In this case study, Auction Finance supported a client in purchasing a property at auction with bridging finance, transforming it into a high-yield HMO (House in Multiple Occupation), and then exiting the bridge with an HMO mortgage based on an investment valuation.
Unlike standard bricks-and-mortar valuations, the investment valuation highlighted the property’s rental potential, allowing the client to secure a higher refinancing amount and maximise the property’s overall value.
Objective
The client’s primary goals were to:
Purchase a property at auction using bridging finance.
Convert the property into an HMO to enhance rental yield.
Exit the bridging loan with an HMO Buy-to-Let mortgage, using an investment valuation to maximise refinancing and long-term income potential.
The Challenge – Bricks-and-Mortar vs. Investment Valuation
Why Bricks-and-Mortar Valuation Fell Short
Limited Comparables: Local properties were not HMOs, meaning a bricks-and-mortar valuation undervalued the property’s potential.
Overlooked Income Potential: Standard valuations do not consider rental income, so they fail to capture the true market value of an HMO’s revenue-generating capacity.
Solution: By using an investment valuation based on the property’s rental income, the client was able to refinance at a higher loan-to-value ratio, increasing their available capital.
Step-by-Step Strategy and Execution
Step 1 – Securing the Property with Bridging Finance
The client purchased a terraced property at auction for £200,000, securing ownership quickly with a short-term bridging loan from Auction Finance. This loan allowed them to complete the purchase while preparing to add value through HMO conversion.
- Purchase Price: £200,000
- Bridging Loan Amount: £150,000 (75% loan-to-value, or LTV)
- terest Rate: I 0.7% per month, with a 12-month term
Step 2 – Converting the Property into an HMO
The next step involved converting the property into an HMO to boost rental yield. Key upgrades included:
- Installation of fire doors, smoke alarms, and emergency lighting to ensure HMO compliance.
- Kitchen upgrades and additional bathrooms to support multiple tenants.
- Security upgrades, such as individual locks on bedroom doors for tenant privacy.
- Conversion Costs: £40,000
- Total Investment So Far: £240,000
Step 3 – Choosing Investment Valuation Over Bricks-and-Mortar
Upon completing the renovations, the client needed to refinance to exit the bridging loan. This presented two valuation paths:
Bricks-and-Mortar Valuation:
- Based on comparable single-family homes, the estimated value was £250,000.
- This valuation offered limited refinancing potential due to the low market value estimate.
Investment Valuation:
- Based on projected rental income, with six rooms generating an estimated monthly rental income of £3,000 (£500 per room).
- Resulting in an investment valuation: £325,000, enabling a higher refinance amount.
- Outcome: The investment valuation allowed the client to refinance at a higher loan amount, making the HMO mortgage exit both more profitable and sustainable.
Exiting with an HMO Mortgage
- Refinance Amount: £243,750 (75% LTV of £325,000)
- Interest Rate: 4.5%, fixed for five years
- Monthly Mortgage Payment: Approximately £912
- Monthly Rental Income: £3,000
Financial Summary
- Total Investment: £240,000 (£200,000 purchase + £40,000 renovations)
- New Mortgage: £243,750
- Released Equity: £3,750 (used for fees and additional expenses)
- Monthly Cash Flow After Mortgage: £2,088 (£3,000 rental income – £912 mortgage payment)
Refinancing based on the investment valuation allowed the client to release equity and enjoy a significant increase in monthly cash flow.
How Auction Finance’s Expertise Was Key to Success?
Auction Finance’s deep understanding of investment valuations and the HMO market enabled the client to achieve a higher refinancing value and optimise rental yield. Our tailored support included:
- Specialist Bridging Finance: Quick, flexible funding enabled the client to secure the auction purchase within the necessary timeframe.
- Valuation Strategy: Leveraging an investment valuation helped the client maximise refinancing options and achieve better cash flow.
- Seamless Transition to HMO Mortgage: Auction Finance facilitated the move from bridging finance to a long-term HMO mortgage, supporting every stage of the investment cycle.
Key Takeaways from This Case Study
Maximising Value Through Investment Valuation:
Investment valuations are ideal for high-yield HMO properties, providing greater refinancing potential than bricks-and-mortar valuations.
Increased Value Through HMO Conversion:
Converting a property to an HMO can maximise rental income and market value, making it a profitable choice for investors.
Expert Guidance in Finance:
Working with Auction Finance ensured a seamless exit strategy, helping the client unlock the property’s full potential.
This case study highlights how an investment valuation approach can reveal a property’s income-generating capacity, allowing investors to achieve significant returns and maximise cash flow.
