Renting your property out by the room can be a profitable strategy, but you need to be aware of the risks involved. We asked two experts for their guidance on how you can make it work.
Chris Rolls, managing director of Rental Express, looks at the risks involved in renting your property by the room and shows you ways to avoid them and increase your rental returns
Over the last few years there has been a push by some property investment 'experts' to use certain strategies to maximise rental return to increase the speed at which they become cash flow positive.
While it makes sense to implement strategies that maximise the returns you get from your investment property, it's important you weigh up all the facts before implementing aggressive and sometimes costly changes to your portfolio in the process of trying to increase your rental return.
One method that has been recommended to a number of investors has been renting normal residential properties to individual tenants on a room-by-room basis. Typically the owner makes some changes to the fixtures and fittings of the property and then markets it as 'student accommodation' or 'boarding rooms'.
For example an investor may own a five bedroom house that is renting for $480 per week. Their reasoning - and often the reasoning of so-called property experts - is that by renting out each individual room to a separate tenant, they can probably collect $125 per room per week, immediately increasing their rental return to $625 per week. The tenants then share common facilities such as bathrooms, kitchen and living rooms.
While this sounds good in theory, in practice the results are often much different. This is because there are a lot of unconsidered factors that come into play the moment you rent one residence to multiple unrelated parties.
At Rental Express we manage over $1 billion worth of residential property, and in many cases find that when owners utilise this strategy they actually lose money. Whether you are going to be better or worse off depends on your individual circumstances. Here are a few important factors to consider before adopting this strategy to increase your rental return.
1. Security modifications
Few tenants will rent a room in a property with people they don't know without added security. That is, each room you rent will require its own locks with individual keys. Common doors like the front and back doors will require access by all tenants. These doors will need to have different keys than the individual rooms.
You may also need to provide lockable cupboards in the kitchen as one of the main complaints in shared tenancies is people eating each others food.
In most cases you'll need to furnish each room - some tenants will expect it, others won't - and you will also need to provide furnishings in the common areas.
This includes the lounge room, dining room, kitchen, bathrooms, laundry, and other general areas like decked patios and entertaining areas. You'll also need to provide a small fridge in each room.
These furnishings will all incur wear and tear, and unlike renting to a group of related tenants, if something is damaged you can't hold any one tenant responsible unless they admit to causing the damage.
3. Electricity and water
While the regulations will vary from state to state, in most cases you won't be able to charge individually for water, gas and electricity unless it is individually metered - something that is nearly impossible to do in boarding room accommodation. This means that water and electricity come out of your gross rent, reducing your net return.
4. Cleaning and maintenance
If you've ever lived in a share house you'll know that an ongoing problem is working out who is responsible for cleaning. How do you ensure the cleaning of the common areas is kept up to date?
You can hire a professional cleaner, but that will reduce your rental return further. Alternatively you can leave it up to the tenants, but inevitably it won't get done, or there will be arguments about doing it.
This will increase tenant turnover as well as making it hard to rent vacant rooms because every time your property manager shows a new tenant through, the common areas are a mess. You'll also need to pay for garden maintenance - a cost you could avoid if there was a single tenant.
5. Wear and tear
Having four or five (or more) unrelated tenants living in one property increases wear and tear which will increase your maintenance costs. Keep in mind that as the tenants are unrelated, they'll all have their own social circle of friends and partners dropping in as well.
It is a fact that you will end up with more vacancy in boarding room and student accommodation compared with renting a property as a single tenancy. While some so-called property experts debate this, before accepting their advice find out how many properties they've rented recently.
At Rental Express, we accommodate over 6,000 tenants each year. In almost all cases properties rented as individual rooms have higher vacancies than those rented as a single investment property.
• For most people, boarding room or student accommodation is seen as a temporary solution to their accommodation needs. Students will often rent individual rooms for the first six months of university before meeting new people that they want to move in with.
• Non-students who utilise boarding room accommodation tend to be lower-quality tenants, resulting in irregular rental payments and increased damage to property.
• Moving multiple unrelated parties into one property often results in disagreements, which increases the turnover of tenancies.
• Because this style of property is often utilised by students whose university year goes from late February to November, rooms become very difficult to rent for the three months between November and February.
In the current market the average residential property rented as a single tenancy has just two to four days vacancy on average per annum. If you plan to rent your property on a room-by-room basis, you should budget for approximately three weeks vacancy per room per annum.
7. Other costs
There are other hidden costs associated with boarding room or student accommodation. These include;
• Landlord's insurance:
Landlord's insurance policies are typically paid for on a per tenancy basis. This means that if you want landlord's insurance for your student accommodation of five rooms, you will need to pay five insurance premiums.
• Government regulations:
Each state of Australia is different, but in most states there is additional fire safety regulations required for boarding room accommodation, particularly if you are renting out larger numbers of rooms per property. This also adds additional costs, which vary depending on the circumstance of your property.
• Management Costs:
The cost of managing individual tenancies is also much higher. If you are renting five rooms, you'll need five separate leases, five entry condition reports, you'll need to lodge five bonds, and you'll have to collect rent from five different people. This will significantly increase your workload if you manage the property yourself, or will cost you more if you have a property manager look after it.
How to make it work
As you can see, there are some significant additional factors you need to consider before heading down this path. However if you have decided this is what you want to do, here are some things to look out for when determining if your property is suitable for this style of accommodation.
Properties that are within walking distance of a university campus or major CBD centre are always easier to rent with this style of accommodation. Proximity to public transport is also important as it's rare you'll end up with enough car parking for all of the rooms in your property.
Ensure that your property has enough separate living areas in proportion to bedrooms. You'll need at least two separate living areas, which could consist of a separate lounge and dining room plus an outdoor entertainment area. These are necessary to make the property appealing to prospective tenants.
Fixtures and fittings
Make sure your property has hard-wearing fixtures and fittings. If you are renovating a property for this style of accommodation, installing tiles instead of carpet or polished wooden floors will reduce maintenance costs.
Keep the end in mind
If you are making changes to a property, keep in mind that if you want to sell it, you'll reduce the market you can sell it too, if it can't be converted back into a normal residence. However on the up side, if you have chosen the right property and you can make it work, you just might increase your sale price based on your increased rental returns.
While it may look appealing to be collecting 20-25% more rent by renting out individual rooms, most owners who take on this strategy fail to increase their rental return significantly due to the associated costs.
If you do want to give it a go, make sure you budget accurately for all the increased expenses you will incur and don't forget to include the increased time it will take to look after the property.
Chris Rolls is the managing director of Rental Express, Queensland's largest property management business with over $1 billion of residential property under management. To receive a FREE DVD on ways to maximise the returns you get from your investment property go to www.rentalexpress.com.au. All views expressed are his own.