Do you dream of being in a position where you always have access to the money that you need, to buy the HMO properties that you want? Would you like to remove the headache of having to find cash every time you want to buy the next property or do another refurbishment?
If that’s what you want to achieve, that’s exactly what we will be covering in this blog post. I’ll discuss the four pillars of funding and talk about how you can master them to build and scale your HMO portfolio or business faster. Read about the four pillars of funding below or check out the full episode on The HMO Podcast.
1. Know Your Numbers
The first pillar of funding to master is ‘know your numbers’. Learning how to effectively appraise deals is crucial. You need to be able to thoroughly understand what your deals and HMO properties should look like and understand the maths behind this process.
While you need to be able to construct an appraisal, you also need to be able to interpret what the numbers mean. To help with this, you may want to use your own spreadsheet, or even better, the ‘deal appraisal stacker’ inside The HMO Roadmap, which will show you the performance of deals.
You also need to be able to input data and make assumptions with a certain degree of accuracy on the average occupancy level, estimated utility bills and refurbishment costs. If you don’t have the confidence to do that, then spend more time learning about these costs and factors. And make sure to account for worst-case scenarios if interest rates and costs were to increase.
If you don’t understand all of the basic principles of property investment and what good benchmarks are for HMO deals, spend time researching this. It’s essential to understand what these metrics mean, how they relate to one other, and what they’re telling you about the performance of a deal.
2. Raising Private Finance
The second pillar is raising private finance, which can help you scale your business almost infinitely. There are different ways to use private finance. Take the time to understand how you can use this and the different kinds of finance and structure you can use.
Start by putting a fundraising objective in place and build your profile and authority. This isn’t all about having tons of experience already. People invest in people. If you can demonstrate you’re the right investment partner, that can be enough. You can even leverage skills, credibility and experience you’ve had in other areas of your life.
Before getting started with this, there are compliance pieces that you need to be aware of. There are regulations set out by the Financial Conduct Authority (FCA) that regulate what you can and can’t do and what you can and can’t say when it comes to investments
If you master this, you will open so many more doors and be able to buy many more properties much more quickly. The HMO Roadmap has a full course dedicated to raising private finance.
3. Recycling Capital
As the third pillar is recycling capital, start by considering how you can recycle capital from your deals and properties. Recycling capital is critical to a business that needs to regenerate cash. This should be considered a priority as it can support private finance deal structuring as well, so you can pay investors back.
There are three main considerations when it comes to recycling capital. First of all, find projects where you can genuinely add value, such as adding square footage. You can also look to add aesthetic value as well, and bathrooms and kitchens are typically where you can do this.
The second consideration is that property values tend to go up over time. Don’t rely solely on capital appreciation with your properties, but this can provide an opportunity to extract value, recycle capital and scale your HMO business and portfolio.
Thirdly, depending on the number of rooms in your HMO, and depending on the rent rolls those rooms are generating, it’s possible that you could get a commercial valuation on your HMO. If you refinance off the back of this, you may find you are able to recycle more capital which you can then roll forwards into the next deal. Sounds good?
4. Accessing HMO Mortgages
The fourth and final pillar is HMO mortgages. Don’t underestimate the value of mortgages. If you put down a 25% deposit to buy a property, you can leverage that to buy an investment with significantly more value.
To access HMO mortgages, it’s important to get yourself into a super lendable position and have the right people on your team. Understand what banks like and don’t like. Make sure your credit score, deal analysis and entire deal prospects are strong.
You need to make the bank feel comfortable and confident to lend to you. When that happens, they’ll lend for cheaper and for longer. And if you can get yourself into a position where you don’t need to borrow as much money from the bank, you’ll get a much better deal and be able to proceed quicker.
It’s also important to understand what’s happening in the mortgage market at any point. A good mortgage broker can be your eyes and ears on the ground. Think about changing interest rates and how that might affect HMO mortgages. Then, master the art of applying for HMO mortgages to get the most out of this kind of funding.
If you can tap into all four pillars of funding at any point, financing your deals will no longer be an issue. This will give you a solid foundation to be able to act on opportunities and secure the right properties, which will allow you to grow a sustainable HMO portfolio faster.
To learn more about funding your HMO portfolio or business, there are courses and lessons on each one of these pillars within The HMO Roadmap, so become a member today to help you master the four pillars of funding!
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 and Smart Property, a specialist HMO property investment and management company. 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!