Does that HMO conversion deal really stack up? Five things to check

Five useful tips for checking whether a new HMO conversion deal really stacks up, especially if you're being offered deals by deal packagers.

1. Don't view the HMO as if it'll always be brand new

When you research room rents on SpareRoom, look at rooms that are actually filled (not just advertised) in HMOs up to five to seven years old. A brand new product will usually carry a rental premium. You need to understand the blended rent roll over your initial mortgage period, typically three to five years, so you don't over-egg your ERV and then complain when the valuer knocks 10–20% off your rents.

"But I've just signed tenancy agreements on these six rooms at £750 a month, Mr Valuer. Why are you saying I can only achieve £650?"

2. Use the right sales comparables

Understand the difference between valuing a brand new HMO commercially on a yield basis and the sales you see of tired HMOs selling at or around bricks-and-mortar prices. The yields those sell at are irrelevant to your asset. Spend time finding like-for-like comparables, then add 1–2% for caution in your early due diligence, before any serious money is spent.

3. Stress test the finished product

Can the HMO survive a market shift in the wrong direction? Run your numbers against:

• Management at 12–14% plus VAT
• Operating costs at 20–30%
• Maintenance at 7–10%
• Interest rates at 6–8%

4. GDVs aren't there to rescue your build costs

GDVs and end values aren't there purely to cover the huge rise in build and development costs. You'll probably have to leave money in on refinance to avoid over-leveraging, especially on six- and seven-bed conversions.

5. If it's a deal packager's deal, question everything

• Get a second opinion on the area from a local landlord. Walk the streets yourself. Get advice from someone who knows the area and isn't the sourcer, and you'll get a more warts-and-all, non-sales answer.
• Get a second, third and fourth opinion on the contractor, the build schedule and the costs.
• Get a fire safety officer, a compliance expert and an energy-efficiency expert to look at the project as early as possible, so you end up with a compliant, legal, future-proofed and energy-efficient HMO.
• Understand the true local demand. Are you really renting to "working professionals", or to working locals? There's a big difference in affordability and dynamics.
• Question the ERV and GDV at length, and think about where the value and rent roll will be not just on completion day but in five years' time.