Rooming Houses - Risk vs Reward?

Question

I am curious to get some opinions on rooming houses. (A single house, rented per room /w shared kitchen/bath) Typically D or C occupants. Rented month to month. Apparently no vacancy in the property I'm looking at and agent says seller has a list of prospects waiting to get in.

I assume they have high turnover and high maintenance and repair costs.

But the income is pretty significant when comparing to small multifamily.

I assume they have high turnover and high maintenance and repair costs.

But the income is pretty significant when comparing to small multifamily.

Roy N. · Answer

Darren:

There are several types/categories of rooming houses depending on your target clientele.  Yes, there is a higher administration component, but not necessarily higher turnover or maintenance costs.

If you give a thorough search on the forums, you will find several threads discussing rooming and boarding houses in which we have addressed many of the pros and cons involved.

https://www.biggerpockets.com/forums/81/topics/128...

https://www.biggerpockets.com/forums/61/topics/198...

https://www.biggerpockets.com/forums/432/topics/21...

I could not find the specific one I wanted to reference {Mindy:  virtual cork board please}, but there are a few key things to keep in mind (based upon our experience):

Zoning:  Most municipalities have tight zoning controls on rooming and boarding houses.  If you are purchasing an existing operation, verify that it is legal before you buy.    I had someone bring me an off-market opportunity on a rooming house last November: I agreed to purchase provided the Vendor secure a zoning confirmation letter from the City indicating the house has a variance to the current zoning.

Financing:  Many, perhaps most, conventional lenders will not finance a rooming house.  We purchase our student rooming house as a "home" for my sister-in-law {she does live there ... see below} and, because of that, the rents did not count towards income for the purchase.

Clientele: When we looked at rooming houses we found three basic types of rooming/boarding house in our area.

• Student - there are two universities and community college in our little city, so students are a prime clientele;
• Industry/Organization/Institution - another type of rooming house is one which is near and caters to a particular employer/workforce (i.e. a factory) or institution (hospital, military).
• Social -  the third type in our area is the rooming house that caters to the working poor, the addicted, and other on the edges of society.

Each of the above types of rooming house requires a different set of skills and management style.  It is best to ensure you are up to the challenge before embarking down a particular path.

Den Mother/Superintendent:  Our rooming house caters to International Students - we rent furnished rooms on month-to-month basis  {we do offer a term lease (academic year) or annual lease as well}.  My sister-in-law lives in the upper unit of the house and serves as our "Den Mother" - she ensures the house rules are enforced, the place is kept clean, and that tenants show respect for their housemate.  While our international students have proved to be far less trouble than our Canadian student tenants, we have found the house runs far more smoothly when you have someone you trust on-site.

Hope that helps to get you started, when you have additional question, feel free to reach out.

Thomas S. · Answer

Statistically both rooming house and C-D tenant base are much higher management intense. Usually the rooming house and C-D tenant go hand in hand. The rooming house scenario is usually operated with a minimum of maintenance, only bare minimum in maintenance and repairs. This is part of why it has a higher return. Students would be your safest option in Barrie as opposed to welfare which is the most common other option for rooming houses. Barrie has a large student rental opportunity but it would be best to rent the entire building to a group of students as opposed to renting by the room. Still more work but much safer investment for the landlord. I personally will not rent to welfare tenants for many reasons not the least of which being the government has deemed them "untouchable" in regards to collections.

The absolute best scenario in Ontario for a investor to operate a rent by room situation is for the owner to live in and share the facilities with other tenants. In this scenario the "tenants" do not fall under the jurisdiction of our Provincial landlord tenant regulations. As such the owner can actually put the tenants on the street without any notice. In effect the tenants of a rooming house shared with the owner have zero tenant rights.

Roy N. · Answer

@Paolo Ruggieri

I think you may misunderstand CAP rates, their purpose and relevance, but that is a discussion for a different thread.

More meaningful measure of your return for capital invested would be:

• Internal Rate of Return (IRR);
• Modified Internal Rate of Return (MIRR); or 
• Financial Management Rate of Return (FMRR)

While these "values" are also presented as ratios, they measure a series of {discounted} cash flows through time, rather than a one dimensional value at a single point in time such as Cash-on-Cash return (which is effectively what you are using the CAP rate to represent).

