MV1 (Market Value 1) YEILD BASED METHOD | COMMERCIAL

For borrowers with high-spec HMO properties, particularly those engaging in the Buy, Refurbish, Refinance (BRR) strategy and investing significantly in conversions, opting for a yield-based valuation can be an effective exit strategy. This method focuses on maximising the potential valuation used towards lending, often at a target of 75% Loan-to-Value (LTV).

Understanding MV1 Yield-Based Valuations:

MV1 Valuations: These are yield-based and calculate a property’s value primarily based on the rental income it generates. This approach is particularly suitable for high-spec HMOs where substantial refurbishments have been made to enhance rental yield. The valuation process typically involves the following steps:

1. Net Rent Calculation: The potential gross rental income from the property is adjusted by subtracting estimated costs for voids and maintenance, which can be a percentage deduction of 20% to 25%. This deduction accounts for the possible vacancies and the ongoing maintenance expenses that the property might incur.
2. Application of Yield Multiplier: The adjusted net rent is then multiplied by a yield multiplier, which is determined based on comparable yields in the area. This multiplier inversely correlates with the yield rate; for example, a higher yield percentage results in a lower multiplier, reflecting the increased risk and higher income stream.

Examples of Yield Multipliers for HMO valuations on HMO mortgages:

• A yield of 14% would use a multiplier of 7.1.
• A yield of 12% uses a multiplier of 8.3.
• A yield of 10% would apply a multiplier of 10.
• An 8% yield would have a multiplier of 12.5.
• A 6% yield uses a multiplier of 16.6.

These multipliers help determine the final valuation of the property based on its ability to generate income, which is crucial for borrowers looking to maximise their refinancing options under a 75% LTV HMO mortgage.

Important Considerations:

• Local Market Factors: The demand for rooms, local area desirability, and the age and condition of the property can influence the percentage deductions for voids and maintenance. A higher demand area might have lower void percentages, positively affecting the valuation.
• Professional Advice: It’s vital for borrowers to consult with professionals for precise valuations. Methods and multipliers can vary significantly based on specific local conditions and property attributes.