A Guide For Investing In HMOs With Little To No Capital

The single biggest limitation to building a property business is lack of capital, and HMO investment is particularly capital intensive.

But what if I told you there’s a way to buy property with little to no capital? And you could rinse and repeat that strategy, buying deal after deal, gradually scaling up your portfolio using other people’s money?

Doing this effectively will provide you with infinite possibilities to scale up your property business! However, keep in mind that this is still very difficult to do – the ingredients have to be just right.

Read below or listen to the full episode on The HMO Podcast to learn how to invest and build a HMO portfolio with little to no capital, including considerations to make and tips on how to get started!

The Basics

To invest with little to no capital, you need to be able to add value and recycle capital. And if you can add enough value, that can cover the cost of the residual deposit when you refinance. Everything else you’ve borrowed can then be paid back out.

This means the new equity remains as your deposit and you’ve effectively got the property for free. And if you borrowed everything to get there, you’ve not had to put your hands in your own pockets. Then you can just rinse and repeat and do it again and again!

To do this effectively, you need to be really focused on finding the right kind of investors to work with, understanding the types of arrangements you need to set up, and investing in the right types of projects and deals that you need to do!

Find the Right Investors

First and foremost, you need to find the right investors. In many ways, you could look at a bank as an investor. You’ll buy a property, put a 20% to 25% deposit down, and the bank will give you the rest of that money.

Some investors like to do exactly the same thing, so if you’re going to use private funding or come to some sort of an arrangement with a private investor, they’ll often like the same thing as that gives them a certain amount of protection.

If they were to give you 100% of the capital, that means if anything goes wrong, such as the property value goes down, it wasn’t worth as much at the back end, or you had problems with the refurbishment, they risk losing some of their money.

That’s why a lot of investors will insist that you put a deposit in yourself – maybe somewhere in between 10% and 25%. However, to master this strategy, you need to get that figure down as low as you possibly can! And that means you need the right sort of investor.

But where do you find them? That’s the big challenge… So, you’ve got to be able to communicate your message well and confidently and understand that not every investor is going to be up for this level of risk. But some investors will be.

I can tell you from experience that it absolutely is possible to find investors who will give you 100% of the capital for the project and the refurbishment! They are out there. You just have to work very hard to find them and forge the right sort of relationships with them.

Structure Deals in the Right Way

There are a couple of ways you can use private finance. If you want to borrow money at a fixed rate, let’s say you want to borrow £200k to buy a property and £100k for the refurbishment. You might take that on a fixed rate at 10%. That’s a pretty straightforward arrangement. You’ll pay that at the back end when you finish your deal and pay your investor back.

If you’re not putting any capital in, the risk is quite high for the investor. And like I’ve said, that’ll put some investors off… So, you might need to consider another type of arrangement, such as an equity type of agreement, especially if you’re at the earlier stages of building your HMO business as this can offset some of that risk for your investor.

Some investors may want 50% if they’re going to lend you all of the money. If that’s the case, I wouldn’t expect them to charge an interest rate as well, but they would own 50% of the project and the proceeds once it’s rented out on an ongoing basis.

That may not be the most attractive scenario if you want to build up your own portfolio, but don’t be too hasty! This is actually a really good way of developing relationships with investors, building your experience and credibility, and adding to your CV.

So, don’t dismiss the idea of doing a joint venture and giving a little bit of equity away if you’ve got an investor who’s prepared to put all of the capital in.

Buy the Right Properties

You also need to buy the right sort of properties that you can add enough value to. But there are some really good ways to add value, including converting existing floor space like lofts or garages.

This is a cheaper way to add value, especially if you can do that under permitted development, because that fabric or structure already exists. If it costs let’s say £50 per square foot to convert the loft, but at the end, it’s worth £250 per square foot. That’s really simple maths!

The other way to add value is through commercial valuations, but keep in mind that you’ll likely only be able to do this on HMOs with more than six bedrooms. You’re going to be looking at more specialist lenders, and you’ll also need to do the right things with the property.

