Rooming house with crazy cash flow ??

Question

Happy Thanksgiving all!

I am a CT investor, and have been having a difficult time locating a property that meets a lot of the criteria we all tend to use for multi family properties.  I found an interesting one that is zoned as a rooming house WITH a 3 bedroom apartment on the first floor.  There are 10 rooms that can be rented, as well as the apartment generating $1,500/mo.  Rooms are going for $180-$200/week.  I like the stability piece in the first floor apartment at $1,500/month, which should cover all expenses on the property (except debt service)

Does anyone have any experience with these?  I understand there may be some more management intervention and some extra administrative duties, but the cash flow seems great.  Would love to hear some pro's and cons' and hopeful that someone out here had some experience.  NOI appears to be around $70k and there is an opportunity for owner financing (about 60%).  Just some background:

-  Near an extremely good Law School

-  Super Location in a major city

-  Parks and restaurants galore!

-  Hospitals

-  Seminary close by

-  Some major Insurance Companies a few blocks away.

I would like to thank you all for taking the time in reading my post, and sharing your experience if you have any.  Again, wishing you and your families a super Thanksgiving!!

Rick S

Santa Realty

Property Management / Sales

Account Closed · Answer

Hi Rick,

Master Jay Hinrichs is right on. It's management intensive. It's a job, not an investment. I'm investing in apartments around San Jose State Univeristy in downtown San Jose.  I have seen these rooming houses came up for sale and have been tempted by their cash-flow. I'm glad I passed on all of them.  Our property manager, who manages over 1,600 units, refused to manage these. There are other issues with these purchases as well such as:

1) Financing. I haven't found a lender willing to lend on a rooming house. This could explain why the seller considers seller financing at 60% LTV. Talk to some banks and find out for yourself. Maybe it's different in your area.

2) The City of San Jose is trying to shut down these rooming houses by giving them all kinds of issues. The neighbors complain to the City Code Enforcement constantly due to the fact that they don't like different people come in and out of these rooming houses.

3) the tenant profile is transient and questionable at times.

What I like most about these rooming houses is the title.  It's called Fraternity or Sorority housing.  :>)

So it goes back to the saying "everything in life has a price." You'd have to work harder to achieve the higher yield.

Happy Thanksgiving!

Matthew Paul · Answer

If you can find 10 different people who like each other , and can get along  you will be just fine .

Jay Hinrichs · Answer

@Rick Santasiere  I got sucked into investing in one with a BP member and it was a nightmare... the tenants unmanageable I finally sold it at a loss

Ramon Gonzalez · Answer

remember people ... Crack kills.

You will earn every percent of that return.

The operative word is earn

Jacqueline Carrington · Answer

I think it is too much work and potential headaches even for the income. You'll spend more time managing this place instead of using your time and energy towards the next investment.

Jay Hinrichs · Answer

@Rick Santasiere  super management intensive... its a business not a RE investment

just like buying a motel is a buisness.

Only shared housing I would do would be limited to top end collage areas and Airline crew crash pads

Paolo Ruggieri · Answer

From my experience... You need a great specialized property manager... I have a rooming house property and am going to buy 2 more because I have the right property manager... Add incentives to the right property manager and you will have great net returns... You will still have more calls from the l property manager than other type of properties, but property manager will do 90% of the work. I agree with several comments above ... If you manage it yourself is a job... Rooming house investment is ONLY with a property manager ... If not is a job

Rick Santasiere · Answer

I love the crack kills comment :-)  I believe I listened to that podcast 140 way back when I first joined a few months back.  I am trying to listen to them all, but can't seem to find podcast 1-42 or so... I have listened to at least 50 podcasts in the past 2 months, and LOVE THEM.. Brandon and Josh are a bit silly, but whatever, it's all good..

Matt, I love the think outside the box attitude.  I was thinking the same thing, like running the rooming house for 5 years (to pay off debt), then convert based on the highest and best use.  I was thinking (if the highest and best use and zoning codes could change) of converting it to either 6 1 bedroom units, or 4 two bedroom units once there is no debt and the cost of the build-out could be financed.  Not to mention the already present 3 bedroom place on the first floor, which in time could be converted to a premium dwelling, getting well over $1,600-$1,700/mo.

And Mike, I missed your last comment on the ARBNB.  So funny you mentioned that!! I literally just thought of that this weekend while still pondering the idea.  So let's say there is a solid base of 4-6 tenants, leaving at least 3 vacant (as revolving doors) to rent out nightly.  I know nothing about AIRBNB (except what I have heard on some of the podcasts), so I am not entirely sure how that would work with a rooming (shared) space.  If I have the three extra rooms rented for a Friday and Sat night, and there are 3 couples.. That adds 6 showers.. Without knowing the layout of the dwelling, not even sure that is feasible. Then the kitchen/dining room.  Imagine 6+ 7 (reg tenants) comingling?  What would the incentive be for the "long term" people to want to be nicey nice to the nightly dwellers?  Sounds like it would have to be some type of an incentive for them to share there space... Could get a little much.  Sounds like a decent thought to me, but you also mentioned why would someone want to live with randoms..  A few reasons I can think of are as follows:

- They have little (or no) security deposit

- They don't have to "split" anything with anyone (bills, rent, etc..)

- They don't have bills at all....

- They prefer not to be "alone.." Some people can't be alone.

My last thought is that I a firm believer in "if something seems to good to be true, it probably is." But I am also a dreamer too..  If I can pickup a property that could be paid for in 5 years (with a lot of work on my end managing it), then end up with a $750k - $850k Multi-family after dropping in 1/2 that on a build-out, couldn't it be possible?

Matt Vogt · Answer

Could you convert it into a few units? Maybe it could be turned into a 3 or 4 plex that would be rented by future lawyers. Although you might not make as much as a boarding house, it would be FAR less work intensive once established.  I would look into those possibilities before going into a boarding house situation, as I think that would be way too much management and headache for the rewards.

Steven Kopstein · Answer

@Rick Santasiere There was a recent BP Podcast on Student Housing - you may want to listen to that.  The consensus here seems to be - you are taking on another job - like running a motel.  It will take time away from more direct REI.  If that's OK with you, then go for it. https://www.biggerpockets.com/renewsblog/2015/09/17/bp-podcast-140-the-riches-are-in-the-niches-with-bill-syrios/

Rooming house with crazy cash flow ??

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