Watch: The most profitable property strategy HMO investors overlook

Ranjan Battacharya (00:11.502)

Ladies and gentlemen, now I hope you’re here for the talk and not just because it’s cold outside and a lot warmer inside. What am I talking about? going to talk about the number one opportunity that a lot of HMO investors don’t know about. A little bit about me and my background. I am an HMO investor. We have a couple of hundred rooms around North London. I haven’t done a proper HMO since 2013. And that’s because

kind of do something else really, which I’m going to kind of introduce to you. But my bag is I started investing in property in 1990. I went sort of full time, if you like, in property in 2001. I did my first commercial to residential conversion in 2006. And my bag has been pretty much converting commercial buildings to residential use and renting those out.

You may have seen the property elevator show. Anyone seen the property elevator show? Who’s seen the property elevator show? A few fans. And Shuen, of course, was on it. So we’re on season five of that show now. We just filmed season five. It’s going to be on the telly in October. One of the interesting things about the deals that are being funded with quite regularity is how many of them are commercial to residential conversion. And you’re to see from some of the stuff I’ll be talking about today.

why commercial to residential conversions are rather profitable and why they’re likely to be increasingly profitable as we head forward to the next year. I do a little bit of YouTube. Are there any followers of the YouTube channel? a few. But it’s only a whimper. Are there any followers of the YouTube channel? brilliant. If you’re not, you want to get on. We’re close to 60,000 subscribers on YouTube and we put out videos every week all about…

keeping people on top of their property investing game, like, comments. I’m not on YouTube. What am I thinking? I’m in a live audience. I shouldn’t be telling you to click now and read the description below. It’s just an automatic habit. HMOs. I do a little bit of HMOs. But HMOs have a little bit of hassle, should we say. There’s licensing that you have to worry about. There’s unlicensed HMOs. There’s licensed HMOs. If it’s more than a certain number of rooms, you need planning permission and this, that, and the other.

Ranjan Battacharya (02:36.366)

the regulation seems to be going up and up and up. When I started HMOs in… I did my first HMO in about 94, 93 or something like that and buying basically three storey houses in Islington and making them into eight or nine rooms and renting them out room by room. And at that time it was pretty much the Wild West. Then came…

the first element of licensing where three story houses started to be needed license and it’s been every single year there’s been an extra layer of legislation. Some of it has been good and sensible and made some sense but some of it has been nonsense quite frankly and not been for much benefit except just racking on cost for the landlord. There’s a lot of management headache with HMOs. In my time of course you get people

nicking food out the fridges, but the worst thing I’ve ever had, I think, where we were called by a neighbor, accused of subletting a shed in the back of the garden. And I couldn’t believe that because we wouldn’t do that sort of thing. I turned up on a Sunday and I found two people naked having sex in the garden shed because one of my HMO tenants had sublet the goddamn shed and I was getting the bad reputation for it. You know, so these sort of things happen. I’m sure you’ve all got your HMO management hassles.

headache stories. But HMOs do require a bit more management effort than the average single net tenancy. Bills, bills are often, it’s an all you can eat buffet. know, some HMO tenants are oblivious to the energy crisis. think they are, how do they control the heating? They open the window, don’t they, to cool it down a little bit. It’s an all you can eat buffet.

Council tax banding is a new threat that’s been happening up and down the country and I think that’s going to get worse where every single room is banded for individual council tax. People are getting into HMOs sometimes by HMO, sorry, by rent to rent and renting the properties off the landlord. That is great. I think that’s going to be a big issue going forward, especially if the landlord’s on a mortgage and their mortgage rates are going up pretty damn quick. But the other issue with

Ranjan Battacharya (05:00.225)

doing it from a rent-to-rent perspective is you never own the damn thing. It’s a lot better to own the property that you are going through all that hassle to manage. Fit-out and upkeep. These days, things have to be fitted out to a very high standard. It’s more than just mushroom-colored cushions and all of that sort of trendy-featured wallpaper and all of that. They have to be fitted out to a good standard. And it’s not just for the first tenant, it’s for every tenant. So the upkeep.

of that property to keep it up to good spec is a little bit of an issue. And with all of these things, what we are seeing is that the HMO is always, it seems every year, it’s slightly less profitable than the year before. The cash flow is going down a little bit. What can you do instead? What about the commercial property in multiple occupation?