Another important area to consider is the location of these deals. We’re often limited by location. I like to buy in areas with good capital values with lots of potential for capital appreciation and very strong rental demand.

But the downside to that is buying these kinds of properties in the first instance is often quite expensive as it’s more competitive. People are prepared to pay more, so that makes it tough to create as much value. So, I do leave a lot of capital in many of my deals but not all of them.

Sometimes you need to look further afield in peripheral areas. These areas might have more scope for you to find properties that are more distressed or aren’t on any people’s radar, which could help you engineer the value you’re looking for.

Considerations to Make

It’s tricky to hit the nail on the head with this every single time with every single deal. You might find that you get too frustrated, your investors go cold, or you start to upset agents wasting their time. So, here are a few considerations you should make to help you with this investment strategy!

Put contingencies in place.

What if things go wrong? Ideally, you’d have some savings set aside in case the valuation didn’t come in where you needed it to or there was a problem on the refurbishment and you needed to spend more money.

You’re going to have a contract with your investor, and they will be due their money back. So, you need a savings pot that you’ve set aside in case something goes wrong. If you don’t have any savings, you could have this conversation with your investor or a family member.

Ask them if some capital got left in the deal, would they be okay with a secondary arrangement where you pay them over the course of the next 12, 18, or 24 months through the profits of the deal?

For me, it’s not the ideal solution. I want to get them out of that deal as quickly as possible. And for most investors, that’s how they want to exit the deal as well. But it’s important to have that conversation at the front end, so that you can put the right contingencies in place.

Look at how integrated high street finance works.

The other thing that you can do is look at how integrated high street finance will work paired with this. You might be able to borrow some private finance and then top it up with bank finance to buy and then do a refurbishment on the deal.

5 Tips for Investing in This Way

Here’s my top advice to help you develop rapport and build relationships with investors, which is an essential part of the process of investing in little to no-money down deals!

1. Map out a business plan.

Get your plan down on paper in a clear business plan, which will help you and your investor understand how you’re going to find, refurbish, and refinance the deal and handle all of the if’s, what’s, and but’s along the way.

2. Work on a cashflow forecast.

Put a financial plan on paper regarding how this is actually going to work. Use a cashflow forecast where you can input figures, projections, purchase price, refurbishment costs, buying costs, and revaluations. And then you can stress it and look at what happens in different scenarios.

3. Leverage your network.

The next thing you can do is leverage your network of friends, family members, and associates. Start telling everybody about what you do as you never know who might be interested in investing! When you find someone you know who has an appreciation of property and has some savings, you’ve got a really good recipe for an investor relationship.

4. Take advantage of social media.

Social media is still the single most valuable free tool that you can use to expand your network, find investors, and demonstrate your credibility! Online networks and groups can be a particularly great place to connect with prospective investors.

5. Put an investor deck together.

Most prospective investors will ask if you can send over some information on yourself, your experience, and what your plans are. So, you need to have an investor pack ready, and it needs to demonstrate your plan, why you’re doing this, and include examples of what you’ve done.

If you can get these things right, there’s nothing stopping you scaling your HMO portfolio! I hope this has shown you that it is possible to invest with little to no capital. In the last couple of years, I’ve done this on deals worth millions of pounds. So, you can do it. You just have to get it all right, and you have to work really hard to make it happen!

To help you get started investing in HMOs with little to no capital, become a member of The HMO Roadmap. If you’d like access to my template investor deck, business plan, and cash flow forecast spreadsheet, sign up for the premium subscription!

And to expand your network and connect with prospective investors, join our free Facebook Group The HMO Community, which has nearly 9,000 people in it!

About the Author:

Andy Graham is the founder and the lead trainer at The HMO Roadmap! He is also the co-founder of The HMO Mastermind. He writes as a regular columnist in different magazines about a variety of HMO topics and is the host of The HMO Podcast! Follow Andy on Instagram!