HMO Investment Case Study: How I Achieved 42% ROI in 8 Months

The Property 

This particular property was a 5-bedroom, licensed end-of-terrace HMO in the popular Highfield area of Sheffield, close to Sheffield United Football Stadium and a short walk from the train station and the city centre. Being in the Article 4 area, it already had the necessary HMO licensing in place and had been run as an HMO for over 10 years, an important factor for HMO regulations compliance.

The property had been on the market for a while, and when I enquired, the agent mentioned a previous sale had fallen through, so it was back on the market. It was tenanted and being sold with tenants in situ, something that could be favourable from the day one cash flow perspective.

With an original asking price of £220,000, I knew the location and demand in the area made it worth a closer look. I booked a viewing and apart from some TLC and refresh, there were no visible issues or structural concerns on the first glance. After some negotiation, we agreed on a purchase price of £210,000, given the vendor’s motivation to sell quickly after the failed sale. However, this was about to change with initial challenges from a mortgage lender... 

Pictures from the estate agent's listing

Mortgage Issues

With the sale agreed , I moved ahead with my mortgage advisor to secure financing. We managed to lock in a good mortgage deal and things were moving smoothly, until the lender instructed the valuation survey.

At that point, I was expecting the formal mortgage offer to follow shortly after. But then came an unexpected twist.

The surveyor’s report flagged an issue with the ground floor rear bedroom, noting that they were excluding it from rental calculations. The reason? The room was part of a rear extension that featured a uPVC wall, which the surveyor deemed uninhabitable. That raised a red flag with the lender.

Soon after, I received a call from my mortgage advisor confirming the bad news: the lender had rejected the mortgage application. Their reasoning was that the rear extension, with its uPVC wall, was considered non-compliant with building regulations. Since this part of the property made up around 25% of the total structure, it was classed as a non-standard construction and therefore too risky for the lender.

It was a frustrating moment, but also a crucial learning experience about the importance of understanding construction types and how they can affect lending decisions.

As soon as I've got the lender’s decision, I contacted the estate agent straight away to explain the situation. I was transparent about the survey findings and the fact that, due to the uPVC rear extension, the property was now considered un-mortgageable by a mainstream lender.

Understandably, the vendor wasn’t thrilled. According to the agent, they were growing increasingly frustrated as this was now the second time a sale looked like it might fall through. With emotions running high, it was clear I needed to think creatively and act quickly if I wanted to salvage the deal.

Win-Win Solution

After weighing up the property's potential and considering the vendor’s growing frustration, I sat down with my mortgage advisor to explore alternative financing options. It was clear that conventional lending was off the table, but I was not ready to walk away from the deal with this much potential.

That’s when we came up with a strategy that could work for everyone.

We proposed to purchase the property using a combination of cash and bridging finance. The goal was straightforward: buy the property quickly, carry out the necessary building works to bring the rear extension up to building regulation (which included removing the uPVC wall and rebuilding it completely) and then refinance onto a standard HMO buy-to-let mortgage once the work was complete.

For those unfamiliar, a bridging finance is a short-term funding option often used by developers or investors purchasing at auction. It allows for fast completion (typically within 56 days), but it comes at a cost. Monthly interest rates usually sit around 0.75–1%, with high arrangement and valuation fees and the loan must be repaid within 12 months, or else late repayment penalties start to apply. It is a specialist product best used with a clear exit strategy in place.

While my mortgage advisor was confident that, post-refurb, we would have no issue refinancing onto a standard HMO buy-to-let product, I knew there were still risks. There was no absolute guarantee of a mortgage offer down the line when it came to re-financing and we would be fronting the cost of the building works ourselves.

Taking this into account, I renegotiated the purchase price to reflect the extra risk and additional investment required. After some back-and-forth, I secured the property for £190,000, a £30,000 discount from the original asking price of £220,000!

In the end, it was a win-win situation for everyone:

• The vendor got a quick, reliable sale after a failed attempt.

• The estate agent secured a faster completion and their commission.

• And for me, while I was taking on more risk, the potential upside could be significant.

Building Works and HMO Licensing Compliance 

When we took a closer look at the rear extension with my builder, our initial thought was to simply replace the non-compliant uPVC wall with a traditional brick-and-mortar structure. Technically, that would have satisfied the lender’s requirements and would comply with building regulations.

But as we assessed the overall condition of the rear bedroom and the adjoining WC, it became clear that a quick fix wouldn’t do the space justice.