What is a commercial property in multiple occupation? I’ll give you a few examples and then I’ll share with you some of the advantages of doing commercial properties in multiple occupation, which get you the same, if not more cash flow as doing HMOs back in the old days without any of the hassles that I’ve showed you on that page. So this is a former nationwide regional HQ building in Leicester. This has been acquired and converted into

three retail units on the ground floor and eight one-bedroom flats on the upper floors. So this is not done under planning permission, this is done under permitted development. That means you get the right to do it is given provided you meet certain criteria. You only have to wait 56 days to get that permission if you’ve got all your ducks in a row. The great thing about this is that if you do a CMO,

and you convert a building into small one-bedroom flats, then there is no licensing. Each unit is a single let. It doesn’t matter if there 20 flats in a particular building, there is no licensing. There is no management headache because each flat is on a separate AST. So it’s pretty much as I call let and forget. We don’t really have to do that much furniture.

Ranjan Battacharya (07:27.179)

Because in HMOs you pretty much have to kit them all out and communal areas and all of that sort of stuff. This is just nice walls, nice floors, white goods and unfurnished. A few years ago, of course, landlords lost the right to the 10 % wear and tear allowance. And that’s one of the reasons why savvy landlords are increasingly going towards the unfurnished model to take out that loss that we had a few years ago. This is another one.

Again, this is two shops and this works up and down the country. That’s why I’m showing you examples from different parts of the UK, different parts of England. This is two ground floor shops. The upper part used to be an office. The upper parts have been converted again under permitted development into four one bedroom flats. Again, all self-contained units, no communal kitchens to maintain or look after and single nets and…

pretty much let and forget kind of style. This was the, the upstairs here was the former, and then this might be a little trend coming shortly. This was the former Conservative Party constituency office for the seat of Amisham and Cheshire. Now, surprisingly, this had been a Conservative seat for 20 years, but this…

came up for by-election, flat bang in the middle of the Matt Hancock affair fiasco, and they lost. So the landlord was a worried, the Conservatives moved out, and we bought the building. Anyway, permitted development for one-bedroom flats. Again, no management headache, let and forget. Individual council taxes for each flat. Tenants are used to paying council taxes for one-bedroom flats. But what you have…

Because we all know that one bedroom flats are actually very, very good for rental yield. The problem is if you buy them in other people’s blocks, you have service charges and you never own the thing. It’s got a ticking time bomb of the leasehold and that doesn’t really work. So you get the whole former commercial building, you convert it into a CMO, you have nice diversity of cash flow as well because you’ve got some retail tenants as well.

Ranjan Battacharya (09:48.501)

which may be on three, five, 10 year leases, which gives you that security of income. And you’ve also got the sort of one bedroom straightforward flats, which obviously give you that yield. It’s not about gross yield, it’s about net yield. When you take away all the costs, how much do you have left? And if you manage the building yourself, you haven’t got that service charge hassle. This is one in North London. Again, some blue chip tenants got in the ground floor.

It’s a treble unit, Greg’s cost are in the ground floor and 12 one beds above. Again, you’ve got a concentration of cash flow without any communal areas, no kitchens and stuff to maintain, no council taxes to pay or anything like that. I put my socials at the bottom, Instagram and YouTube and all of that. Do follow us on Instagram because all these projects we post pictures and stuff.

as we do these projects, you can follow some of them as they go through. This is one in Gerrard’s Cross. Again, it’s a building comprising of two double retail units. The space above was a office. That, under permitted development, is being converted into eight one-bedroom flats. Former office buildings can be very, very nice to convert. This is a particularly nice building because it’s relatively new. It’s built in the late 80s.

which means it’s cavity wall insulation, it’s clear open floor plate, no chimney vest to remove and all these Victorian features and stuff. So it works very well because newer buildings are cheaper to convert to one bedroom flats, particularly offices like this. So the great advantage of the CMO, as I call it, is that licensing, what licensing? There is no licensing.

You can have as many self-contained flats as you like, no licensing issues to worry about. The letting is as simple as a single let. Now even where areas have licensing rules, they say some of the fundamentalist councils are talking about three or more tenants and that kind of stuff. So what we try to do is make one-bedroom flats. One-bedroom flats won’t be occupied by more than two people and in pretty much most areas…

Ranjan Battacharya (12:12.424)

that will never meet anyone’s criteria to be fully licensable. When you let unfurnished properties, we find that tenants stay for a long period of time. Two, three years or more, tenancies are the norm. So it does become let and forget. The other thing that’s happening now is the energy efficiency stuff, because increasingly we’re putting in stuff where we make it exceptionally… Because if doing it back to brick.

you might as well make sure you put in stuff that is very, cheap to run from a bill’s point of view. That further means that you can charge a little bit more rent and tenants stay. The way we recommend doing it is what I call no money left in. And I’m going to explain how that’s possible pretty much on the next slide. I think we realize I’ve nearly run out of time. OK, why is this profitable? Why is this so easy to do?

