Our latest HMO conversion project has just been approved by Stockport Council, giving us permission to combine two adjacent office buildings into a single 8 bedroom professional HMO.
I’d hoped by now I’d be able to share some good news about our Commercial HMO Valuation for our #IPIMacclesfield Project, but rather frustratingly we’re still waiting to hear back from our lender.
So instead of tying that project up with a nice bow before moving onto the next (as if things are ever that simple!), we’re spending our time planning the next one whilst we wait for the valuation report to arrive.
If anything, it’s a good distraction for us as the surveyor didn’t seem to be in the best mood when he visited a couple of weeks ago, so focussing on the details for the new HMO conversion is helping us stay positive.
In this post, I’m going to share some of the details of the project plans that we’re working on, and what’s gone into the project so far to get it to this stage.
If you want a copy of the excel spreadsheet we use to analyse all of our HMO deals, you can download it here.
How Did We Acquire This Latest Project?
Actually we haven’t bought it yet, although as with 99% of our projects it was on the open market with a local agent. No deal sourcers, no brown envelopes, and certainly no garish yellow letters!
We found this whilst driving around our local area, and spotted the board from a commercial agent we’re friendly with. It was in a good location and looked a good size, so we went to view and instantly knew it was a good building. The layout was great (see the next question), the price was good, and we knew demand in the area was high.
The problem was, we’d had issues before with planning permission for large HMOs with Stockport Council, so I wasn’t 100% confident we would get it approved (more on that in question 3!).
So rather than take a massive risk by buying it without planning, we wanted some security over the building whilst we submitted the application whilst still having an option to pull out if it didn’t go our way.
After a few weeks of negotiations via the agent, the vendor and I agreed a short (in the commercial world at least) lease for 12 months, whilst consecutively exchanging on the purchase for £1.
This way the vendor got an income from the property whilst it was sitting empty, we got 12 months to submit and potentially appeal the planning application if necessary, and we knew that he couldn’t sell it to anyone else in that time but if planning was refused we could walk away and lose the monthly lease payments plus the £1 we exchanged on.
There are plenty of creative ways to structure deals like this, but in our experience you’ve got more chance of finding a receptive vendor in the world of commercial property than you would with a residential seller.
What Do The Floor Plans Look Like?
As I mentioned above, a big part of the appeal for us was the existing layout, as it lends itself pretty well to splitting up into multiple good sized bedrooms (in fact it’s already split up pretty much how we want it).
It is currently two separate buildings, but knocking through to create a single large building will be relatively easy. It looks as though they were each residential properties in a past life, which explains why the layout already works so well.
On the ground floor we’ll be putting a large kitchen diner, plus a lounge and 3 bedrooms, with the remaining 5 bedrooms going on the first floor. There will either be 7 or 8 bathrooms in the final layout, as well as a large cinema room and a separate utility room in the existing cellar chambers.
Was Planning Permission a Challenge For This HMO Conversion?
On our last large HMO conversion in Stockport, we had a real nightmare with the planning application. You may remember my tales of woe from #IPIChurchgate as it was my main focus for what felt like years (in reality probably more like 9 months) trying to get it through planning.
We had objections from several local councillors which sent it straight to committee meeting, where their idea of an HMO was The Young Ones bringing down the neighbourhood.
Despite it meeting all local and national planning criteria, it was refused the first time for inadequate rooms sizes (the minimum was 11 square metres). We revised and resubmitted, reducing the bedrooms from 12 to 10, and eventually it was approved through gritted teeth.
So we entered tentatively into this project with some major concerns about having to repeat that saga. Thankfully though it was approved first time with no objections, no committee meetings, and (most surprisingly) no parking requirements!
So what did we do differently with this HMO conversion that gave us such an easy ride this time around?
I think ultimately a few things swung it in our favour, driven mainly by involving a planning consultant to handle the application instead of an architect. I’ve been talking a lot about this recently, and firmly believe that in most cases you should save the money on an architect and spend it on a decent planning consultant.
If your HMO conversion is relatively simple or you’ve done a few in the past, you can quickly determine the best layout for a building. Paying an architect to draw your own vision is a pretty expensive exercise, and whilst you may think you’re getting a deal if they also handle the planning application, in most cases they’re not particularly qualified for this task.
We have started working with lower cost technical drawers to create our floor plans, and then handing everything to do with the application to Paul Butler Associates to give it a smooth ride through the planning process.
