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Base Assumptions:
Property Current Value: £301,600
Existing Bridging Loan: £175,000 @ 12% p.a. (£1,750/month interest)
Houzy Ltd Net Equity Contribution: £126,600
4-Flat Recon Cost (incl. 20% contingency): £120,000
11-Unit HMO Recon Cost (incl. 20% contingency - based on detailed plan): £137,500
Estimated Bridge Interest Accrual (if Funding Option 2): £15,750 (9 months example)
Sales/Legal Costs: ~£37k (Flats), ~£20.5k (HMO)
Profit Split% used below are EXAMPLES and are negotiable.
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Summary & Conclusion for Potential Investor:
Funding Structure: Funding Option 1 (Refinancing the bridge AND funding reconstruction) offers a significantly lower risk profile and cleaner structure for the incoming investor across both Flat and HMO strategies (Scenarios 1 & 3). Option 2 (Scenarios 2 & 4) presents higher potential ROC percentages but carries substantial risk due to the active, high-cost bridging loan.
Strategy Choice (Flats vs. HMO):
4 Flats (Scenarios 1 & 2): Represents a more traditional, arguably simpler development. Asset management post-refinance is less intensive. GDV is likely more predictable. Returns are solid, especially with Option 1 funding (48% ROC).
HMO (Scenarios 3 & 4): Offers significantly higher potential returns (both absolute profit and ROC), driven by strong rental income and commercial valuation methods. However, this comes with increased operational complexity, higher reliance on achieving premium rents, and the critical hurdle of confirming HMO planning/licensing. Reconstruction costs, while detailed, are also specific to the HMO plan.
Most Attractive Options for Investor (Balancing Risk & Reward):
Scenario 3 (HMO / Fund All): Offers the highest absolute profit potential (£340.9k example) and a very strong ROC (~109%) with the cleanest structure by removing the bridge risk early. This is likely the most compelling option IF the investor is comfortable with HMO operational complexity and the initial planning/licensing steps are seen as achievable. Requires the largest partner investment (£312.5k).
Scenario 1 (4 Flats / Fund All): Offers good returns (~48% ROC) with lower operational complexity and planning risk than the HMO. It's a solid, less speculative choice requiring £295k from the partner.
Highest Risk/Highest Potential Reward: Scenarios 2 & 4 offer headline-grabbing ROC percentages (>89% / >180%) but are heavily dependent on managing the bridging loan risk effectively. These might appeal to investors with a higher risk appetite and confidence in rapid project execution and exit.
Recommendation:
We recommend focusing discussions on Scenario 3 (HMO - Fund All) due to its highest potential returns combined with a de-risked funding structure (bridge cleared), while being transparent about the necessary HMO planning/licensing steps.
Scenario 1 (4 Flats - Fund All) serves as a strong, lower-complexity alternative.
This comparison should provide a clear overview for investors to understand the trade-offs involved in each potential pathway for this promising development.