Mark Baker says ‘Rooming Houses’, also known as boarding or share house properties, can provide investors multiple income streams with up to 330% more cash and positive super cash flow.
Rooming Houses are a special type of positive cashflow property which have allowed Mark to sustain his ideal lifestyle and live solely off the income from his property portfolio for over a decade.
Today, he is one of Australia’s most knowledgeable experts on rooming and boarding house properties, being a full time investor and owner of Rooming House Expert and Super Cash Flow Developments alongside his son.
On the Get Invested podcast, Mark joined Bushy Martin to talk about the type of investor profile rooming houses are suited to, and the considerations to make when exploring this strategy.
Rooming House: What is it?
A ‘Rooming House’, also known as a boarding house or a share house, is a property where you can legally rent the property room by room.
“It’s not something where you can just go throw some locks on doors and sign people up. There is a fair bit of regulation around it, and a lot of that comes from occupant safety requirements around fire safety, because if you have locks on doors how do you get a person out of that room if someone needs to get them out, or how do they know if there is a fire in the rest of the house before it’s too much of an issue?” Mark said.
“Some of the regulations go overboard, some of it’s there for sensible reasons. Sometimes, I get people that say to me, oh but that rule is stupid. Well I don’t care if it’s stupid or not, it’s what you’ve got to do. If you don’t comply with the legislation and the rules then you can end up in jail or have very significant penalties attached.”
Rooming House: What profile of investors is it suited to?
Mark advised that Rooming Houses are best suited to investors who are more advanced in their investment strategy.
“It’s probably two things. Firstly, it’s typically probably a later investment strategy once you’ve built up some equity, because they are equity heavy and there’s money tied up. Even if you’re getting 80% lending on a million dollar property, you’ll probably need $300,000 including other costs to be able to do it. So generally a later investment product,” Mark said.
“Other than that, it could be a high income high network individual that gets into it, or even just high income could be enough to get you going in it if you’re not in a hurry to leave your job. At one stage, I was sort of looking at well, how can I do more? And I thought maybe I need to do some development or something like that. But then it was like, well why would I want to do that for? I’ve got the cash flow there, just keep building it up and it replaces that anyway. And I already had a reasonable number of properties from the time I’d been investing. So unless you can go out and buy 15-20 properties, then a different approach is probably better. And why would you go buy 20 properties when you can buy one or two that are going to give you the cashflow income that’s going to sustain your lifestyle?”
Bushy added: “For me, the only reason I invested in growth was so that I could convert that to cash flow at the other end of the journey. But what I’m loving about the Rooming House exercise, given the much higher cash flow capacity, if you’ve got horsepower you can fast track that exercise to create residual income of a much bigger size far earlier than you would if you go down the traditional route”.
Rooming House: What are the pros and cons for investors?
Mark delved into the benefits and challenges that investors may face when investing in a Rooming House.
“It’s obviously great cash flow and it’s a great way to hold land. Cons are it’s equity heavy and it is a fair bit of work to get right. When you have a rental property, you’ve got issues with tenants, and when you’ve got an apartment block, you’ve got a lot more interaction between people. So it’s all that on steroids. It’s not only managing the property, but also managing the owners corporation. Even though it’s one owner, you’ve got common areas to look after as well. You’re also dealing with a variety of people that may or may not get along, and that shouldn’t be your problem, but it becomes your problem,” he said.
“There is also different stuff in different markets. I get people sometimes that want to do a Rooming House targeting a specific market. And it’s like well that’s great, but how are you going to find them? I would tend to say in a lot of cases you can do your best thinking of what’s there, but generally the market will choose you, rather than the other way around. And if you’re not prepared for that, and if you think oh I want to do this and I want to get people that work at the hospital or whatever, and then they come and they don’t want that, and the only market you’re getting for that product is unemployed people that are on welfare payments that might have mental health or drug issues or whatever and you can’t cope with that, well then you know that’s not it. I mean you can do things to design what you’re doing be more suited to a market that you’d prefer to deal with, but they’ve got to be there in the first place.”
Rooming House: What is the difference between converting a property and purpose building?
Investors need to consider whether they plan to build or convert a property into a Rooming House.
“The property profile, the layout and the amenities have got to be flexible enough to appeal to a number of different users because they’re not all going to be the same. They might work different hours, have different needs, different cultural backgrounds, and different expectations, so being very careful about where and what you actually provide in that context,” Bushy said.
Mark added: “And that’s where there’s a big difference between converting a house and purpose building. When you’re purpose building, you’re designing for the use of a specifically targeted market. So you’re taking into consideration things like noise between rooms and all that stuff. But when you’re converting an existing house that’s already there, there’s a lot of stuff you can’t deal with and you’ve just got to make the best of what you can, and it’ll be a different market because of that”.
Rooming House: What profile of tenants can be expected?
There are a range of tenants that investors can expect to attract to a Rooming House.
“It could be first home leavers just looking for something to establish their rental history or get into the broader market. It could be people later in life that don’t need as much and they’re just happy with somewhere that’s comfortable for them to live with everything included. It could be people that have an employment contract in an area for a period time and don’t need to go and buy all the future or connect the utilities. It could be people that need that lifestyle flexibility and can do it at a cost that’s affordable to suit their lifestyle,” Mark said.
Listen to the full interview here.
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