Pros and Cons on Rooming/Boarding House Investment

Multi-Family and Apartment Investing
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Pros and Cons on Rooming/Boarding House Investment

Jacquie Hannibal
Bainbridge Island, WA · Member since 2013 · 2 posts · 0 votes

Hi there,
I'm a new investor, have not made a first purchase yet, still exploring and learning.

Thank you to everyone for being so open and sharing - makes it less overwhelming to learn!

I'm wondering if there are any opinions (or facts?) on investing in a boarding/rooming house. I'm looking for buy and hold for passive income.

There is a 13 unit property with 1 common kitchen and living room, 3 shared bathrooms. The rest are just bedrooms. Its located in the university district so "easy" to rent to students.

Asking price is $1,350,000.

Income:
Rental income $90,000
Parking income $1,600
Laundry income $1,250
Utility reimbursement $9,100
Signing fee income $750

Expenses:
Maintenance $5,600
Cleaning $3,000
Insurance $2,600
Taxes $11,600
Utilities $3,500
Gas $1,700
Water/Sewer/Garbage $3,900

Not sure of cap rate for area. sell sheet says 5.17%

I like the idea of one property with multiple rents coming in so there should be less risk to making mortgage payment, fewer kitchens and bathrooms to remodel, one roof, etc. Downside is renting to students and potential to have several vacate around the same time with school schedule.

Anyone with experience in these kinds of property have any opinions?

Any thoughts on an appropriate price range?

I've asked to see rent roll and maintenance schedule for past 3 years. Anything else I should be asking for to make an initial assessment?

Thank you!

Jacquie

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Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
13y

Seems way overpriced to me.

I assume by rental income you mean gross potential rental income.

If landlord pays no utility then take away 50% cost.

90,000 / 2 = 45,000 at a 10 cap that would be 450,000 sales price and at a 5 cap 900,000 sales price.

I am guessing they did not do repairs much to the property and you will find deferred issues you have to fix. Owners show schedule E's and say look at all of this great cash flow and expenses are only 30%!

That I because they rigged everything over the years and want the buyer to be the sucker that overpays and inherits a ton of repairs that will kill returns for years.

What kind of money were you putting down??

Most commercial loans are at 75% ltv but with my clients we get the seller to hold a 10 to 15% second which makes you only have to put 10 top 15% down.

Unless you are banking on back end appreciation and want almost zero cash flow after servicing the debt I do not know why you would buy such a property. Having more doors for an apartment building is a great thing because you can control the whole look and feel of the development and have a full time repair person and property manager on staff. Smaller buildings your investment is influenced more by outside parties and you have less control plus the scale isn't big any to put the proper hands off structure in place.

Where I am at my buyers are getting 9 to 10 cap going in with good areas. Not amazing areas that are appreciation driven and overpriced but good quality areas.

Some investors love student housing investments. The yield can be more but the properties can take a real beating from the kids.

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    13y

    Seems way overpriced to me.

    I assume by rental income you mean gross potential rental income.

    If landlord pays no utility then take away 50% cost.

    90,000 / 2 = 45,000 at a 10 cap that would be 450,000 sales price and at a 5 cap 900,000 sales price.

    I am guessing they did not do repairs much to the property and you will find deferred issues you have to fix. Owners show schedule E's and say look at all of this great cash flow and expenses are only 30%!

    That I because they rigged everything over the years and want the buyer to be the sucker that overpays and inherits a ton of repairs that will kill returns for years.

    What kind of money were you putting down??

    Most commercial loans are at 75% ltv but with my clients we get the seller to hold a 10 to 15% second which makes you only have to put 10 top 15% down.

    Unless you are banking on back end appreciation and want almost zero cash flow after servicing the debt I do not know why you would buy such a property. Having more doors for an apartment building is a great thing because you can control the whole look and feel of the development and have a full time repair person and property manager on staff. Smaller buildings your investment is influenced more by outside parties and you have less control plus the scale isn't big any to put the proper hands off structure in place.

    Where I am at my buyers are getting 9 to 10 cap going in with good areas. Not amazing areas that are appreciation driven and overpriced but good quality areas.

