Newcastle HMO Cost Breakdow
Hey guys, Samuel Leeds here. So I went to Newcastle to see Rye Beaumont's latest property purchase. It's a BRRR (buy, refurbish, rent, refinance) HMO with an excellent view. He purchased the property for £75,000 and, after refinancing, managed to pull out most of his money. And with a £1,000 monthly profit, he should get back the rest within a year. So how did he do it?
What Made Him Start Investing in Property?
Rye, who’s a music artist by profession, revealed that he began watching my videos, read my book, and even joined me for dinner about 18 months ago. The knowledge he acquired from my teachings encouraged him to seek financial freedom through property investment. So together with his mate from school, whose parents are property investors, they began a property business. They currently manage seven properties, three of which are big commercial deals. “Mad respect, man,” I acknowledged his rapid rise in the property world.
Rye resides in London. So why did he buy property almost five hours away? He said it was because of the long-term growth (LTG) potential of Newcastle's property market, explaining “you could get cheap stocks but really strong yields.”
Rye revealed the previous owners of the house were an elderly couple who lived there for years. So when he bought it, it was in a slightly run-down condition. They, therefore, had to strip out pretty much everything and do a full refurb. The entire process took a few months due to factors such as delays caused by the coronavirus outbreak.
Given Rye's demanding career as a musician and the long drive from London to Newcastle, how on earth did he find the time to find builders and manage them? “No social life is one way of doing it,” he explained, saying since he lives with his mates, he doesn't have to go out to meet with them, say on weekends. So instead of going to parties and the like, he would drive up to Newcastle to check on the refurb's progress and drive back to London that same day.
The entire house has five bedrooms, a kitchen, and a common living area. And all rooms are ensuites! The first one I got to see was a double room, which had just been rented out for £425, 50 quid more than they expected. Another person had also secured one of the other double rooms for six months. And there was someone else coming in that week to secure one of the other rooms.
So in just one week of advertising the rooms, only two were left. I suggested doing block viewings, where you invite all prospective tenants to view the available bedrooms on the same day. Block viewings create a competitive atmosphere, which may lead to them placing higher offers. You have to sell the tenant on moving in because money doesn't come from properties; money comes from people.
As for the kitchen, although it's a shared room, Rye decided to put locks on all the cabinets. The idea being that each tenant should have their own upper and lower cabinet, which they can lock. “Dude, they're gonna have so many keys,” I remarked, joking he'll probably receive a call from one someone saying they're hungry but can't gain access to their cupboard because they've lost the key. So I suggested he consider a key safe.
But again, “why would anyone want to lock their cupboard,” I wondered out loud. Rye said that the tenants might likely leave them locked. “I don't know what I was thinking,” he said. But I was quick to point out trial and error is fundamental, and who knows, to the tenants, a cabinet you can lock in a shared home might be the best thing since sliced bread.
With the advice of his builders, Rye decided to have a small communal area upstairs so they could have a big double room downstairs. It was small but served the purpose. And give that no one really spends time in a communal room, it often ends up being a waste of space. Rye commented that students are more likely to make use of a common room than professionals.
At that point, I revealed I never deal with students, which surprised Rye. He wanted to know why, so I told him since mixing professionals and students is a no-no, I always choose professionals. But occasionally, I've had tenants who are postgrads or people who are working full-time while attending college. “That's what's good about Newcastle. Loads of postgrads stick around,” Rye noted.
Lastly, he showed the back garden, which was overgrown when he bought the house. He had it re-gravelled for about £400 to £500. “Really nice. I like it,” I said, impressed with the transformation. The HMO, in general, was quite impressive. Rye stated that while he, to a degree, took a hands-on approach, he should have been more involved. “But I was learning. So I was just trying to figure out all the little nuances of managing a project,” he explained.
- Buying price: £75,000
- Refurb cost: £45,000
- Total spent: £120,000
- After repair value (ARV): £145,000
- Profit: £25,000
- Loan to value (LTV) on cash-out refinance: 75%
- New mortgage amount, i.e., 75% of ARV: £108,750
- Cash-out amount: £108,750
- Monthly rental income: about £2,000
- Monthly profit after expenses: about £1,000
Going by the numbers above, Rye should make the amount he couldn't pull out, that's about £12,000, within a year. We also discussed how interesting it is that in an area like Beaconsfield, where I live, houses cost millions of pounds. But regardless, if I wanted to rent a spare room, I'd get about the same rent Rye is gaining from the Newcastle house he bought for £75,000.
“To me, monetarily, you need to come to the North if you want good yield,” Rye responded, despite the 10-hour round trips it would take someone in the South to do site visits. I should mention, Rye's HMO is not in an Article 4 area, so when the area introduces Article 4 directions, which it will, the value of the property will shoot up.
As Rye revealed during the house tour, it wasn't all smooth sailing. At some point, he even had to fire the original builders. The reason being, they initially told him they understood HMO compliance, i.e., ensuring the HMO meets the local authority standards. But two, three months in, it was evident they didn't have the know-how to meet compliance requirements in certain areas.
“They did a fairly good job with some other stuff,” Rye said, explaining that their shortcomings didn't cost them an arm and a leg. However, the replacement builders had to fix the fixtures and fittings, do the last bit of the kitchen refurb, and work on the garden. Interestingly, the previous builders quoted £4,000 for the garden renovation, while the replacement builder did it for about £500.
If you're doing a large HMO, you will need a license. So my advice, go on the council website and get a list of exactly what needs to happen for your property to be considered HMO compliant. Share that list with your builders, so they'll know how to go about complying with the given regulations. And remember, HMO requirements vary from county to county.
“Ryan, you've done so well,” I said as we concluded. I asked him to share his top tips with future property investors. And this is what he had to say:
- Know your compliance obligations.
- Don't get too stuck up on a location that you miss out on a promising property. Rye explained that while due diligence is crucial, as long as many people live in an area, a property will rent. “You just need to find if it's optimal for you,” he said.
- Just do it. That's the best way to learn.
Stay tuned to my channel for more on Ryan and other similar inspiring stories.
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