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How Bridging Finance and HMO Mortgage Exit Maximised Property Value?

How Bridging Finance and HMO Mortgage Exit Maximised Property Value?
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
With funding in place, the client could secure the property, paving the way for HMO transformation.

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

With the investment valuation at £325,000, the client refinanced onto an HMO Buy-to-Let mortgage, structured to support long-term cash flow.
  • 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.

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