    Some investors love student housing investments. The yield can be more but the properties can take a real beating from the kids.

    Podcast Guest on Show #47
    NNN Invest53 Reviews
    WebsiteView Page
    2Reply
  • Jacquie Hannibal
    OP
    Bainbridge Island, WA · Member since 2013 · 2 posts · 0 votes
    13y

    Hi Joel,
    Thank you for the reply and insight.

    My goal is buy and hold for passive cash flow ... in the future.

    Agree - seller is asking for WAY too much. Have not seen the prop yet but guessing $800-$900 is the better price range but the owner must not be realistic as its been sitting for a while so motivation might not be high? Plus they have not been putting much into maintenance so guessing there could be a lot of repairs?

    Say I could get it for the right price, do you think this kind of property would be a sound investment vs say buying several single family houses? As a newbie, it seems to make sense to have fewer kitchens, baths, roofs, exteriors, etc. to maintain. Downside would be constant turn-over and as you say, kids may abuse more.

    More thoughts?

    Thank you!

    Jacquie

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    13y

    Your options and what makes sense will be based on if you only want local or you are willing to buy in other areas and even states.

    How much time you have to allocate to your invest is critical as well. For example I work with many clients that are high level corporate execs, surgeons, etc. They do not have time to manage anything and want something passive.

    To really do that you need something like triple net or something that you can scale to have a full time property manager in place and a repair person. For multifamily that starts right about 50 units or so.

    If you own little houses locally that is one thing long term that could work. I would not recommend that from a distance. Larger scale investments you can do remotely with larger properties and infrastructure.

    The key is do you value tax depreciation more or cash flow or back end appreciation??

    You can invest in notes or be a HML, or buy tax liens etc. and not have the tax depreciation like with owning a property for investment.

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  • Leon D.
    Investor · Chicago, IL · Member since 2012 · 190 posts · 85 votes
    13y

    Jacquie,

    Nice part of the country. I'm familiar with it, having once worked for a certain large aerospace company...

    Besides Joel's analysis and input, be sure to check the laws in the area that govern these types of MFRs. In many areas, the laws surrounding them are "unique." For example, you may not be able to convert the building into conventional apartments unless each tenant moves out voluntarily (not including evictions); the city may keep track of these places and not let you convert if it pushes some ratio or another too high or low (they arenoften seen as filling a social need for transient housing); some form of rent control may be in effect, etc.

    Rooming houses are NOT conventional apartment buildings, just be sure you've done the background before committing.

    1Reply
  • Karen MargraveBusiness Member
    Moderator
    Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes
    13y

    Jacquie Hannibal First off, are the tenants male or female? Girls use the bathrooms much more often than boys, and therefore; plumbing fixtures get a workout. 3 bathrooms doesn't seem like enough to me. How old is the building? What is the electrical like? Again, a house full of girls with curling irons, blow dryers, etc. may demand upgrading electrical system.

    I've never had a rooming house per se, but did rent out my 4600 sq. ft. house to 14 girls from a school of ministry. They kept the house sparkling clean, had a great system of cleaning, etc. It had 4 Bdrms. 4 Bathrooms, and 3 separate living areas. Plus a wrap around porch, swimming pool and was set on 20 acres. I'd do it again no questions.

    1Reply
  • Blake Gordon
    Engineer · Corvallis, OR · Member since 2016 · 1 post · 1 vote
    9y

    You need to have a passion for this type of property of or be getting a really good deal. These properties are unique and can be hard to sell, so I would expect some discount or carry from the owner. Costs are much higher, generally utilities and basic house supplies are included, and a maid service if you want it to be reasonably clean. You can really get creative with the theme of the house and charge a premium if you do it right. I manage a pair of 1930s boarding houses and they are definitely a labor of love.  If you want to be hands off market it to a group like Karen did is probably the best. Fraternities, serroritys, students groups, religious groups, nonprofit organizations, social agenda groups, gay, vegetarian, green living ect. The Fire Marshal hates these properties and can be a pain. 

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