I’m confident this is the approach we’ll use going forwards. First of all, there seems to be a certain professional courtesy given to planning consultants from the council planning officer that isn’t shared with Joe Public or even architects.
It’s almost as if the council planning officer assumes the consultant will have done their homework and submitted something reasonable rather than ludicrous, so can rely on their pre-work and conclusions to a greater degree.
The consultants also seem to be given more respect when they stand their ground on points, and given they are (or should be) experts in their field, they also know where they can stand their ground.
On the Churchgate project for example we ended up having to provide 5 parking spaces for a house that’s closer to the town centre than our latest project purely because the committee members felt like it was necessary, yet Ralph (our consultant) knows the local policy inside out and put forward an unquestionable statement along with the initial application that any attempt by the planning officer, highways or committee members was vanquished before it even raised its head.
Our rooms aren’t bigger, our communal space isn’t better, and the location certainly isn’t more convenient, but 10 weeks after submission we received the decision notice from the council highlighting that our application was approved with only minor conditions!
What Does The Project Plan Look Like?
We haven’t gone into massive detail yet regarding the schedule for this HMO conversion yet as we thought we’d have longer to think about it during a drawn out planning application, but I’m certainly not complaining that we need to make up for lost time.
Based on our past projects and what we’ve lived through so far on this one, I’d expect the schedule to look something like this:
- September 2017 – First viewing of the property
- December 2017 – Heads of Terms agreed for lease and purchase
- 25th April 2018 – Planning Application submitted to Stockport Council
- 8th June 2018 – Lease signed and purchase contracts exchanged
- 28th June 2018 – Planning Application approved by Stockport Council
- July/August 2018- Finalise finance for the purchase and sort out building regs etc
- September 2018-January 2019 – 16-20 week renovation schedule
- February/March 2019 – Marketing and housemates moving in
- February-April 2019 – Refinance onto term product
You can see that the actual build work is a major chunk of time, expected to take us 4-5 months from beginning to end, but in the overall scope of the project this is only a quarter of what will be a 20 month process from first viewing through to refinancing.
Commercial conversions are great, but the reality is they are often a lot slower than standard C3 residential to C4 HMO conversions because of everything else that’s involved like planning permission and more drawn out finance applications.
And What About The Financials?
As a commercial to HMO conversion, this is towards the top end of what we spend on a project, but we still think the end rewards justify the extra cost and time involved up front.
In the interest of transparency (we don’t have any secrets here!), this is a joint venture with a friend of ours. They fund the initial project costs, we put in the blood, sweat and tears for 20 months taking it from ‘Hey, that building looks interesting’ to ‘Hey, welcome to your new home’, and after refinance we split the profit and equity 50/50.
This is the overview screen for our Wellington Road project in our new HMO Deal Analyser. Download a free copy for your own HMO projects here.
Here are the high-level projects financials:
- Purchase Price – £204,000
- Legals, stamp duty and short term finance – £14,000
- Renovation costs including furniture – £136,000
- End Value – £396,000
- Gross Rental Income – £4,400/month
- Running Costs – £2,400/month
- Net Profit – £2,000/month
- ROI (based on cash left in after refinance) – 42%
So it’s not a “no money left in, retire on one deal” type deal, but I’m pretty excited about adding another great home to our portfolio.
Obviously we’ll share more details as the project progresses, but in the mean time the best place to keep up to date with progress is over on our Instagram account. See you there!
Wow, that is a deal!
Thanks Vince. Certainly good enough for us to be happy!
Do I have this right –
The JV partner equity is the £57k left in the deal + 50% of created equity. So c. £76k? And rental profits are split 50/50?
Hi Mike, thanks for a great overview into your project. I have a query regarding your deal analysis spreadsheet. The Finance costs are currently calculated on the purchase price of the property and excludes one off fees and funds required for the works. Can you please explain how these are funded? If this is coming from a JV partner I assume they would want to see a return on their funds in the form of either/both fixed interest and share of profits which will affect returns(?). Many thanks.
Hi Oren, the finance costs are actually calculated based on the purchase price of the property less the deposit, so in this case it’d be 70% of the purchase price. Other costs like legal fees, renovations etc are funded from cash within the company. Yes, there is an opportunity cost to those funds being used for this project over something else, but we don’t track it to that level of detail as we could spend months debating what that opportunity cost is in financial terms.
Thank you for your prompt response. Yes, forgot to add “less deposit” in the previous message.