With gross rental yields in high capital growth areas contracting to under 5% in Brisbane, 4% in Melbourne and 3.5% in Sydney, rooming houses are a great way to immediately increase your cashflow with the ability to rent out each room individually on long term leases to tenants.
What are the best configuration options for a rooming house? The outcome is dependent on various factors such as location, lending, council regulations and achievable rent.
There are three main rooming house designs:
1. Existing house conversion
2. Self contained rooming houses and;
3. Multi occ rooming houses
1. Existing house conversion - This type of rooming house accounts for the majority of legal rooming houses in Australia likely to be over 95%. The cost to convert an existing residential house into a legal rooming house is approximately $20,000 to 30,000 and usually involves converting existing living areas into additional rooms and creating additional bathrooms. The final completed design will most often have more bedrooms than bathrooms and will have shared common areas such as the kitchen, laundry and lounge area. Due to the sharing of common areas and the older age of the rooming house the rent achieved is less than other rooming house designs.
Pros - lower purchase price in comparable location to a new rooming house or a premium location for the same price. If you already own a house in a great location, a conversion may be the most affordable option to increase your cashflow.
Cons - more competition from existing converted rooming houses and illegal rooming houses, less rent per room ($150-$220 per room per week) due to shared common spaces such as bathrooms and less available tenants who do not want to share over crowded bathrooms.
2. Self contained - A more recent and popular design which has a bed, living space, ensuite and kitchen/cafe bar. This allows the occupant to effectively live self contained in their room like a hotel room. The house also has a share kitchen and living area to comply with council regulations.
Think of a house that looks like a normal house from the outside. But inside it has 5 'micro apartments' who only share a communal kitchen and laundry. That's your self contained design.
Pros - Self contained rooming houses can achieve some of the highest rent per room. As it's the closest thing a renter can get from having their own apartment. But it comes at a slightly cheaper rate. In Brisbane you can achieve anywhere between $280 to $300 per week per room.
Cons - The first major problem that can arise from the self contained design is lending. If the valuer believes it is a commercial property designed for rooming only then your lender will require a higher deposit up to 30% and charge a higher interest rate 2-3% higher than standard residential rates. The way to avoid this issue is to build a standard residential house and then do the conversion to a rooming house after it has been certified.
The second issue to consider is the cost of building 5 additional kitchens/cafe bars at approximately $30,000-$40,000.
3. Multi occupancy - Also a more recent and popular design with the added benefit of being able to rent the property as a house or a rooming house. The design is very similar to a standard 5 bed 5 bathroom home (each bedroom has its own ensuite) however with rooming house certification. You will have a shared living, kitchen, dining and outdoor area. This design has 2 purposes, it can be used as a normal house or rented as a rooming house. Therefore you are not dependant on a certain style of accomodation. If the market ever changes, this house design adapts.
Pros - Lending is straight forward with valuers recognising the house as a standard design and valuations most often favourable without the additional cost of 5 additional kitchen/cafe bars. One of the biggest advantages is that the house can be rented out as a house or a rooming house and can be sold to an owner occupier as a standard house.
Cons - Needs to be slightly better located than a self contained design to achieve the same occupancy. Rent will be $30-$50 less per room per week than self contained due to the fact that each room does not have its own kitchen/cafe bar and living area. It is also more difficult to obtain the correct mix of tenants with them having to share more common areas such as kitchen, living and laundry areas.
Conclusion
The main purpose people build or convert a rooming house is to gain higher cashflow or effectively a commercial return from residential property. If you already own a house in a great location then a house conversion is most likely best for you with a required $20,000 to $30,000 to make it a legal rooming house. If you are looking at building new then it will depend on your budget and financial capacity. A self contained rooming house will provide the best weekly return however there is a chance that your lender may require you to provide more equity (up to 30% of valuation) and charge you a higher interest rate. The more conservative option is to build a multi occupancy rooming house that allows you to also rent as a house, sell to an owner occupier if required and gain more flexible lending.
Each client is different and it's our job to help guide you in the right direction for the most effective strategy. Get in contact with us today to find out more.
If you have any questions regarding rooming houses, please don't hesitate to contact us - contact@thepropertyroom.com.au
I hope you enjoyed reading our article. We do not charge for education, we just wish to inform. If you like our articles then please give us a "like", "Tag a friend" or "Share" it around. We appreciate every bit of support!