Boarding Houses - Best Yield?

I have been looking at a few properties with R3 zoning in the Penrith Council areas especially in Kingswood. I noticed a few of the listings for these kind of properties had their main selling point as the ability to build “boarding houses”. Hmmm... not a bad idea I thought as it is close to the Western Sydney University campus and the Nepean Hospital. So I decided to have a look at these areas mainly on Manning Street and Second Avenue.

I couldn’t believe what I saw. One of the properties on Manning Street (think it's 42 Manning Street) has 16 letter boxes outside. 16 different tenants staying here and paying about say $200pw which equates to $166k a year!!!!!

Imagine the yield on that. The land was only about 650m2 in area too. The boarding house pretty much occupied all of the land. It got me thinking why wouldn’t an investor buy one of these R3 zoned properties of similar size, get DA approval and build a “boarding house”? Sounds simple, but let’s see what’s involved.

Getting one of these properties isn’t too hard as a recent sale went for $807k - 44 Manning Street - an auction I went to. This property had an old brick built house on about 650m2 R3 land.

Next, getting DA approval. Apparently, the Council has this zone as a R3 zone and was approving DA for boarding houses as part of its affordable rental housing initiative. It seems likely that the DA will be approved considering that they need a higher density of cheap housing in the outer suburbs and the fact that there are several of them in this area - I actually saw 4 that were very close to each other. Also, it doesn’t seem too hard to find properties with already existing DA for boarding houses.

Next, getting finance to construct this. This is one of the hardest parts as this probably strays into commercial lending where there are high interest rates, low LVR to get in, less facilities like offset, fewer lenders, etc. I also think that the rent may be not be treated in the same favourable manner as residential rental income.

After construction, finding tenants and managing the property. I was actually expecting that these boarding houses that I looked at in Kingswood would have only students (who go to the nearby Western Sydney University) and nurses (who work at the nearby Nepean Hospital), but I was wrong. Most of the tenants seemed to be on Centre Link, not many students and hardly saw any who seemed to be working at the hospital. I guess it would be extremely hard to manage so many tenants, but the rewards seem enticing - extremely high yields.

The other plus is that if you are an investor with a cause, you are pretty much helping build social housing, however, the neighbours in these areas hate it as it is generally attracts the wrong sort of crowd. Some of the long term residents that I spoke to here, said that with so many boarding houses that have come up and a few more that were coming up, there were a lot of social, drug and security issues and they were going to pack up and head further west to the Blue Mountains. Irrespective of all this, the yields seem very enticing. If the above issues can be managed, then would boarding houses seem like a profitable venture?

So has anyone had a go with developing or investing in Boarding Houses?

 

Most residential zonings permit boarding houses. Whether council will approve One is a different question.

 

You can have it on r2 as well

Few issues (recently)
Parking conditions have gone up to 0.5 and I think boarding houses may be limited to 12 (doesn't really matter as thats a lot)
Construction cost isn't cheap
Finance
Oversupply of units minimising the gap though lower rents

I didn't think the location you posted is worth it but have heard of a few in Randwick/Northern Beaches that at one stage rumour was renting at 600pw each

 

That's quite high considering that the modern boarding house room is only 16m². Most that I have seen in the inner west/lower north shore are around 250-350/wk.

 

I thought it could be upto 25m2 not including wet areas (bathroom/cooking facility areas)

Again what I said was a rumour (just heard from a designer that he had also heard)

 

Of the ones that I have seen a s/c bedsit has a compact bathroom (shower/toilet/basin), kitchenette (2.1m benchspace, o/h cupboard/exhaust, 2 burner cooktop, M/W & sink), room for 2-2 1/2 seater lounge, bed & small table. Some with 2m2 balcony/or small courtyard.

 

Hi Investor1234 - I too have looked into this and found the following:

a) A lot of these sites are going for 800k+ which for the area they are in is overpriced. Most developers would pay no more than 750k for these sites, however you are now competing with home owners wanting to move into the area - take a look at 44 Manning street (sold $807k) - I see more value buying in Penrith of St Marys for this amount;

b) Recently (2019 onwards) there have been several DA's submitted in the Manning Street area and surrounds that have been rejected (read the rejection for 6 Edith Street DA) due to pressure from residents in the area - there is a large risk that the DA will be rejected and you will have to go through the Land and Environment court

c) the cost of developing a boarding house is high (you're looking at minimum $160k per studio) - so to develop 10 studios (minimum boarding house requirement) you are looking at $1.6m + (not including design fees etc).

