Potential yield
10pc or more.
The rewards
MUFBs allow investors to earn multiple revenue streams from one property, therefore generating a higher yield than a single let.
They also limit the shock to investors’ cash flow when one of the flats is empty. A landlord operating a single tenancy suffers a complete loss of income from that property during void periods, compared to multi-let landlords who only see their income drop by a percentage.
Like conversions to Houses in Multiple Occupation (HMO), landlords can add significant value to a property by converting it from one large home to four or six smaller ones, for example.
For landlords buying previously converted properties, the opportunity to increase the value of the investment comes when you decide to sell up.
Investors can raise more capital by splitting the block into individual flats and selling them off one by one to homeowners. However, expect extra legal fees to create the leasehold titles for each flat, which can be a long, drawn-out process.
The risks
Valuations of multi-unit freehold blocks are affected by more variables than single-let properties, which makes it harder for investors to raise finance against them at the outset, and forecast how much they’ll make when they decide to sell up.
Lenders vary when it comes to valuing MUFBs. Some will value the building as an investment asset based on the rent and yield. Others will take a bricks-and-mortar approach – deciding what the property would be worth if simply sold as a vacant house, using the sales of other similar houses to guide them.
The bricks-and-mortar route usually results in a lower valuation, which could restrict the amount of finance you could borrow against it when buying.
Selling an MUFB is also harder than selling a single let.
Kunal Mehta, managing director of bridging finance lender SDKA, said: “An MUFB has a much narrower resale market than a standard house because, unless the property is split up, it will generally only appeal to investors.
“A three-bedroom semi-detached house, for example, can be sold to both owner-occupiers and investors, creating broader demand. An MUFB, by contrast, is valued primarily on investment fundamentals such as rental yields, interest rates and investor appetite, so values can fluctuate more as market conditions change.”
Landlords must also consider the concentration risk of potentially having their entire portfolio of buy-to-lets in one building.
A major issue such as a fire, flood or subsidence could affect the whole building and wipe out your entire revenue for months.
When it comes to converting a house into an MUFB, you are also at the mercy of local authority planning departments and promises from third parties, such as builders or architects, on timings and costs. If there are delays, or third parties overrun or overshoot the budget, it can put the profitability of your deal in jeopardy.
Chris Duckworth, head of bridging and commercial at Echo Finance, said: “It’s crucial that the team you are using for your conversion project delivers on what they say they can do if you are reliant on short-term finance, such as a 12-month bridging loan.
“For example, when inexperienced investors buy into a project that needs planning permission, it has been known for architects or planning consultants to say they can obtain planning consent within three months.
“If the planning permission isn’t granted in time, that 12-month bridging term can run out, which leaves the investor to either negotiate an extension or go through a costly refinancing process. It’s better to plan for things to take longer.”
Similarly, build costs can overrun, builders can go out of business or building control sign-off can be delayed, without which you cannot refinance your bridging loan, increasing the risks of incurring more finance-related fees.
The final risk for MUFB investors is extra costs that can come with managing a block versus a single let.
Blocks come with shared hallways, bins and sometimes gardens and parking, all of which must be maintained and managed. You could do this yourself, which is time consuming, or hire a managing agent whose fees will eat into your profit margin.
Watch out for the next in our series: Leasing to local authorities.