How to make single family rentals cash flow instead of HMO’s?

How to make single family rentals cash flow instead of HMO’s?

10:53 AM, 11th March 2014, About 10 years ago 9

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I have owned four single family cash flowing rental properties since 2006 and last year started looking for ways to expand my portfolio where I could invest in a property, add value (perhaps through refurb), recycle the deposit and invest in another etc.

My current portfolio, small though it is, cash flows for me and I want to find additional cash flowing properties. Maybe I am rusty but I am struggling to find single family property opportunities that stack up for me. How to make single family rentals cash flow

I am working on the basis of 35% of rental going for management, insurances, repairs, provision for voids, carpet & paint etc. This leaves 65% for finance and hopefully cash flow left over.

My aim is at least £200 PCM cash flow after all costs.

In my location (Cambridgeshire & Suffolk) a typical 3 bed property would rent for £600 to £650 PCM.  After costs, 65% of this rental is £390 to £422 and this reduces to £190 to £222 left to pay finance after taking off my target £200.

At 5% interest that buys a £45k to £53k loan.

At 75% loan-to-value that would be a property worth £60k to £70k.

Properties of that value don’t achieve £600 PCM rents in my area, unless I look at HMO, but professional letting agents don’t seem to like them.

Perhaps I am being unrealistic expecting to cash flow £200 PCM after costs?

And so, I am going around in circles.

Am I getting my numbers wrong or am I looking in too narrow an geography?



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Mark Alexander - Founder of Property118

11:05 AM, 11th March 2014, About 10 years ago

Hi Matt

I like the way you have looked at this dilemma, well done. Great question too 🙂

The only way I can see that you might get £200 pcm cashflow from single family house in your area is to borrow a lot less than 75% LTV on conventional mortgages or to use a combination of traditional mortgages and 20% equity finance - see >>>

With regards to HMO's, you are very close to an award winning letting agent and one that I hold in very high regard personally. They operate mainly in Havehill in Suffolk. I have no commercial relationship with them other than absolute respect respect and admiration for what they do and how they do it. If I was still building my portfolio I would definitely use them to source and manage a few properties for me. The main man is Robin Pilley and the company is CXG Property Services. If you do call him please pass on my regards as it must be a few years since we last met up for a coffee. Robin submitted a series of four guest articles back in 2011 - see >>>

This then they have gone on to collect a vast number of trophies.

I hope this helps and thanks for your donation 🙂

Some One

11:58 AM, 11th March 2014, About 10 years ago

Given the numbers you're presenting: 75% LTV on £70,000 dwelling, gives a deposit of £17,500 and you want that to provide a clear £200 per month - ie: £2,400 per year.

So essentially you want a pre-tax income yield on money invested of 13.7%. That feels very ambitious to me

Mark Alexander - Founder of Property118

12:06 PM, 11th March 2014, About 10 years ago

Reply to the comment left by "Some One" at "11/03/2014 - 11:58":

I agree that it's optimistic but I did manage to get a London flat to stack up to those sorts of numbers using a combination of equity finance and traditional mortgage finance recently - see >>>

John Constant

12:14 PM, 11th March 2014, About 10 years ago

Good afternoon Matt,
I read your article with interest. We are Business Partners with Property118, specialising in BTL mortgages and as you would expect, we get to see landlords all around the country. We also get to see lots of different propositions as regards purchase prices, LTV's etc. There is a way in which you can make the money that you require and finance it to a decent level. You may have to look a little further afield, but it will be worth it.

Whilst you have given rental figures in your area, you haven't mentioned purchase price, so I will assume £125,000. I am not sure if you could find a property at this valuation in your area, but from my personal experience, there are areas not too far away in Essex, for example, where the £200 figure transforms to more like £250 using your criteria. There is one area in London, where a £135,000 purchase will give you £375 spare each month after deductions!

Back to my hypothetical £125k purchase. Deducting the 25% deposit, will leave a mortgaged amount of £93,750. This could be mortgaged with one particular lender at 2.88%, giving monthly payments of £230pcm assuming the arrangement fee is added to the mortgage. Taking your £650 figure, deducting the 35% for bits and bobs, gives £422.50, then deducting the £230, you are awfully close to your £200pcm (£192.50).

As I said, I am not sure whether you could find a property like this in your area, but the bargains are out there my friend. Take a look on rightmove at the sale prices and rentals being asked in different areas. I am sure you will find the right property.
(Don't forget to look for the right broker too!)

12:27 PM, 11th March 2014, About 10 years ago

I assume that you are quoting private rents? If you let to LHA tenants, you may find the deals stack up better (although you may encounter more hassle).

LHA rates are the same for a low standard property as they are for a high standard property. Rightly or wrongly this encourages some landlords to provide the most basic of accommodation.

We have discussed it at length on Property Tribes and I believe that something needs to be done about this, as it rewards landlords for only supplying the most basic of accommodation and penalises landlords who endeavour to deliver a higher standard of accommodation. But perhaps going off at too much of a tangent?! 🙂

Here are my tips to find deals others might have missed:

Matt Brown

14:48 PM, 14th March 2014, About 10 years ago

Thanks guys. I guess the message is, it is possible to find deals with this cash flow but I need to look further away.

I realise that using current loan rates will achieve more cash flow at the moment. I am using a 5% loan cost as part of my criteria as a more realistic longer term rate.

Appreciate all the input.

Mark Alexander - Founder of Property118

14:58 PM, 14th March 2014, About 10 years ago

Reply to the comment left by "Matt Brown" at "14/03/2014 - 14:48":

Hi Matt

That being the case you need to head North West to Manchester where modern properties can still be purchased for under £100k and where gross yields being achieved are up to 8 or 9%.

Be sure to employ a good ARLA letting agent though. See this article to help you to keep your management costs right down and your cashflow strong without compromising on quality >>>

Personally I recommend the £34.99 pcm + VAT package as it includes absolutely everything, even RGI.

Matt Brown

15:20 PM, 14th March 2014, About 10 years ago

Thanks Mark. I will look into it.

You are also right to highlight management costs. I prefer to have my properties managed but it does take quite a chunk out of the overall margin. I have hung on to using a traditional letting agent, mainly because they have done a great job at keeping voids low. I don't want to cut back on the management cost to end up with higher void cost but I will look at this again.

Thanks again.

Mark Alexander - Founder of Property118

16:21 PM, 14th March 2014, About 10 years ago

Reply to the comment left by "Matt Brown" at "14/03/2014 - 15:20":

Hi Matt

If you buy away from home this is the perfect opportunity to try something new. I think you will be very pleasantly surprised about the service and shocked at how comparatively cheap the alternatives can be.

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