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Houzy Limited presents a meticulously planned, high-yield House in Multiple Occupation (HMO) development opportunity in the robust student and young professional market of Pontypridd, CF37 2BW. The latest local HMO data (PropertyData, last 9 months) indicates a "Landlord's Market" with rising rents and strong demand.
Scenario 3: HMO (11 Units) - Funding Option 1 (Partner Refis Bridge + Funds Recon)
Funding Required from Partner:
To Pay Off Bridging Loan: £217,000
To Fund HMO Reconstruction: £137,500
Total Funding from Partner: £354,500
Total Effective Project Capital Base: Partner's £354.5k + Houzy's Net Equity £84.6k = £439,100 (This remains the same as the total capital structure is consistent).
Exit Strategy C1: Sale of HMO
GDV: £820,000
Less Partner's Capital: £354,500
Less Sales/Legal Costs: £20,500
Project Net Profit (before split): £820,000 - £354,500 - £20,500 = £445,000
Example Profit Split (70% Partner / 30% Houzy):
Partner Profit: £445,000 * 0.70 = £311,500
Partner ROC: £311,500 / £354,500 = ~87.9%
Houzy Profit: £445,000 * 0.30 = £133,500
Exit Strategy C2: Rent HMO & Refinance
Refinance Amount (70% LTV of £820k): ~£574,000
Partner Capital Repayment: £354,500
Surplus from Refinance: £574,000 - £354,500 = £219,500
This surplus can repay Houzy's £84.6k net equity and provide a kicker to the partner of £134,900 (which is the same kicker amount as before because the refinance amount and GDV are the same, and it's calculated after partner capital repayment).
Mortgage Houzy Services (after partner paid + kicker, Houzy equity out): £354,500 (partner) + £134,900 (kicker) = £489,400. Debt serviced by Houzy is £489,400.
Annual Mortgage Cost (£489,400 @ 7%): £34,258
Net Annual Cash Flow (to Houzy): £57,540 (NOI) - £34,258 = £23,282 (Increased from £17,360 if partner takes a larger kicker because Houzy's mortgage is effectively what's left after the kicker and Houzy's equity has been paid out of the refinance surplus).
Alternative: If Houzy's mortgage is the full £574k - £ (partner repayment + agreed partner profit), the cash flow changes. The previous example assumed a specific kicker. If we assume the mortgage taken by Houzy is the full £574k less partner capital out and Houzy capital out:
Refinance £574k. Partner out £354.5k. Houzy out £84.6k. Kicker to partner £134.9k.
This means £354.5k + £84.6k + £134.9k = £574k. All capital is out. Property is 100% leveraged.
Net Cash Flow (with 100% leverage on value): £57,540 (NOI) - (£574,000 * 7% = £40,180 mortgage) = £17,360. This is the more consistent figure for total cash flow if aiming for full capital extraction for both parties.
1. The HMO Opportunity – Enhanced by Current Market Data:
Prime HMO Location: Proven demand - close to South Wales University, the town centre, and transport.
Strong & Rising Rental Market:
Double En-suite: Average £600/pm (Range £500-£700)
Double Room: Average £410/pm (Range £350-£550)
Local HMOs are 100% furnished, 100% include internet, and 77% include bills – our model will align with these market expectations.
High Yield Potential: This rental income underpins strong operational yields and a high GDV when valued as a commercial HMO.
2. The Property & Proposed HMO Conversion Detail:
Address: 16 Gelliwastad Road, Pontypridd, CF37 2BW
Proposed HMO Design Focus: To create a premium co-living experience, attracting quality tenants and justifying top-tier rents. This includes:
Modern, well-appointed en-suite and shared bathrooms.
Spacious, fully equipped communal kitchen(s) with ample storage and appliances.
Comfortable and stylish communal living/dining areas.
Dedicated laundry facilities.
High-speed broadband throughout (100% market expectation).
Durable, high-quality furnishings.
Compliance with all HMO licensing standards (fire safety, room sizes, amenities).
Planning Note: to engage with Rhondda Cynon Taf Council to confirm specific HMO change of use requirements and licensing for a property of this scale. The existing lawful use and prior flat planning provide a positive starting point for this discussion.
5. The Developer - Houzy Limited, in partnership with experienced HMO managers.
6. Project Team & Timeline: HMO focus is potentially a longer timeline for HMO-specific planning/fit-out.
7. Risk Mitigation (HMO Specific):
Planning & Licensing: Top Priority. Engage Rhondda Cynon Taf Council. Our strategy includes professional consultation to navigate this efficiently.
HMO Construction Costs: The £180k includes a 20% contingency. Detailed HMO-specific quotes from experienced contractors will be a primary task post-funding agreement.
Tenant Management & Voids: Given 100% furnishing and internet, and high bill inclusion (77%), we will factor in a robust, potentially bills-inclusive model. We will partner with or employ experienced HMO letting/management.
Market Strength: Current data shows a "Landlord's Market," mitigating void risks if product quality is high.
