HMO valuing

[realpawl]

Hello everyone,
can anybody tell me if there is any kind of general formula for valuing an existing HMO please.
I mean for example can you use the average price of non HMO comps and add a certain amount for each letting room?
thanks,
Paul.

[LandlordZONE]

There's no simple formula for property valuation - every property is unique and therefore requires consideration on is own merits - plusses and minuses.
For example, in the case of an HMO, it might have a calculated value for this use, but in fact it would be worth much more if you converted it into apartments or even demolished the property and built 4 blocks in its grounds?
A very rough guide to HMOs value as a going concern would be a multiple of it full potential rental income (perhpas 10%?) and also taking into account comparables close by.
Best to ask specialist agents in the area - those that deal regularly in investment property - see:
http://www.landlordzone.co.uk/dir/surveyors-consultants.htm

[realpawl]

Thanks for your reply, i am not sure what you mean by, "a multiple of its full potential rental income (perhaps 10%)"

Does that mean a fraction? eg a tenth of the full potential income? and if so, how long is the full potential income calculated over, it could be forever?
Thank you,
Paul.

[Editor]

Valuing an investment primarily focuses on its income return (Yield)
As a starting point you can take and compare with a risk free investment (eg Building Society which for our example purposes is virtually risk free)
Let say you earn £50,000 interest from a building society investment at 5% interest for ease of calcs.
The multiple here is 20 - 100/5 = 20, therefore the capital value is £50,000 x 20 = £1m - you need £1m to give you a £50k return risk free.
With a building society investment though there's no capital appreciation and with inflation running at say 3% your capital is losing this amount of its value (£30,000) every year. This gives you a net yield of £20,000 before tax.
With property it's not risk free and with an HMO you need a lot of managment effort so you would expect a better return than 5% to compensate you for the risk you are taking and the management effort you are putting in.
With good management you might get 8 to 10% (total return) in a managed fund, so you would hope for a better overall return than that (Income plus capital growth)
To be conservative let say you aim for 10% income gross yield (before running expenses) and a 7% capital appreciation (long term trend on property appreciation is lower than 7% so expect a regression to the mean eventually, if not soon) giving you a 17% overall return on your investment.
Let's say you can earn £50,000 income from your HMO fully let and we take 10% as a notional retun. 100/10= 10 therefore the multiple is 10.
£50,000 x 10 = £500,000 - therefore as a rough guide based on these assumption you HMO is valued at £500k.
This therefore ingnores capital appreciation (which is uncertain), alternative uses, local and comparable factors such as improvements in the area, and the future income stream. These other factors need to be taken into account.
At the end of the day though, the place is worth as much as you can get from a motivated buyer and this in turn is a factor of the amount of time you have to look for one, luck (in finding one who is perhaps willing to pay a premium price?) and the amount of time, effort and money you are prempared to put into marketing the investment.
Quite a lot of people are considering selling HMOs because of the new licencing regime, but I suspect that this regime will not be quite as bad as it seems and the overall effect of people selling could reduce supply and increase rents.

[realpawl]

Hello Editor,
Thanks once again, I really appreciate your patience with a newbie like me, & the time & effort you put in.
I can’t say i under stand every word you have said completely, but i will absorb it. It’s amazing how wide a scope of things one can learn from a simple? question like that.

[jeffrey]

Valuing an investment primarily focuses on its income return (Yield)
As a starting point you can take and compare with a risk free investment (eg Building Society which for our example purposes is virtually risk free)
Let say you earn £50,000 interest from a building society investment at 5% interest for ease of calcs.
The multiple here is 20 - 100/5 = 20, therefore the capital value is £50,000 x 20 = £1m - you need £1m to give you a £50k return risk free.
With a building society investment though there's no capital appreciation and with inflation running at say 3% your capital is losing this amount of its value (£30,000) every year. This gives you a net yield of £20,000 before tax.
With property it's not risk free and with an HMO you need a lot of managment effort so you would expect a better return than 5% to compensate you for the risk you are taking and the management effort you are putting in.
With good management you might get 8 to 10% (total return) in a managed fund, so you would hope for a better overall return than that (Income plus capital growth)
To be conservative let say you aim for 10% income gross yield (before running expenses) and a 7% capital appreciation (long term trend on property appreciation is lower than 7% so expect a regression to the mean eventually, if not soon) giving you a 17% overall return on your investment.
Let's say you can earn £50,000 income from your HMO fully let and we take 10% as a notional retun. 100/10= 10 therefore the multiple is 10.
£50,000 x 10 = £500,000 - therefore as a rough guide based on these assumption you HMO is valued at £500k.
This therefore ingnores capital appreciation (which is uncertain), alternative uses, local and comparable factors such as improvements in the area, and the future income stream. These other factors need to be taken into account.
At the end of the day though, the place is worth as much as you can get from a motivated buyer and this in turn is a factor of the amount of time you have to look for one, luck (in finding one who is perhaps willing to pay a premium price?) and the amount of time, effort and money you are prempared to put into marketing the investment.
Quite a lot of people are considering selling HMOs because of the new licencing regime, but I suspect that this regime will not be quite as bad as it seems and the overall effect of people selling could reduce supply and increase rents.

OR the new regime will be worse - much worse - than it seems. HMG initiatives usually are.

[Editor]

Jeffrey, to contradict what I said above, you could well be right, especially if your local authority has high fees and interprets the rules to suit!
The complexity of the process is ominous - even the Environmental Health officers seem to be having difficulty intrepreting the rules correctly, there's so many combinations and permutations, and I can't help thinking the lawyers will have a field day and a lot of expensive holidays on all of this.
From the landlord's point of view the trick is going to be meeting the requirments without spending too much money. I'm sure it will still be possible to make good returns, but the whole process, and crucially the way you deal with officialdum, is going to need careful management. It's going to be the ones who can handle this who still make money - if you get on the wrong side of the system there's not much chance.
Why on earth they could not have come up with a simple system:
(1) Any property occupied by members of more than one family must meet certain build regs and safety requirements and (2) any landlord of such a property must be a fit and proper person - Full Stop! Result - thousands of man hours and expense saved, and a system which may actually be workable!

[rigsby_d1111]

also - how come its just the HMOs that they seem to be interested in. In the leaflet I looked at it reffered to landlords 'intimidating and bullying' tenants - which presumably can't take place in a two story proeprty :rolleyes:

[red40]

I have found that there are more landlords wanting to buy this type of HMO than are selling.