Alison James · Answer

I've run a boarding house for 20 years for seasonal workers in a resort town.  At present I have at least 50 applicants begging to rent a room because of the severe housing shortage.  It wasn't always that way, the recession was tough.  But at present it's fun and lucrative.  I recommend a high end boarding house with 6 month leases.  Now looking to get a second house purely for airbnb as way more profitable.  Need to check zoning.  Also for financing there are now restrictions on government mortgage insurance, so some lenders won't lend on airbnbs.

Samuel Sedore · Answer

I have one of these listed here in Cambridge, owner brings in 3,500/m in income, but the tenants are nightmares. I have them giving me crap for waking them up at a 4p.m showings on the weekend, BTW they don't work.

He tried not living in and getting it managed and ended up with an escort and a drug dealer getting in and causing a lot of damage.

Your basically catering to people on ODSP and welfare.

The only advice i could give, is he said the more you charge the better tenants you get which makes sense. He said at 400/m you get ODSP and drug addicts, where at 550/m he gets people with welfare/ students and minimum wage jobs. Be warned though he ends up dragging 1/10 onto the streets as they never pay past the first month. Which is illegal if not owner occupied

Paolo Ruggieri · Answer

yes... I read Limit in GA is 4... So I am going to keep "rooming" houses with 3-4 bedrooms top... To stay under the single family house umbrella ... This might have also simplified the issue with tenants managing fewer people/low scale.

CAP rate for me is very relevant.... As it measures how much I bring home for each $ invested... Expecially when I am trying to achieve a certain $$/month with my portfolio in order to live just from it (financial freedom)

I understand that if I would resell single family house , value would me minimally impacted by CAP rate... But my goal here is to keep it up until gentrification happens in the neighborhood from the Atlanta beeline projects

Thank you

Roy N. · Answer

@Paolo Ruggieri

Congratulations on your investment.

It is quite possible that with 3-4 rooms, your house is not classified as a rooming house - check your community's bylaws with respect to the number of unrelated adults living in a residence.

If you are planning to convert additional houses into rooming houses, verify that a rooming/boarding house is permitted under present zoning before you acquire the property.  Most places have fairly tight restrictions on where rooming houses may exist.

Finally, CAP rate is a rather meaningless ratio for residential properties as they are valued and transacted based upon comparable sales and not the cash flow they generate.

Paolo Ruggieri · Answer

I have purchased a small rooming house (3 rooms) and have had a good experience.. It came with an amazing property manager used to this type of properties (rooming houses is all she does) . She managed vacancies, non payments and tenant's craziness ... I am cashing like crazy... Total Purchase and works $36,000 -gross rent is $1500- net income after management, repair, taxes, utilities, insurance, vacancies is  ~$600 (insane cap rate)... I am now converting 2 more properties to rooming houses. One more benefit if you are investing in low income areas is that:

- property is never vacant... When you change one tenant only one room is vacant, but others are in place... This prevents AC theft and vandalism

- properties in streets that are mostly boarded up do not qualify for section8... For this reason They can be purchased cheap... And these tenants do not care that neighbor houses look bad... Specifically in Atlanta we have a beltline project that is pushing prices very high is streets that look decent... Rooming housing allows you to cash flow with cheap properties while waiting that the street turns around

Now... You need a very good property manager and you need to be willing to hear crazy stuff that tenants request... Even with a property manager this is no "passive" income... Seems that I get calls every other week from property manager because something is happening... But For me is totally worth it given the huge CAP rate (especially in areas that are at the beginning of gentrification process where you need to survive as a landlord for few years)

Darren Horrocks · Answer

Hah ya I've heard about them as well. And I also have no experiencing managing D tenants. But the interesting thing about this scenario is the rents are guaranteed by social programs. That doesnt mean the tenants are any better, but the income being paid by government social assistance for these types of people helps I suppose.

Not saying that makes it any better haha

Matt Geerts · Answer

@Darren Horrocks I think that if you're not going for students you're nuts. However, sometimes nutty people get rich. Do you personally have experience with managing D-class people? Scenario: no rent paid by half of the house, you show up and everyone's high on crack and the kitchen cabinets are on the lawn. Are you prepared for this? If you are, heck, go for it. Frankly, I've heard bad things about the lower-crust in Barrie specifically, but that's just hearsay (and a long history of landlord stories).

Rooming Houses - Risk vs Reward?

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