It makes sense, right?

People live in them.

They are homes.

So, if a Rooming House is somewhere people reside, surely they must ‘residential’.

Well, yes.

Unless you’re a major bank.

Then, no.

The ‘Big Four’ banks don’t understand Rooming Houses, so don’t view Rooming Houses as ‘residential’ products, so you’re unlikely to get a standard residential loan to build or buy if you apply through 90% of brokers or a major bank. You need to find a specialist broker with access to a specialist lender to get the right LVR, terms and interest rate to finance a Rooming House build or purchase. (More on that later).

You can disagree with the bank as much as you like, but you won’t change their mind – even though a Rooming House is a ‘Class 1’ structure under the Building Code of Australia, as is a typical family house. (There are 10 Classifications – house dwellings being Class 1).

Banks categorise family homes (Class 1) as ‘standard’ residential.

This is where banks feel most comfortable.

Standard Class 1a residential family homes (in their view), can be sold quicker than a dwelling such as a Boarding House or Rooming House – which they classify as ‘non-standard’. Banks can be wrong. Demand for high cash flow houses is very strong, too.

Subsequently, Rooming Houses are categorised ny the major banks as a ‘commercial product’, so they get boxed into the commercial loan category, with a lower Loan to  Value Ratio (LVR) and higher interest rate. (A Loan to Value ratio is the total value ratio of a loan to the value of an asset purchased).

A residential family home’s LVR can be 80%. or even 90% with Loan Mortgage Insurance (LMI).

That is, banks will lend you 80% (up to 90%) of the property value. This is because the banks see residential property as low risk (plenty of potential buyers should a loan default).

A Rooming House can be anything between 50% -70% LVR, depending on the bank, and how well they understand Rooming Houses.

Banks like to make money, so they will lend for Rooming Houses.

They also like to de-risk their money.

The Major Banks view a Rooming House as a ‘non-standard’ product, at a higher risk. Lending less money with a lower LVR de-risks their exposure.

Banks believe Rooming Houses are a niche product (true) with a smaller percentage of the home buying market (true), with less appeal to buyers (false), taking longer to sell than a standard family home (false).

Banks don’t know the market, so are making uneducated, flawed assumptions.

Very few Rooming Houses are ever sold. Owners hold onto them. The sales supply is low but demand is high.

Rooming Houses are an ‘investor’ market product. A lot of investors want Rooming Houses. They just can’t find them. They rarely, if ever sell.

Ask yourself, why would an owner sell one of the best performing property investment products they could ever possibly own?

There are few, if any, better investment asset classes than a Rooming House. They tick all the boxes.

Let’s look at the comparison between selling a Class 1a Family Home and a Class 1b Rooming House.

Let’s imagine these two dwellings are in the same suburb, in the same street – in fact, are side by side, next door to one another.

They are both on equal size lots.

They look the same.

They both have five bedrooms.

They are both valued at $1.4m.

The Class 1a house at 123 Smith Avenue is rented to a family for $650/week.

The Class 1b house at 125 Smith Avenue is rented by the room for a total of $2,000/week.

Both are advertised for sale at the same time with the rental income included in the listing description.

Which do you think will appeal most to investors?

Which will attract the most enquiries?

Which will sell fastest?

When a bank tries to value a Rooming House, they will ask a valuer to value for a loan.

The valuer may be a standard residential dwelling valuer, never having previously valued a Rooming House, and won’t know where to start. This is a common experience with Rooming House investors. The valuer wants to be paid for a valuation, so may compare a Rooming House (Class 1b) to a Family Dwelling (Class 1a).

This is close to comparing apples with oranges. They may both be fruit, but they are very different fruit.

Some valuers may try comparing to Boarding Houses – Class 3 where room rents can vary by as much as 100%. Boarding Houses often contain smaller rooms without the same ensuite and kitchenette private use facilities as a Rooming House.

Without a network or expertise in the Rooming House sector, an inexperienced valuer will not know which managing agent(s) to speak to for rent appraisals.

Banks should not pay for these flawed ‘guesses’. These are not true, professional valuations, so should not be presented as such.

These are valueless valuations.

A reputable valuer who specialises in Class 1a houses should refuse valuing a Class 1b Rooming House unless he has experience in Rooming Houses or Commercial property valuations, based on yield.

To accurately value a Rooming House:

1. First add up the property’s total weekly rent.

2. Then multiply weeks in a year.

3. This will give you the total annual rent (gross income pa.).

4. Look online for the area residential rental yield (search for the suburb + yield). Investors like to earn much more than the area average yield, so double the yield to appeal to investors (this is a thumb-rule, as each investor has their own tolerance).

5. Divide the gross income pa. by the local yield x 2.

E.g.

Rent: $400 per room per week x 5 rooms = $2,000/week

Annualised: $2,000 x 52 weeks =$104,000 gross pa.

Deduct around $15,000 of operating costs (management, rates etc.) = $89,000 net income.

Divide the net income by the capitalisation rate (also known as the ‘cap’ rate), which is the net yield used for commercial property investments. This varies between 3.5% – 5.5% at time of writing.

Let’s be conservative and go with a cap rate of 6%.

 Gross income ($89,000) divided by the cap rate (6%) = $1.48m

Capitilsation Rate Explained

Commercial Investors use the Capitalisation Rate or ‘Cap’ Rate.

This is the actual rental return after all costs. Depending on your area, how well your property has been designed and built, and your Property Manager fees, the costs (outgoings) for a Rooming House is around $15,000 pa.

Deduct Your outgoings ($15,000) from your gross annual rent. will give you your Net Income or Net Operating Income (NOI)

This is your clear actual income pa., not including interest.

In this case, your Cap Rate is your NOI ($89,000) divided by your property value ($1.48m) = 0.060.

Multiply 0.060 by 100 to get the percentage = 6.01%

The Cap Rate is 6.01%

If you are having your Rooming House project valued, always insist on an experienced, knowledgeable valuer.

We can refer you to an experienced, qualified broker with access to the right valuers and lenders.