Watch: Unlocking HMO success: Creative financing strategies for property investors

Kim McGinley (00:04.367)

Good afternoon, everyone. Yes, my name is Kim McGinley. I’m from Vibe Finance. And today I’m going to be talking you through creative finance strategies that our current clients are actually using to fund their projects. So I thought I’d kick off first of all with just giving a summary of 2024 so far. Now, it is a completely different kind of setting to where we were in 2023, which thank God for any broker that’s gone through that or anyone going through a mortgage application last year.

the rates were just insane in the pace that they were increasing and the pressure that kind of lumped on the brokers as well. So 2024 is a lot more stable. Yes, rates are still a little bit more volatile. Swap rates are kind of on the up, then they’re on the down. But in the grand scheme of things, they’re kind of staying there or thereabouts at the moment, which is great for us. So in the market at the moment, we are in a low rate.

high fee kind of market and vice versa. So your higher rates come with lower fees. What I would say is to kind of dispel anything that you’re thinking about the products themselves, that you’re just chasing either the lower rates or that you’re obsessed with the fee because for any broker that’s worth their weight in gold, you should be provided options based on the true cost of the loan over the fixed term because you can add the fees. It’s including the balance that’s outstanding as well. So

really, really important for your brokers, for you to be working with them, and they’re giving you the right options to make an informed decision. Some lenders are now actually charging fees when rates, so it’s funny actually, last year, no fees were being charged for rate increases on your live application. So once it starts going through the motions, it goes to valuation and legals. As rates were increasing, obviously that did impact mortgage applications as well.

Now we’re in a market where rates are starting to decrease. Lenders, some lenders, not all of them, are now introducing fees. And these fees can be anything from £100 to £499. And it’s something that you should be aware of depending on the lender that you’re working with, just bearing in mind that hopefully as we see rates decrease, that you could be hit by changing to a reduced rate on the fee that they’re charging you. Now, I haven’t actually got up here, but we are…

Kim McGinley (02:23.237)

we do have a general election coming up. And there’s more conversations that are coming about as to how that may or may not impact the mortgage market. We will probably see rates still be that little bit volatile. So swap rates, for example, when rates are changing at the moment, it’s normally around 0.1 to 0.2 basis points. So it’s not drastic changes, but we’re kind of expecting it to stay the same up until the general election when hopefully we get some stability in the market again.

And obviously we’re all hoping for the bank base rates to come down at some point. When that happens, there’s a lot of speculation that it’s gonna be the summer, maybe autumn. We do tend to follow America. So we’re just all keeping an eye on that. But I think when that happens as well, it’s gonna give a kickstart to the mortgage market as well. More lenders are now considering first time HMO landlords, which is great because for a long time, they kind of pigeonholed themselves only to several lenders that would lend first time HMO landlords.

We’ve got more and more that are coming to the market now. We’ve also got lenders that are looking at investment valuations on small HMOs. It’s one of the biggest topics and the questions that we get as a broker for small HMOs, which I’ll come onto the description of what’s classed as a small and large in a moment. But whether you get a bricks and mortar valuation or the investment valuation based on the yield of the property. So what is classed as a small? I’ll quickly touch on that now.

Anything up to six beds, typically speaking, is classed as a small HMO. Anything seven beds plus falls into the large HMO kind of status, okay? Another area that we’re seeing a lot of clients going into is the supported living. And it’s great now because we have got more and more lenders that are coming into this space. There’s certain questions that we need to know as brokers, ultimately, who’s the tenants? If there’s a local authority involved, who is that?

what type of tenants are going in there? Is there a live-in carer or a 24-7 carer? That’s the biggest thing that’s going to affect how many lenders will lend to you if there is a live-in carer there. So several questions around that, but the supported living model is definitely up and coming. I think over the last 12 to 18 months, a lot of investors are starting to diversify their portfolios. They’re looking at high yielding properties such as HMOs and the supported living kind of model fits in with that as well. So

Kim McGinley (04:44.661)

Valuing a HMO, and it’s really important. Every lender’s kind of different when it comes to their criteria for small HMOs and how they value them. Again, broadly speaking, HMOs short from valuations applied to a small HMO, so anything up to six bedrooms. This is again, very high level broadly speaking. That will mean the bricks and mortar valuation. When you start to get into your SUI Generous, your seven beds plus, that is a long form value, Red Book valuation report. So they’re about 30 pages long.

it’s different to a short form that’s about two to three pages and more of a checklist. Now, the lenders that we actually work with that do lend on small HMOs on an investment valuation basis, depending, there’s certain criteria that you need to bear in mind. I’ve actually popped on here. So we’ve got Shorebrook Bank, one of the key players in this space, Kent Reliance, Hampshire Trust Bank, Paragon, and Interbay Commercial. These are your lenders that any broker would look at for a small HMO on an investment valuation basis.

