Experience with Rooming houses as investment properties?

Question

I have an opportunity to acquire a "Rooming House" that, on paper, looks very strong. I have a call scheduled with the property manager to learn more about the nature of the tenants, but was curious if anyone had experience, good or bad, with this type of investment and some 'pearls of wisdom' for what to look for, ask, or frankly run away from. Thank you.

Colleen F. · Answer

@Jason Ross they are certainly needed and having family who lived in a couple I know they can vary in clientele. First, I would make sure it is legal. Determine what demographic you have living there. Are they longer term or transient. Neither is better, it really depends on the reason for the demographic. Can you determine number of police calls to the location? Is there any common area for food prep or do you have a bunch of people with hot plates in their room. (it might sound good to have no common food prep area but it leads to other issues and to me it seemed like a more transient/rougher population. Make sure you are seeing rents paid, not rents charged.

Luciano A. · Answer

Make sure city in which this property is located that you check with the city if they require any permits and if this particular property is current with all health and safety inspections. We are currently building multiple duplexes catering to rent by the room. This type of investment is great cash-flowing property but just like MTR, you are running a business not just a real estate play. The property manager is key. Making sure they have property background checks, and good accounting will make this adventure a lot more successful. Hope it works out.

Best of Luck

Jason Ross · Answer

Michael: Thanks so much for taking the time to reply. Your comments were affirming in terms of what seems to be an attractive investment but also my focus on talking to the property manager/operator with a set of questions inclusive of the points you raised. Thank you!

Michael Smythe · Answer

make sure city is ok with boarding houses.

make sure you understand the types of tenant these are. Class C tenants will not often work.

Jason Ross · Answer

Thanks so much @Colleen F. and @Luciano A.These are all helpful and useful points. I've determined it's legal, the house is properly zoned and that 70%+ of the tenants are longer term with the balance currently seasonal/temp workers. Common area for food prep with hot plates not currently permitted by current owner. One of the residents receives reduced rent for keeping the place clean tidy (kitchens and bathrooms) and alerting property manager of anything needing to be addressed. Lingering (and sole) concern at this point is sustainable property management. There are not "professional" property managers in this city willing to manage this property. The person currently managing the property has the heart and skill set for the work but doesn't utilize all the normal business processes (monthly statements, etc.) that I'm accustomed to with my more tradition SFR properties. I'm getting comfortable with this, especially as we've continued to communicate and my comfort with her is growing.

Michael Margarella · Answer

Great post. Rooming house is certainly a wealth driver. I would say one of the most important thing to do is a due diligence on the operators. It is as much - if not more - an investment in the jockey not the horse.

Also, analyze how they arrived at their projections. For example, did they project a quick sale at today’s cap rates with aggressive rent appreciation and occupancy levels built in? Or, did they add 0.5-1 point to the cap rate and project more conservative rent appreciation and occupancy.

Experience with Rooming houses as investment properties?

Experience with Rooming houses as investment properties?

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