8. Next Steps & Due Diligence:
We are confident this HMO conversion offers an exceptional return profile, underpinned by strong and improving local market fundamentals. A comprehensive Due Diligence Pack is available upon request, including:
Full Business Plan & Detailed Financial Model (showing these updated figures)
[Other documents
Key Enhancements in this Version:
Latest Market Data: Directly references the new £600 (en-suite) and £410 (double) figures, and the "Landlord's Market" sentiment.
Potentially Higher GDV: Justified an £815k GDV based on the stronger NAROI and a reasonable net yield.
Consequently, Higher Profit Figures lead to a more attractive ROC for the investor.
Specificity on HMO Standards: Mentions aligning with market expectations (furnishing, internet, bills).
Stronger Emphasis on Planning/Licensing: Acknowledges this as a critical early step.
selling the shares of the Limited Company (the SPV holding the property) instead of selling the property directly can indeed avoid Stamp Duty Land Tax (SDLT) for the buyer and potentially some other transaction costs. This can make the "package" more attractive to a buyer, allowing to achieve a slightly higher effective price, thus boosting your ROC.
Assumption for Recalculation:
Let's assume the buyer effectively "shares" the SDLT saving with you by paying a premium for the company shares.
SDLT Saving Estimation: SDLT is complex and tiered. For residential properties, especially a portfolio of 4 flats or a high-value HMO, this can be substantial.
For the 4 Flats (GDV £569,000), if sold as a portfolio to one investor, the SDLT (including the 3% surcharge for additional properties) could be roughly £32,000-£38,000.
For the HMO (GDV £820,000), if sold as a commercial property or to an investor, the SDLT (non-residential rates if it's truly commercial, or residential if it's just a large house being bought) could be £25,000-£45,000.
Shared Saving Premium: Let's conservatively assume you can achieve an effective price increase for the company shares equal to 50-75% of the buyer's SDLT saving.
For Flats: 50-75% of (say) £35,000 = £17,500 - £26,250 premium.
For HMO: 50-75% of (say) £35,000 = £17,500 - £26,250 premium.
We will use an average premium of £20,000 for flats and £20,000 for HMO for simplicity in demonstrating the ROC increase. The actual sales/legal costs for a share sale might be slightly different (more on legal due diligence, less on conveyancing), but for this exercise, we'll assume the previous sales/legal cost estimate is roughly applicable to overall transaction advisory, or the saving there is minor compared to SDLT.
Scenario 3 (MODIFIED): HMO (11 Units) - Funding Option 1 - SHARE SALE EXIT
Funding Required from Partner: £354,500
Total Effective Project Capital Base: £439,100
Original GDV (Asset Sale): £820,000
Premium from Share Sale (Buyer's SDLT Saving Share): +£20,000
Effective Sale Price (Company Shares): £840,000
Less Partner's Capital: £354,500
Less Original Sales/Legal Costs (as proxy): £20,500
Project Net Profit (before split): £840,000 - £354,500 - £20,500 = £465,000 (Increased from £445,000)
Example Profit Split (70% Partner / 30% Houzy):
Partner Profit: £465,000 * 0.70 = £325,500 (Up from £311,500)
Partner ROC: £325,500 / £354,500 = ~91.8% (Up from ~87.9%)
Houzy Profit: £465,000 * 0.30 = £139,500
Enhanced Exit via Company Share Sale:
An alternative to selling the individual property assets is to sell the shares of the SPV (Limited Company) holding the completed and tenanted/stabilised property.
Benefit to Buyer: The primary advantage for the buyer is a significant saving on Stamp Duty Land Tax (SDLT), as share transactions typically do not attract SDLT.
Benefit to Us (Seller SPV & Partners): By facilitating this SDLT saving for the buyer, we can often achieve a premium on the sale price of the company shares compared to a direct asset sale. We estimate this premium could be in the region of £17,500 - £26,250, effectively increasing our Gross Development Value.
Impact on Returns:
For the HMO Sale Strategy: This premium could increase the total project net profit from ~£445,000 to ~£465,000 (using a £20k premium). For an investor partner, this would uplift their profit from ~£311,500 to ~£325,500, increasing their ROC from ~87.9% to ~91.8% (based on a 70/30 split).
Considerations:
This exit route is typically more attractive to experienced property investors or companies rather than individual owner-occupiers.
The buyer will undertake more extensive due diligence on the company itself. Our SPV will be maintained as a 'clean' entity solely for this project to facilitate such a sale.
We will seek specialist tax advice to ensure the most efficient structure for all partners should this exit be pursued."
Why is this attractive to an Investor?
Increased Upside: It demonstrates an additional way to maximise returns beyond a standard asset sale.
Flexibility: It adds another potential exit route, appealing to a broader range of end buyers (those who prefer company purchases).
Important to Emphasise:
This is a potential enhancement, not a guaranteed one. Market conditions and buyer preference will dictate feasibility.
The exact premium achievable is negotiable and depends on the specific SDLT saving for that buyer and their willingness to share it.
Transparency about the increased due diligence for the buyer is important.