Instead, we opted for a full renovation of the extension—transforming it into a high-quality en-suite room that would add long-term value and offer better comfort for tenants. It was a strategic decision: improving the standard of living would not only justify higher rents but also help us secure a stronger valuation at re-finance.

Scope of Works:

• Clearing the overgrown backyard area, removing shrubs and general waste

• Removing the existing uPVC wall and creating a temporary support for the roof

• Building a new external cavity brick wall, completing with two brand-new uPVC windows

• Replastering the room, fitting new skirting boards and re-decorating the bedroom

• Reconfiguring the WC entrance by replacing the double doors with a single door for better layout

• Installing a full shower unit, including a new tray, mixer shower, wall cladding and a screen

• Plumbing upgrades with new pipework and stop valves to isolate shower and taps

• Repairing the suspended timber floor and fitting new laminate flooring in the en-suite bathroom

• Fitting a new toilet, sink and water taps

• Repainting the entire en-suite bathroom area

• Finishing off the external backyard area by creating a clean and low-maintenance patio space. 

The result would be a significantly improved living space that enhanced the property's appeal and functionality, while ensuring full compliance with building regulations.

While the renovation work on the rear extension was underway, I also had to take care of another critical stuff - transferring the HMO licence from the previous owner to our company. A few weeks after submitting the application to Sheffield City Council, I received an email confirming the inspection date.

The Council’s Private Housing Standards inspector arrived and carried out a thorough review of the entire property. She checked every room and noted some issues that needed to be addressed before the licence could be officially transferred. I expected a few minor fixes, but the official inspection report came back with a list of 12 mandatory and recommended actions for full compliance with HMO regulations.

Most of the items were focused on fire safety, including maintenance of fire doors, upgrades to emergency lighting, replacing some fire alarms and electrical safety checks. Individually, they were fairly manageable, but collectively, they added up. On top of that, I was required to obtain a new Gas Safety Certificate, Electrical Installation Condition Report (EICR) and an Emergency Lighting Certificate, as some of the previous documents were either expired or nearing renewal.

To make things more pressing, the inspector gave us just six weeks to complete all required compliance works. These had to be done as a matter of urgency.

It was clear that the previous owners hadn’t kept up with general maintenance or compliance obligations and the property was bit neglected. So I took this opportunity to go a step further. In addition to addressing the licensing requirements, I decided to repaint the entire house, giving it the TLC it clearly needed.

This turned into a bit of a mini-project, with me coordinating and managing several different trades - including my builders, an electrician, gas engineer, decorator and a handyman.

In the end, all the works took around five months, factoring in inevitable delays with contractors. As the final touches were being completed, we moved ahead and submitted our application for re-mortgaging, which was a crucial point in achieving uplift in the property value and transitioning the property onto a long-term HMO buy-to-let mortgage product.

Before

Work Process

After

Re-mortgage and New Value

With all the refurbishment and compliance works completed, it was finally time to move off the bridging finance and onto a long-term HMO buy-to-let mortgage. We applied for a new mortgage, and soon after, the lender instructed a valuation survey.

To support our case, I prepared a comprehensive valuation support pack. It included:

• Before and after photos

• A full breakdown of the works completed

• Photos from key stages of the refurbishment

• Comparable 5-bedroom HMO properties sold within a 1-mile radius.

Based on my market research and the improvements we'd made to the property, I estimated the new value to be between £245,000 and £250,000.

On the day of the inspection, the valuer carried out a detailed assessment, reviewed the valuation pack and took time to walk through the property. He acknowledged the quality of the refurb and the work we had done to meet HMO licensing standards.

Then he asked me what I thought the property was worth now.

I confidently said, “£250,000.”

He nodded and replied, “That’s the figure I was thinking too.”

Bingo!

The valuation report came back shortly after- £250,000 confirmed.

This meant, on a 75% loan-to-value mortgage, we could get £187,500, allowing us to repay the bridging loan and recoup a significant portion of our initial purchasing cost.

However, the lender required one final condition to be met before completing the mortgage: we had to obtain a Certificate of Lawfulness of Use from the council. This document essentially confirms that the property’s use as a C4 HMO is lawful, based on at least 10 years of continuous letting history and without needing to apply for a full planning permission to change the use class from C3 to C4.

Fortunately, we were well prepared. Our solicitor had obtained all tenancy agreements dating back to 2008, clearly demonstrating the long-term HMO use. The only downside was the delay - it took the council around two months to process the certificate due to their internal timelines.

Once the Certificate of Lawfulness was issued, the mortgage completed and we paid off the bridging finance in full. This was a huge relief.