 

With regards to Point (a), I do think most developers would actually pay well more than $750k as they see the potential to develop and have the funds to develop it as well. They would 100% pay more especially if it's already got DA approval. For example, please see my below post from the Thread - "IP in St Mary's" (IP in St Mary's [NSW])

My previous post:

"Yes, he seems to get the best price for his vendors. There is this property currently for sale at 8 Cosgrove Crescent, Kingswood wich has 556m2 and is R3 zoned. It rents for $515 and has 4 beds. Normally, you would think that even in this heated market, it would not go for anything above $950k, but guess what - with the DA approval for a 13 room boarding house, the vendor is asking for a min. $1.3m! It was last sold for $696k in Jan 2017, and it has doubled if it sells for more than $1.3m; all because of the DA approval. The DA does costs money too, so that needs to be taken into account as well.

Yeah, his name is also against a number of listings for R3 properties in St Mary;s, Oxley Park, and Kingswood areas. One of the more popular and well established agents in this area.

Back to the property at Willmot; do you think that price paid was too much? $700k for a house + GF in Willmot with 607m2 land and a corner block."

With regards to 44 Manning Street, I was there at the auction. I think there were 3 bidders and the person who won it with the highest price of $807k was a young-mid 20 year old buying his first house. He had his mom with him as well. I think to me it seemed like he just wanted to get into the market and get a house. After the auction, he asked me if the price he paid was too much or not, and if it's a good purchase or not. I am not sure if he knew the intrinsic/market value of the property itself, but I am glad, being so young, he got it regardless of whether he overpaid it or not. If he holds it long-term (10 years' time or so), and when he looks back at the purchase after it has grown quiet considerably, he would hardly remember that he overpaid for the poperty by $30k-$55k or so. It was a nice sight to see his mom hug and be proud of him after he won.

I also agree with your point that there is more value in buying in Penrith than St Mary's. First, prices in Penrith rise and then it flows onto St Mary's. Kingswood is also a great suburb as it has the Nepean Hospital, Western Sydney Uni and TAFE close by, and is close to Penrith CBD and St Mary's centre too.

With regard to point (b), you are 100% right. When I was at the auciton at 44 Manning Street, a number of neighbours came to the auction. They were all complaining about the issues with the number of boarding houses coming up in the area such as parking, drugs and other anti-social issues. I think 40-42 Manning Street already has Boarding Houses, and the proeprty opposite 44 Manning Street at the corner also has a boarding house. You should see the number of lettter boxes outside these boarding houses - some had 16! Imagine the annual rent (assuming 100% vacancy) - 16 rooms x $250pw x 52 weeks = $208k per year!!
The neighbours were complaining that the boarding houses attract some people who were prone to cause issues. They have even seen people go to these boardning houses to buy drugs apparently and have complained to the Police who haven't done anything. Yes, the neighbours are fed up. These streets are starting to lose their owner occupied appeal. One neighbour told me he was leaving to the Blue Mountains and can't stand this anymore. He wanted to see how much 44 Manning Street would sell for and see if now is the time to sell and leave or not.

Yes, there are some approvals that are being rejected. 89 Second Avenue's DA approval for 13 or so room boarding house was rejected last week. It is now back on the market with a guide of guess what - $1m!!!! It is R3, 718m2 and is a corner block (so great potential for development). I thought this would go for $850 to $900k, but a starting guide of $1m! - never expected that. Developers see a lot of potential in these R3 zoned properties considering that it is close to the uni and would attract a lot of uni strudents and others looking for affordable housing.

(c) 100% right. This is not for people like me on single income!

I am not considering buying any R3 properties in Kingswood anymore because they are way out of my budget not only to purchase initially, but also to develop; and I also fear that the council could change the zoning or reject DA requests as more and more people in these areas start complaning about the anit-social issues stemming from the development of numerous boadring houses in these areas.

I have moved onto exploring other areas - South West Sydney maybe.

 

student accomidation as well.

 

I'm not sure they can change the zoning now - they would just continue to reject the DA submissions. There would still be a chance to get this approved through the Land and Environmental court but that's a risk in itself

 

https://www.realestate.com.au/property-house-nsw-kingswood-135948874

Another for sale in Manning Street - I wonder what this one will go for. 23 Manning Street sold last week for $855k!