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Expected return on boarding house?

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  • Expected return on boarding house?

    Hi everyone, I haven't been here for years because our rental's been chugging along smoothly, but now I'm thinking about adding another and I'd appreciate help.

    It's a 6 bedroom house in Christchurch on land I'd like to landbank, currently let by the room to long-term tenants who sound worth keeping. I think that means it's a boarding house...

    If anyone's got any info about the financials of running a small boarding house, I'd be incredibly grateful. Especially compliance costs and info about what kind of return on capital I should aim for.

    Thanks!

  • #2
    Hi One,

    1) Return on capital - everyone is very different and it's really subjective
    - some would be very happy if the rent paid the expenses, as you mention that you are really landbanking it
    - some would like the rent to pay all expenses, plus principal repayments so that the property is debt free over 25 years
    - some are happy if the rental returns a greater return than having the money in the bank. So 3-3.5% on the money you have invested

    It sounds like you have put cash in, so the rental doesn't have much debt (my reading between the lines which might be miles out) - and if it has future development potential, which I presume is your landbank comment, then I'm be happy with 3-4% return on the cash you have put in, if you expect to development within a relatively short term, say 5 years or less.

    2) financials of running a small boarding house. From a tax perspective this is just a rental if residential, and you are renting on a standard long term residential tenancy. So having Xero can give you some great information on profit, the actual profit but also compared to budget. Plus make your end of year financial statements easier.

    Ross
    Book a free chat here
    Ross Barnett - Property Accountant

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    • #3
      Hi Ross

      Thanks for that. Sorry, I wasn't at all clear in my post. I'm got my eyes on a place to add to my (small) portfolio, and I think the place I want to buy would be a boarding house. I'd be buying it mainly to landbank, and got a bit of a shock to realise it'd be a boarding house, because that's new territory for me. Hence the questions about boarding houses, especially the finances. Googling found me a fair bit of info about the people side of managing a boarding house, and the tenancy act side of it, but not a lot about the financials. So any info much appreciated.

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      • #4
        Hi One,

        Is it a) just a big house that you are renting as a long term residential property, to one tenant with a Residential Tenancy Agreement?

        Or b) you are renting room by room. But still to long term tenants, with RTA agreement

        or c) are you renting short term accommodation as a boarding house. ie some staying 1 week, some 3 weeks, some 3 months.

        Ross
        Book a free chat here
        Ross Barnett - Property Accountant

        Comment


        • #5
          what is it "approved" for at present?

          RTA= is a room related to the tenacy agreement? then uit is a boarding room = 1 boarding room and more than 5 occupants then this is a boardinghouseg. Rent to flatmates or a head tenant or a shared tenancy and it is not a boarding room and not a boardinghouse.

          if you change to a boardinghouse with more than 5 boarders there are serious fire requirements under the building act.

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          • #6
            Hi guys, thanks heaps.

            Ross, I expect it to be (b) you are renting room by room. But still to long term tenants, with RTA agreement.

            Among the current tenants, there's no "head tenant" who sublets to the rest. Maybe one of them's prepared to become a head tenant.

            John, it's not approved for anything at the moment. As far as I can tell, the owners got round all the rules by living on site and saying that the tenants were their flatmates. If I buy it, I won't be living on site, so would have to convert it to something else legal.

            Groan about the fire requirements. Do they definitely kick in at 6 rent-by-the-room tenants? The place doesn't even have smoke alarms! I'd fix that, of course, but if there are serious fire regulations requirements, blow that for a joke. Do you know if there's a nice clear list of boarding house requirements online anywhere? I've searched but haven't found one. Or do I need to call the Council?

            Thanks again. This is starting to look like more of an undertaking than I realised.
            Last edited by One; 08-10-2018, 06:21 PM.

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            • #7
              its likely approved as a detached dwelling single house.

              You need to be careful not to change the use to boardinghouse but up to 5 boarders is allowed and still a detached dwelling and fire requirement remain the same as for a house

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              • #8
                Thanks, I think you're right and I'll calculate the return based on 5 tenants.

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                • #9
                  set it up with a head tenant who sublets to flat mates? he gets one room free/reduced and room rates cover rent. Can be tenancy agreement and a flat sharing agreement under that

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                  • #10
                    I think John the builders suggestion is great one
                    Give him a free room pay him maybe a part time salary of say $20k pa
                    Do allow a budget for fire report and anticipate some sort of fire safety capital fire alarms, perhaps sprinklers etc.
                    With this sort of property perhaps a net yield of 7pc to 8pc would be expected .
                    So if the property was worth $1m I would expect $75k net profit before interest and tax .
                    Based on 100pc funding at say 4.5pc you would net after tax maybe $20k pa to repay principal
                    Not much of a profit but as you said if the land content is also worth $1m you are really land banking
                    I certainly would not go into a venture like this for less than $20k pa as the property will have heavy wear and tear requiring substantial refurbment every so many years (and after principal and tax there will be little in the kitty)

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