The entire process - from purchase to refinance - took about 7 to 8 months. We were well ahead of 12-month bridging finance deadline. It was an intense few months, but a satisfying finish to a very hands-on project.

Dealing with Tenants

As we had inherited tenants with the property, one of my first priorities was to reach out and to introduce myself as the new landlord. It was important to build trust early and ensure a smooth transition - especially in a shared HMO environment where relationships and communication really matter.

I arranged to re-sign tenancy agreements under our ownership, which also gave us the opportunity to review the existing rent levels. The rents hadn’t been updated for over three years and were noticeably below the current market rates for similar properties in the area.

This naturally led to some sensitive conversations. I explained the situation honestly, highlighting both the ongoing improvements to the property and the need to bring rent levels in line with the local market. Thankfully, the response from the tenants was very positive.

They had all been living in the house together for over three years, and the property had become more than just a rental house - it was their home and a small community. They appreciated the investments we had made in upgrading the space and recognised the added value in the new standard of living. I had to temporarily re-locate the tenant occupying the rear extension bedroom while we were completely revamping the space. 

As a result, we were able to sign the new tenancy agreements with revised rent levels and without losing a single tenant! It was a great outcome: the tenants benefited from a much-improved living environment and we achieved sustainable rental income that better reflected the market and improved the cash-flow.

Numbers 

🏠 Purchase Details

Purchase Price (PP):                                      £190,000

Bridging Loan (Gross, 75% LTV):                 £142,500

Bridging Term:                                               12 months

Monthly Interest Rate:                                  0.75% (retained)

Bridging Fees (Facility, Valuation, etc.):      £3,000

Net Bridging Loan Amount:                         £127,500

Deposit:                                                           £62,500

Legal Fees (Purchase):                                   £5,000

Stamp Duty (SDLT):                                        £5,700

Total Purchase Cost:                                      £73,200

Total Refurb Cost:                                          £10,000

Total Capital Employed (Purchase):            £83,200

🏦 Refinance Details

New Valuation (GDV):                                    £250,000

New Mortgage (75% LTV):                             £187,500

Legal Fees (Re-mortgage):                             £1,140

Other Fees (Searches, Registration, etc.):   £530

Net Cash Received (Post Bridging & Fees): £58,330

💰 Capital Position

Net Money Left in the Deal:                          £24,870 

💵 Rental Performance (Per Annum)

Gross Rent:                                                       £28,500

Operating Expenses (Mortgage, Bills, etc):  £18,000

Net Rent (Profit):                                              £10,500

📊 Key Investment Metrics

Gross Yield on GDV:                                        11.40%

Gross Yield on PP:                                           15%

Gross ROI (Gross Rent ÷ Money Left):         114.50%

Net ROI (Net Rent ÷ Money Left in Deal):    42.20%

Conclusions

This was my first HMO deal and it was far from straightforward, but the results made every challenge worthwhile.

I stepped in after the vendor’s original sale fell through and were able to secure the property using creative financing strategies, offering a fast and reliable solution. By resolving the issues that had made the property un-mortgageable, I managed to turn the problem property into a great investment use-case.

Our work went far beyond surface-level improvements. We carried out essential remedial works, brought the property fully in line with HMO licensing standards and successfully changed its use class from C3 (residential) to C4 (HMO) by securing a Certificate of Lawfulness of Use. These steps significantly increased the property’s value, resulting in a 32% uplift in value by the time we refinanced.

But it wasn’t smooth sailing.

There were multiple hurdles to overcome - from managing different tradespeople during the refurb, to meeting council compliance deadlines, dealing with multiple solicitors and navigating the re-mortgage process. All of this had to be done while the property remained tenanted, which brought its own complications—particularly when we had to relocate one tenant during the full renovation of the rear extension. On top of that, I had to re-negotiate all tenancy agreements and bring rents in line with the market.

Despite all challenges, I stayed on the course.

Within 8 months, I completed the refurbishment, restructured the tenancies, secured a long-term mortgage, and refinanced the property - without losing a single tenant. We not only this preserved our cash flow but increased our rental income, which was key to making the deal sustainable.

The tired house we started with was transformed into a modern co-living space, providing high-quality accommodation for working professionals and a solid return on the investments.

This project was a win-win all around:
✔ A seller who moved on
✔ Tenants who stayed happy
✔ And a deal that delivered a 42% Net ROI!

I'm always open to talking to existing landlords to help them to sell their property quickly and to potential investors seeking strong returns through strategic property investments. If this is something of interest to you, please reach out to me by submitting the below form or by booking 30-minute call with me via Calendly.