Where it kind of applies for small HMOs on the investment value is where there’s certain kind of key criteria. So if you’re looking at a property in an Article IV area, it’s changed from C3 to C4 on the planning. Again, that’s a big benefit for the lenders to give an incentive for them to use the investment valuation. Sui generis already classifies as that, so I’ve gone over that already. The key part actually is the other bit on there. So for a lot of refurb projects,

some clients are spending significant money on converting some properties to a HMO. And when they’re doing so, when it can only really be sold as a HMO, that’s the incentive for the lender who relies on the valuers. So big part of this is for the valuers comments, their comparables and them confirming basically that the investment value applies. But yeah, so on the next slide, I’m just gonna talk you through.

an example of one of our clients in real time really, what they did. So they took a four bed HMO, sorry, a four bed property, converted it to a six bed HMO. And this is where we pushed for the investment valuation with the lenders. You’ll see that they converted the two, the Studio 2 and Studio 3 on the ground floor. They’ve got, separated the gardens. They came with their own gardens, private gardens each. They put on suites in every single bedroom. And again, so really on the layout of this property, it can only be sold as a HMO.

Kim McGinley (07:08.428)

What they’re looking at, the lenders, you can imagine a row of terraced houses, all of them residential, someone buys, let’s say the middle one, and they spend minimal works converting it to a HMO. The lenders typically say, why would someone pay a premium for that HMO and not buy the next door property, spend minimal works, and then let it out as a HMO? So that’s what they’re looking at. For the bigger conversions and the more…

the varied conversions with the en suite, that’s when it really comes into its own from an investment valuation basis. Going on to creative finance strategies. I’m going to talk you through a few strategies that our clients that we’re working with on lenders at the moment. Delayed completions, this is definitely more up and coming now. don’t know if vendors are more susceptible to negotiating on these types of deals, but…

We’ve got clients where they are undertaking works between exchange and completion. When you complete the purchase, you can potentially actually borrow 100 % of the purchase price. We are currently working with bridging lenders. So this is on a bridging short-term basis. I do need to stress that. But we’ve got bridging lenders that are lending 100 % of the purchase price purely because of the fact we’ve got clients that can demonstrate that between exchange and completion, they’re using their own money to increase the value of the property.

So they’re injecting a cashflow into the property to increase the value. But big caveat is that it can be no more than 75 % of the new market value of the property. Okay, so like I said, short-term finance is required for this strategy. And you can actually start the remortgage process. You don’t have to wait six months. There is a six-month rule that’s a little bit archaic for some of the lenders, but there are certainly lenders that will lend day one once you’ve purchased it off the increased value. So they kind of run in tandem with each other.

So that’s today completions. Purchase lease options. Okay, so a purchase lease option agreement, can’t even say it right, a purchase lease option agreement, gives property investors the chance to rent a property and generate an income from it with the rights but not necessarily the obligation to purchase it at a later stage at a predetermined price. Okay, so both parties will generally require a solicitor to ensure…

Kim McGinley (09:26.219)

The transaction is done properly and the agreement is legally binding and typically these will be registered at land registry for the security. Where this is actually happening, so we had a client, this case study that we’ve got, they agreed to purchase property with a lease option in place. It was formally registered at the land registry and they’d had agreed a predetermined price of £135,000. The client was actually paying £300 in rent to the vendor as part of this agreement.

but they were actually receiving 775 pounds in rental income. So it’s income generating for them, whether they decided to purchase it or not. Now the client also did carry out refurb works by the time, like I said, they came to us, I think it was 18 months into the purchase agreement. They had undertaken refurb works to the property and they could evidence that the money had come from their own fund. So it comes down to that hurt money that lenders do talk a lot about.

By the time that the option was actually exercised, so as part of our purchase, the mortgage that was going through, the value had actually increased to 210,000. Now we worked with a term lender on this particular application and even though the agreed purchase price was 135,000 pounds, we completed the term loan mortgage purchase at a loan of 157,500. So that was 75 % of that new value.

So these are the kind of strategies that really work for some clients and it does depend who the lenders are. This isn’t normal for a lot of lenders, but we do know the lenders that will accept these. Below market value and you’ll see on there that I do put it must be a true below market value deal because we do have clients that come to us and they say, found a property, amazing deal, got it below market value. And we’re like, great, how much is it? It’s on for 230, I’ve got it for 225. And we’re like, that’s not really true below market value, okay?

