Watch: Navigating article 4 and maximizing HMO returns

Josh Knight (00:04.398)

Over the next 10 minutes or so, I, from a lender’s perspective, will be talking about some of the creative strategies we’ve seen our clients, our borrowers, use to navigate Article 4, maximise their permitted development rights, and ultimately build wealth through their HMO investments. Now, some of you in the room will know who Octane are because we’ve lent to quite a few of you before. Others will be less familiar. So for you, a very brief introduction to us as a business.

We’re really proud to be the headline sponsor of today’s event. We’re a specialist short-term lender. We offer bridging and refurbishment finance to property investors, principally to help them buy, refurbish, improve, convert property, typically with the goal of either increasing its value or increasing its income potential. And we’ve been doing that for seven years since we launched. Now in that relatively short amount of time,

we’ve funded over £1.5 billion worth of deals. And in the last 18 months or so, we’ve seen a dramatic increase in the number of HMO deals that we’re funding. Everything from small non-article 4 HMOs through to larger sui generis projects and even commercial inter-residential as well. The next three slides will show three case studies which I think are particularly creative on the part of our borrower.

but also show how we can go about funding these deals. The first case study is one where we permitted our client to apply for planning permission mid-loan term, during the term of their refurbishment project. And for anyone that’s dealt with a development or a refurbishment lender before, you’ll know that’s usually a big no-go. But in this case, we were able to get comfortable. This property that the client was buying, and sorry that it might be a bit small, I’ll explain what’s on each slide.

The property being purchased here was actually an existing six-bedroom HMO in Leicester. Now, Leicester, like many cities in the UK, now has an Article 4 direction that encompasses the whole city. And perhaps for that reason, we often see investors targeting off-market existing HMOs that were demonstrably converted and let before the introduction of Article 4. And the benefit of that approach, if you can secure those deals off-market,

Josh Knight (02:33.12)

is that despite being small HMOs, they’ll justify a full commercial valuation from your lender and that should substantially improve your lending figures. Also, you’ll be able to secure properties that are in prominent city centre locations. Now this property was underperforming, in need of refurbishment, none of the bedrooms had en suites, so it wasn’t surprising that the existing owner was keen to offload it. And our client felt they could add some value.

And principally they were looking to add that value by way of loft conversion, rear extension, under permitted development, the introduction of ensuite bedrooms and a complete internal renovation. Now this already had consented use as a six bedroom HMO and our client knew that with the value that they were looking to add, the numbers would stack up from a rental perspective as a six bed. But their ultimate goal was to apply for sui generous planning for a seventh bedroom.

And we allowed them to apply for that planning permission during the loan term, whilst those construction works were ongoing. Now, if planning was successful, they would house that seventh bedroom in the loft, the loft space that they were creating. If planning was declined, they would simply fall back on their six bed numbers and the extra space that they had created would simply be used as extra communal space or just make a couple of the six bedrooms a little bit bigger.

But the point is this, they were allowed to roll that dice for planning and potentially substantially improve their yield, their GDV, and of course the amount that they can pull out at the back end when they refinance with a term lender.

When we fund these deals, there are two parts to our loan. The day one loan, which is the amount that we lend the day the loan completes. And in this case, that’s used towards the purchase of the property. 70 % loan to value net day one. That net point, very, very important. Most of our peers in the bridging space deduct interest from your day one lend. So your day one lend, interest and fees are taken off it.

Josh Knight (04:47.307)

And we don’t do it in that way. Interest is added to our loans, not taken from it. It makes a massive difference to the amount that you actually get towards the purchase of the property. And it was interesting to listen to the last speaker talking about how he uses investors to fund the refurbishment of a property and uses a bridging loan just for the purchase. If you use a lender like us, we’ll give you 70 % net towards the purchase, but we’ll also give you 100 % of the cost of refurbishment.

which means that requirement for investor cash is potentially lessened. 100 % of refurb costs you draw down on that refurbishment facility as and when you need it until the project is fully funded. Drawdowns are overseen by an asset manager, not a QS. It’s light touch monitoring. We’re keen to get the money out the door because we only charge interest on drawn funds.

I won’t labour this point because I’ll talk about it more in little while. Our rates are among the cheapest in this market. The rate for this case was equivalent to 0.83 % per month, but I’ll talk a little bit more about that in a few slides time.

The second case study looks at this idea of using multiple separate permitted development rights to maximise your return. This property being purchased here was in Bristol in a non-article four area and it consisted of a vacant commercial unit on the ground floor and a single self-contained flat above. Now our client already owned the flat. The commercial unit was owned by a third party on a separate leasehold. And his plan was…

to acquire the commercial unit, giving him control of the whole building and the freehold. And the reason this was a particularly interesting case is that because there were separate leaseholds here, he could exercise separate permitted development rights on each aspect of the property. It was a non-article four area, which meant he could convert the small flat into a small HMO under permitted development. And because the commercial unit had been vacant for some time,

Josh Knight (06:58.893)

and it met the other relevant PDR conditions, he could convert that into a single residential dwelling, again, under permitted development with a prior approval application. And I just thought that was so interesting. He was able to overhaul the usage of both aspects of the property, but didn’t require a full planning application to get there. And that just meant the whole process was much, much quicker. No surprises for how we funded this deal. Exactly the same as the last one, 70 % net day one.

