boarding houses

From: Ken .

I have come across a council approved boarding house that will give about 12% return. It is also in an area that is starting the gentrification process, so will have good future growth. It appears an ideal 2nd IP for me. My question to all you more experienced investors is

- What are the downsides and/or pitfalls of buying this sort of property, am I missing something?

I remember seeing boarding houses being discussed before, but I can't find them

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Reply: 1
From: Pierre .

G'Day Ken.

9 Shedden Street Islington. 4BR furnished Council approved boarding house returning aprox 370pw for $152,000. Listed by Noel McFarlane Hamilton.

Am I right?

The guy who owns this place owns a lot of boarding houses in Newcastle. It was one of his first but he has found that it is too small for him and his needs. Not a bad property, but have a read below of my post, and think about some of the pitfalls (especially insurance). The price has come down from $167000 to $152000 in the last 4 months. Another tip for this place - the agent says it is council approved, but its not. The property requires installation of 3 emergency exit lights for final approval. At the moment, it is approval pending (the lights). The owner hasn't been bothered to get the final approval.

My tip - if you buy it - and I think its worth considering - do not insure it as a boarding house. You should be able to seek insurance as a standard property - its only a 4BR terrace.

Anyway, here's my post which you can find on the old forun under The Castle.

A couple of tips. My wife and I have just purchased and set up a 9 bedroom house which we have let as student digs and learnt a fair bit ...

1. Insurance. Find out from the vendor who they have insured the place through, what they are paying, and whether they have fully disclosed all deatils of the operation to the insurer. I had, and you will have a difficult time obtaining standard residential building, contents and landlord's cover insurance. The Childers backpacker fire has scared off most insurers, and although you won't (don't) mention the word 'boarding house' or similar, the insurer will say to you - "Oh, so you want to insure a boarding house. Sorry, Click..." If you happen to find an insurer that will take the risk, they will want to slug you $3000 - $10000 per annum depending on the risk!! You need to consider this before proceeding!! I say again, you need to find out what the vendor is doing, follow that up, and seek your own quotes. Try to go the usual channels, and push as hard as you can for standard insurance. I contacted twelve brokers for insurance, and told every one of them that under no circumstances were they to use the words "Boarding House" when seeking insurance quotes. I told them that it was simply a large house (which it is), and that my tennants were on long-term agreements (1 - 2 semesters). On EVERY quote I received back , they had ignored my instructions and had sought quotes for a "Boarding House". Obviously this drove me nearly insane, and a lost my temper big time with a couple of them. In the end, I had to go with a $3800 insurance bill becuase it was too late by then (I had people moving in). Don't get caught out like we did. Fortunately our cashflow predictions were made on the worst-case scenario, and I had budgeted for it, but it is a big chunk out of our profits.

2. Proximity to the Uni. Our place in is Newcastle. It is located in Mayfield, about 9 mins bus ride from the uni, and about 15 mins to town and the beach (its actually fairly equidistant - it just takes a little longer by bus to the town/beach. We targeted international and country students, and hoped for about a 50/50 mix. When the internationals arrived, all the Americans and Europeans demanded to live on or near the beach (top of town), and didn't want to stay with us. All the Asian and African students wanted to stay within 5-10 mins walking distance to the uni, and didn't want to stay with us. Not all doom and gloom 'though - we filled the place with Australian country students - but not after much worry and concer. Bottom line - do your market research. We did, but we were a bit off-track. We'll know better next semester.

3. Furnishings / Quality. Students are just like the rest of us - they like quality (but they aren't willing to pay for it!!) Furnish your rooms with neat, good quality stuff that will last, but don't over capitalise - buy nice second hand stuff. Use your Christmas period for maintenance and painting - you'll have plenty of time to do your odd jobs. I decided to put fridges in all the rooms - save the hassles of people knocking off eachother's stuff. Keeps the house happy. Happy tenants come back, look after your house and pay well. With seven people in the house, you need to decise whether this is something you want to consider. Also, I require lodger bring their own crockery, cutlery and linen. If I provided that stuff, the kitchen would never be clean - people would never take responsibility for their own stuff. If they own the gear, they are more likely to clean it up or have it thrown away.

4. Rents. You obviously realise that you will generally only receive 40 weeks per year - so budget your cashflow based on that. In most instances, we collected rents for the whole semester up-front with a two week bond. Good for cashflow - good for the LOC mortgage. (Thanks to Pete McGrath for this tip). I do this becuase it is difficult to fill a room part-way through the semester if someone pulls out. If my lodger pulls out, they have the choice of finding a suitable (to me) replacement, or they forfeit their rental payments. If you choose to do this, make sure **your demand is high enough such that you can afford to turn away people who don't want to pay up front, or **you are negotiable in your terms. For example, I had some good applicants who coudln't afford to pay for the whole semester up front. For those, I allowed them to pay monthly or fortnightly in advance, but to cover my financial interests, I demanded a 4 week bond that would not be refunded if they left before the end of the semester.

$480 per week for a 7BR place averages $68.50 per week. Not too bad - depends on what your rooms are like, whether they are furnished, depends on whether that included utilities. Have a look at similar places in your area to compare rents and review this.

5. The RTAct. Some of you may be thinking - "how can he get away with this or that??" You need to make a decision about whether you are going to have your occupants as lodgers or tenants. This is important as their legal status WRT the Residential Tenancies Act 1987 (NSW - not sure in other states) is determined by this. Tenants are covered by the Act. You must have a standard lease agreement. You must lodge bonds. You must give certain notices. You must give the tenant quitet enjoyment of the property. You must do this that and the other. As a lodger or boarder, the occupant has no rights under the RTAct. You can keep their bonds, make your own house rules, put people on whatever agreements you like, kick them out under whatever terms you like, access the property etc. It's all about control. You need to check these things out and decide which way you want to go. Look at the Guide to Sharehouse Living published by the Redfern Legal Centre for more info or do a search on Boarders and Lodgers at for more info or contact the Dept of Fair Trading.

6. Costs. I have already mentioned insurance. Also, consider whether your rents include utilites, cleaning of common areas in the premises, providing toilet paper, cleaning products etc. It all has to be factored into your calcs.

For more information see Contact me on the phone numbers there if you wish to discuss further.

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Reply: 1.1
From: Ken .

Hi Pierre

Thanks for your reply, that is exactly the sort of info and advice I was hoping for.

I had been using your past post about Newcastle as an area guide for where to look.

Looking at the under 120k houses in Islington,Tighes Hill, Wickham and Maryville, they are predominantly miners type cottages on very small blocks,fibro or w/bd, often with common side walls and no off st. parking, extensively modified etc.

I think that it would be better to look a bit more expensive to get larger block, off st. parking, completely stand alone, larger floorspace, maybe even brick, and in a street that is made up of similar houses.

My concern is that even though there will be cap growth in the area, the property still needs to be good quality, and surrounded by good quality, to take max advantage of this.

What are your thoughts on this Pierre?

Thanks Ken
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Reply: 1.1.1
From: Pierre .

Go for the off-street parking. Added value.

You will find excellent buys at or near 100K.

Try to get 3BR or at least a 2BR that can be modified to create a third.

Be patient with the area - it will take some time, but I see the rewards as good. Buy a cosmetic makeover property and add your own capital gains.

Much of Islington is still very close to Hamilton and Beaumont St. Get in now and let the ripple / gentrification catch up.
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From: Ken .

Thanks for that advice Pierre, it is much appreciated. By the way, you were spot on in picking the particular boarding house. The background info you gave on it is priceless, I will be asking some questions to the r/e agent and see what response I get.

Thanks again,
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