even £100.

Another advantage of this is the council class these as bedsits and therefore the tenant is responsible for paying any council tax and not the Landlord, but as the tenants are DSS, they do not pay their own council tax. This increases the cash flow even further. The only downfall is if you have any voids then you are responsible for paying the council tax, so make sure you are proactive and don’t have any.

Another good point is that the majority of people who are prepared to live in bedsits (in my experience) and who are on LHA are young to middle aged men with a vulnerable status i.e. debt or drink problems. This is an ideal way of getting paid direct from the council.

The Remortgage
I remortgaged the property using commercial finance. The set up fees are more expensive but the value of the property can be increased greatly. The basic way to work out a valuation, is the gross yearly rent is approx 10% of the value, which is £312,000

The bank who remortgaged the property took a further 20% off the valuation for voids, management charges and repairs which I thought it was a bit steep but I’m not going to argue, leaving a valuation of £249,000

I was then able to remortgage at 70% of the valuation which meant (after fees) I received £170,000 less my refurb costs and initial mortgage meant I had £28,000 for my troubles.

My payments are £1300 pcm and my rent is £2600pcm, after all bills etc I’m receiving around £1000 per month.

The area that I have the HMO in is a slightly run down area and there are quite a lot of HMO’s (albeit to a much poorer standard) so I will be doing a couple more like this but certainly not flooding the market.

The Figures

  • Initial Purchase Cost £117,000
  • Refurb £25,000
  • Annual Rent £31,200
  • Commercial Valuation £312,000
  • Less 20% for Costs £249,000
  • 70% LTV £174,000Profit (minus 4k costs) £28,000
  • Mortgage – Repayment over 15 years £1300
  • Rent (minus utilities) £2300
  • Cashflow £1000 pcm

 

Regards

John Paul

 

John has written a fantastic e-book on LHA detailing everything you need to know on how to get paid direct, get paid in four weeks or less and loads of other great tips and tricks, a real must for any landlord with LHA tenants. It is available HERE

 

LHA Expert Advice

 

Imagine, month after month, having money deposited into your bank account, with almost no chasing the rent and little tenant support—ever. What an easy way to earn a living that would be! You can have that life. I'll show you how.

If you're serious about your property business in 2012 and you have LHA tenants, you will get this report, right now and read the report today!

 


John Paul

About the Author
John Paul is a portfolio landlord in the North East and founder of the Castledene Group of letting agents. The business is a member of ARLA, NALS, PI insurance and subscribes to the Property Ombudsman Code of Practice. Offices are located in Seaham, Easington, Bishop Auckland, South Shields. Halifax, Leeds, Manchester and Belfast. Both John Paul and the The Castledene Group have earned an enviable reputation of being leading experts in the management and letting of residential property to benefits claimants in receipt of Local Housing Allowance "LHA".

 

 

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