The main thing is to understand how commercial property is valued compared to residential property. Residential property is bricks and mortar. Commercial property is cash flow. So the valuation of a commercial property is dependent on the cash flow that it generates. So if it’s empty, it doesn’t generate much cash flow. It’s purely dependent on the rental income. Now, a flat, for example, is valued based on comparables. It’s nothing to do with whether it’s occupied, whether it’s…

tenanted whether it’s owner occupied or how much the rent is. If it was the case then a two-bedroom flat in Hampstead would not be worth what it is. The yield is low because people just want to live there. Commercial property is not like that. With the recession that we’ve got coming on and the fact that so much business has gone on the internet there’s an oversupply of offices, there’s an oversupply of retail units in the UK.

Because of this, commercial property is valued a third or a quarter per square foot as residential property. So, it’s simple. This is the first recession ever where we’ve got permitted development rights. I was doing this in other recessions under full planning permission and it was a pain in the ass. You guys have got it so simple these days. You’ve got a recession where there’s an oversupply of commercial property because there isn’t the same commercial use.

Ranjan Battacharya (14:35.347)

for those properties in a recession. The commercial property price per square foot goes down and we have permitted development rights where if you’re educated and you know what you’re doing, you can convert those properties to residential use using permitted development rights. You don’t have to wait too long to get that permission. It’s a 56 day process to get the permission to convert provided you know exactly what you’re doing.

If you buy newer buildings, it’s cheaper to convert. If you buy older buildings, it’s a bit more expensive. So if you’re doing in cheaper, lower value areas, stick to newer buildings. If you’re in higher value areas, then newer buildings is a massive bonus. But older buildings can work. So the thing is, when you do these sort of conversions, you’re pretty much looking at… I mean, in these days, you should be looking at a minimum of a 35 % margin.

when you do these sort of deals. And you do get that sort of uplift because of the differential between commercial and residential prices per square foot. And that’s where you get your profit. I’ve got some videos on YouTube from Property Elevator. Shren is on this one. She’s actually in the audience there. Put your hand up. Scan that on YouTube. You can see some of the deals that we’ve analyzed. These are clips from the Property Elevator show of people getting their deals funded.

which are commercial conversions, but they’re all based on this model of what I’ve been talking about. Now the interesting thing about commercial conversions is the way you can actually fund these rather flexibly. So what I advocate is this, it’s very simple process and I’ll run it through as quickly as I can because I know I’m running out of time. You secure the site, you can secure a site

using an option agreement or even exchange contracts on it or a subject to kind of offer. Now what you want to do is kick out the completion time to three months from the time that you secure the site and you use that time to put in your permitted development application. You put in your permitted development application, it takes 56 days to get. When you have got that permitted development to convert that building into residential use,

Ranjan Battacharya (16:55.366)

you have uplifted the value of that property. At that stage, you can obtain finance to complete on the purchase of that property. And then you can do this with quite a bit of certainty. At the end, what I kind of advocate to people is that you basically refinance at the end of the deal and keep it and let it out.

At the moment, what we’re seeing and we continue to see in the recession is residential rents in particular are going to be high and are going to continue to be high. So you will the exit is through residential rental and the exit is by refinancing it on a commercial buy to let mortgage at the end. Now, provided you’re looking at margins, if your margin in this is in excess of 35%,

you should be able to remortgage at the end on a 65 % loan to value and get pretty much most of your money out of the transaction. And remember, you’re producing cash flow, positive cash flow each month based on relatively little money tied up. All the deal illustrations that I showed you are done on exactly that basis with the refinance out, pulling out all…

most of the money out and the deals providing positive cash flow. I do a bit of training on this, actually one of the UK’s largest training program for commercial property investors. We show you how to basically do commercial buy-to-let, commercial property through your pension and commercial property conversions and everything that I’ve talked about today. It’s an online course, it’s an eight-week course and I do as part of that eight-week course we do weekly coaching.

which is with me, where I basically show you how to do everything that I’ve talked about. Do connect with me on Instagram and the like, and particularly on YouTube. We put out a lot of case studies from my students and the like who are actually doing these sort of deals right now.