Now is the time to be thinking about conversion finance

Landlords have had it tough.

Many will be feeling frustrated seeing their income eroded by increased mortgage rates, tax and maintenance costs. Whilst the max exodus of landlords from the market that has been cited in the media could be hyperbole, it is unquestionable that single-let properties are now vastly less attractive to investors. At least from an income perspective.

Savills published some data earlier in the year which underlines this point. It noted that the average net profit for a higher-rate tax paying investor has dropped to under 4%, from 23% last year, and to its lowest point in 16 years.

Indeed, rents are rising, but an increase in mortgage rates and running costs has dampened any benefit. And, with many landlords needing to complete refurbishment works to their properties to adhere to EPC regulations, returns could be further affected.

But, amidst this negativity lies an opportunity.

For investors able to convert single-let properties into multi-lets – whether that be HMOs or multi-freehold blocks – the result could be a substantial increase in the property’s income potential.

Consider this example. One of our borrowers recently converted a 3-bedroom house in Bristol into a 6-bedroom HMO. If it were let on a single tenancy it would likely generate a gross income in the region of £15,000 a year. It is now fully let as an HMO for over £58,000 per year. We funded the conversion, which only took 5 months to complete.

The bridging market has plentiful options for investors looking to pursue this goal. Octane’s refurbishment product is our most popular offering and its most common application is for this very purpose - the conversion of houses into HMOs/flats. We lend up to 70% LTV towards the current value of the property, net of interest, plus 100% of any refurbishment costs, which means the investor’s required capital contribution is relatively low. And, with interest rolled up, there is no burden of a monthly payment either – interest is simply paid when the loan is redeemed after the refurbishment/conversion is complete.

A common misconception we encounter is that these projects always require planning permission and are only viable for seasoned property developers.

Firstly, there are large parts of the UK with no Article 4 Direction, which means investors can convert houses into HMOs of up to six bedrooms under permitted development, with no need for planning permission. And, if what Jeremy Hunt alluded to in his Autumn Statement comes to fruition, we could see a potential change in the permitted development rules which would allow investors to convert houses into two flats without the need for planning permission too.

Moreover, the notion that all lenders will require their borrowers to be experienced developers is not necessarily true. Some lenders, including Octane, can be flexible on the borrower’s experience levels, providing they have sourced a reputable contractor to complete the refurbishment works on their behalf.

With barriers to entry so low, and great finance options available in the market, it’s a great time for brokers to be speaking to their clients about this opportunity.