So when it is true below market value, which we often see at the minute, these deals can be found. You can typically borrow 90 % of the purchase price as long as it’s no more than 75 % of the value. Okay, so this is on term finance and short term finance. So whether it’s bridging or a straightforward mortgage application, you can borrow 90 % of the purchase price. Ensure this is really important actually at the bottom. So lenders need to know it’s an arms length transaction.

Kim McGinley (11:47.497)

it’s really important for them. just make sure when you’re working with brokers, I the first question we ask is the explanation, how did it come about? Is it arms length? Give us the explanation to give to the lender. Because then again, it kind of beefs up the mortgage application to allow them to do the 90 % of the purchase price. 100 % funding. So outside of what I spoke about earlier on the delayed completion for short term finance, if we’re looking at anything outside of that, when clients come to us and they hear…

from someone that they can borrow 100 % of a property, it’s a myth. You cannot do that. The only way that you can do that is by adding additional security to allow the equity in there to be viable for the project. it is a myth. It can only be done using additional security. Just to end on specialist finance. So it’s not a tick box system. You can’t compare it to a residential mortgages.

For that kind of side of things, it’s very tick box. This is not tick box at all when it comes to specialist finance. Each case is assessed on its own merits. Every case is unique. It’s not one and the same for each and every one of you. There are grey areas and lenders love to say it’s a grey area. But there are so many grey areas when it comes to specialist finance. Criteria is there to be a guide for lot of lenders.

There are instances, if you get a good broker, we know when and how to push boundaries. We know how to present a deal so that you’ve got the strengths and the weaknesses. We have to be open and honest with all the transactions, but a good broker will know how to put a proposal forwards to push boundaries, rate exceptions, and things like that. So just make sure you’re working. You can do due diligence on any kind of broker to know if they’re good or not. Help us to help you. So yeah, just…

Give us the information upfront. The last thing we want to do, if I’m being totally honest, is waste our time, but also investors don’t have time to waste. So just be upfront and honest with your broker. And first impression is everything. So I’ve worked for lenders. I did that for 12 years prior to setting up Vibe. And I know how important it is, that first impression on a deal. I know sometimes with investors, you do like to speak maybe to two or three brokers.

Kim McGinley (14:01.813)

Please, please just make sure that your deals aren’t being touted around because I can’t explain to you or stress enough how that first impression is everything to a lender. And don’t listen to Dave at the pub. And I’m really sorry if anyone here is called Dave. anyone here called Dave? Good. there’s Dave there. So when Dave’s at the bar later, don’t listen to Dave. No, in all seriousness, this is just a joke really because…

So many clients come to us and say, well, my mate’s done this and this person’s done this and they apply it to their own situation. All I will say is everyone’s situation is different. There’s so many factors that we take into account when we’re kind of looking at which lender to recommend to a client. So I would just say, stay in your own lane. And yeah, I’m here to help anyone. I don’t know if anyone’s got any questions, but thank you for listening to me.

Kim McGinley (14:59.859)

Any questions or am I good? Yes.

Kim McGinley (15:04.683)

Yes.

Kim McGinley (15:14.887)

Ultimately, as long as it can be evidence to a lender, whether it’s legal, that it’s compliant in whatever situation that is, it’s fine. But again, what I would say is make your broker aware of that upfront so they know the lender’s going to be okay with it. Yeah, is that all right?

Anyone else? Yes.

Kim McGinley (15:36.97)

Yes.

Kim McGinley (15:45.131)

Yeah. I think nowadays the due diligence that anyone can do when looking for a new broker, the technology that’s there, you’ve got Trustpilot, Google reviews, you can see what people are saying about them online. Recommendations go a really long way, but it’s a really good question. But I just think with the tools that we’ve got nowadays, you can kind of see if someone’s doing a good job or not.

Kim McGinley (16:10.655)

Dave.

Kim McGinley (16:17.461)

How do we help them pick the best lender?

Kim McGinley (16:22.611)

It’s a great question. If there’s anything we’ve learned over the last two years with the volatility in the market, it’s the lenders that have done really well and maybe not so much. It’s changing all the time. So we work with lenders day in, day out. Personally, when I give options to a client and they’re the best option rate wise for the client, I will back that up by saying, it will take longer to go through. We’re experiencing this at the moment.

And there’s sometimes not much of a difference between using that lender that’s going to delay maybe the process because of their time scales to a lender that can get it through quite seamlessly. So, but it’s ever changing. And I think this is where brokers are worth their weight in gold because we’re seeing it day in, day out. So we can actually say that and back that up. I’m literally going to get clicked off. Time? I’ve got time. Anyone else? We’re good. Thank you so much for listening to me. I’m outside if anyone’s got any questions