I recently received an email from a company selling investment properties. From a glance, it ticked all the boxes:
At this stage it all looked really good.
I then looked a bit further into the detail. It is renting for $1,100 pw ($57,200 pa) RBR or $600 pw Standard.
So what is RBR and what is the issue?
RBR is Rent By Room. So rather than renting the whole property to one tenant, the landlord rents each room individually, and then provides some shared lounge, kitchen, bathrooms and laundry facilities. The landlord also normally provides the power, internet, and some common amenities like a washing machine, fridge, couches , TV, etc.
I have a number of issues with RBR, and these don’t mean you can’t do it, but you need to be careful and fully aware of the issues.
So quick figures: Power might be $350 per month average for five occupants, internet might be $100 per month, and wear and tear $150 per month. Plus higher insurance and possibly a higher property management cost.
So this is an extra $7,200 in costs, which reduces the annual rent to $50,000 or 6.9% Gross Yield.
So maybe you would allow for 45 weeks instead of 52? It depends a lot on the location and demand for rooms. If the property was close to a hospital, then you might find a higher occupancy as nurses/doctors often like this kind of accommodation.
So at 45 weeks, the $50,000 rent from point 1) becomes $43,269 or 6% Gross Yield.
This is my main issue and possible risk for a landlord. What happens if you can no longer rent by room, or you just can’t be bothered anymore?
This property gave the standard rent at $600 per week. So based on say 50 weeks, the annual rent would be $30,000 or only a 4.17% Gross Yield. So as a standard rental the figures have changed hugely - a potentially neutral cash flow property has become quite negative with a full mortgage.
Also, if you wanted to sell this property, would another investor want a Rent By Room, or would you be restricted to selling based on a standard weekly rent?
So overall Rent By Room can be a great way to increase cash flow from rental properties. However, you need to be prepared to deal with the hassles of managing multiple tenants, and be aware of the costs. I personally would still make my buying decision based on standard rental, as long term the Rent By Room might not be sustainable.
Ross
- Auckland location
- Mt Roskill seems reasonable with 43% change from 1/7/11 rating value http://www.aucklandcouncil.govt.nz/EN/ratesbuildingproperty/ratesvaluations/Documents/reval2014ressuburbmovementsbyboard.pdf
- Gross Yield 8%
- Valuation $75,000 more than purchase price
At this stage it all looked really good.
I then looked a bit further into the detail. It is renting for $1,100 pw ($57,200 pa) RBR or $600 pw Standard.
So what is RBR and what is the issue?
RBR is Rent By Room. So rather than renting the whole property to one tenant, the landlord rents each room individually, and then provides some shared lounge, kitchen, bathrooms and laundry facilities. The landlord also normally provides the power, internet, and some common amenities like a washing machine, fridge, couches , TV, etc.
I have a number of issues with RBR, and these don’t mean you can’t do it, but you need to be careful and fully aware of the issues.
- The landlord will be paying the power, most likely the internet, and will have wear and tear on the furniture and appliances provided.
So quick figures: Power might be $350 per month average for five occupants, internet might be $100 per month, and wear and tear $150 per month. Plus higher insurance and possibly a higher property management cost.
So this is an extra $7,200 in costs, which reduces the annual rent to $50,000 or 6.9% Gross Yield.
- It is harder to rent and most likely you will have a higher vacancy.
So maybe you would allow for 45 weeks instead of 52? It depends a lot on the location and demand for rooms. If the property was close to a hospital, then you might find a higher occupancy as nurses/doctors often like this kind of accommodation.
So at 45 weeks, the $50,000 rent from point 1) becomes $43,269 or 6% Gross Yield.
- Is the Rent By Room sustainable?
This is my main issue and possible risk for a landlord. What happens if you can no longer rent by room, or you just can’t be bothered anymore?
This property gave the standard rent at $600 per week. So based on say 50 weeks, the annual rent would be $30,000 or only a 4.17% Gross Yield. So as a standard rental the figures have changed hugely - a potentially neutral cash flow property has become quite negative with a full mortgage.
Also, if you wanted to sell this property, would another investor want a Rent By Room, or would you be restricted to selling based on a standard weekly rent?
So overall Rent By Room can be a great way to increase cash flow from rental properties. However, you need to be prepared to deal with the hassles of managing multiple tenants, and be aware of the costs. I personally would still make my buying decision based on standard rental, as long term the Rent By Room might not be sustainable.
Ross
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