The day one loan in this case was used to cover 100 % of his purchase price of the commercial unit. It also covered any debt that he had on the residential unit, giving us a clean first charge. And of course, like we always do, we funded 100 % of the refurbishment costs. I won’t repeat myself here, light touch monitoring and a sharp rate. And the final case study, I love this one. This is…

really shows ingenuity on behalf of our client. And it shows how you can make the most of every available square foot of a property. This is another semi-commercial unit, this time in St Albans. It’s the white shop front you’ll see there in the middle of the picture. This time, it was a tenanted commercial unit with residential uppers. But the property was being sold with a vacant workshop at the rear of the property. And that’s really where our clients saw development potential.

Now our client’s plan here was multifaceted. He wanted to keep the commercial unit. That was let to a good tenant, generating a decent income that didn’t need to be touched. He wanted to convert the upper floors into a small HMO. Again, this was St. Albans non-article four, no planning permission required for that element of the transaction. And then he wanted to get planning permission on the workshop at the rear and convert that into a single self-contained flat.

So loads going on here. This is not a straightforward deal to fund. So how do we go about funding deals where there’s kind of so much going on? Initially, we just provided a 60 % loan to value bridging loan to help him acquire the site. And during the term of that loan, he was permitted A, to start the work on the HMO upstairs. So he started to self-fund that part of the project. But B, apply for planning permission on the workshop to convert that into a single self-contained flat.

Josh Knight (09:29.165)

The moment planning permission was granted, we moved him from one loan to another, and we were there ready to fund 100 % of his conversion costs, not only to the HMO upstairs, but also 100 % of the conversion of the workshop into a residential unit. And I just thought this was a great example. He’s turned this property from a 680k purchase price into one that’s valued now at £1.2 million.

I think in whole process took maybe 15 months or so, which is a pretty substantial increase in the value of the property. Hopefully that all makes sense. So just to kind of recap on how our product actually works. If you’re buying a property or if you’re refinancing, we will lend you 70 % loan to value against the current value of the property. And that’s net. No interest is deducted. Interest is added.

not taken from the loan. that, again, I can’t stress how important that is in the context of how most bridging lenders operate. We fund 100 % of your build costs. It’s funded in arrears, and that means that you spend a bit, we reimburse you. You spend a bit, we reimburse you. And that rinses and repeats until the project is fully funded. You only get charged interest on funds that you’ve drawn. So it’s totally up to you how much you draw and when you draw it. It might be that you

Do 25 grand of works and then reimburse yourself for that amount. It might be that you’ve got cash flow to allow you to do more and reduce that interest burden. It’s totally up to you. We don’t insist on a QS. It’s an asset manager. So it’s light touch monitoring. It’s a visual inspection before each draw down. We’re certainly not revaluing the property every time you want to access some of that cash. And rates, this is another important point. Our rates start

at 0.35 % per month plus the Bank of England base rate. It’s a tracker rate. So if the base rate moves, the rate will move in line with it. As of today’s base rate, our rate is 0.35 % per month plus the base rate, which equates to 0.79 % per month as of today. But if you borrowed from us today at 0.79, and then in August, the base rate were to drop to 5%, your rate would drop to 0.77.

Josh Knight (11:54.081)

and it would keep dropping if, or dare I say when, the base rate falls. So you benefit from that reduction in the base rate throughout the term of the loan. If it happens, that’s not my market prediction. I know this is on film, don’t quote me on that. Thank you so much for your time. We’d love to hear from you. We’d love to meet you if we haven’t already. And we would love to discuss your deal if you’ve got one that needs funding. If anyone has any questions, I’m happy to answer them now. Yes.

Yeah, so for a refurbishment loan like the ones described, our minimum day one loan is 150,000 pounds. There’s a little bit of flex in that. So if you were buying a house for 200,000 and we were lending 140 day one, we’d do that. Anything sub that amount probably would be too small for us. Maximum loan, not really. So we funded deals of 10, 15 million pounds. We’re principally a refurbishment lender rather than a…

a development lender. So there was obviously a sort of tipping point before something would be deemed a development loan. But yeah, within the context of this, no.

Yes, Would your inspections by the asset manager be tuned at a cost of that? Yeah, so the product has a £995 admin fee and that covers your first two asset manager visits, one before completion and one draw down after. Each draw down thereafter, it’s £295 per draw. That is just added to your loan balance. So you’re certainly not coming out with a chip and pin machine asking you to pay. When you redeem the loan, you’ll just see those £295.

have been added to your loan.

Josh Knight (13:38.796)

Yes.

Mm.

Josh Knight (13:53.213)

Yeah, I would say the biggest thing is being realistic in terms of the yield. So if it’s a full commercial valuation for a larger HMO, ask your lender whether you think that your GDV figures are accurate. Because if you’re coming to a lender and saying, I’m going to get a six or a 7 % yield in Bristol, we’ve funded 50 odd HMO conversions in Bristol. So we’ve got 50 valuation reports that we can look at and give you really good.

idea of whether that’s a realistic number. I’d say the biggest thing is sense check your numbers, use a broker that knows what they’re doing, like yourself Ed, call on the lender, sense check your numbers.

Josh Knight (14:39.058)

Cool, thank you so much for your time and yeah, hope to speak to you soon.