HMO#2&3

HMO = House of Multiple Occupancy (Sub-letting)

Hi,

So thought I'd share a deal I made about 5 months ago.
Over the last year i've been questioning how to best invest moving forward with the changing climate. This has lead to the next step in an incredible journey meeting some incredibly savvy and mostly quite young investors.

A large emphasis in my portfolio now is multi-res. Boarding houses / backpacker hostels / caravan parks / unit blocks / room-by-room letting. This is a broad overview of the market I have found my niche in, a niche which has many niches of its own.

So deal.
Note: This is an unusual house which provides a yield well above the norm.

Sydney based.
Put lease on 2 properties side by side.
Rent $2,250/week.
Sub-lease $4,900/week.
Expenses $500/week including claiming cost of furniture over 2 years.

Profit: $2,150/week.

Cost of entry, after all expenses, vacancy etc. $60k. I have clawed back a majority of that amount already.

$2,150*52 = $111,800
Cash on cash = 1.863
ROI = 86%

I have permission from the owners and insurances to cover any liability. They are set up in trust structures which are paying into a trust set up as a 'consultancy' so that in 2 years the bank will use it as an income as normal.

An typical HMO should net about $20k IMO (approximately 25-30%). They require some hands on management. I am currently in negotiations to bring a full time manager, however they are asking for 15% management fees. A couple of other friends who are in this space and I are looking at hiring our own management team to reduce costs.

There have been a lot of mis-steps in the journey. I will post about the first HMO which yielded considerably less in another forum and will answer questions if any come up.

 

HI,

This is an interesting project and good cashflow on the face of it.

How long is your lease for?

 

It's a UK term.
My business partner is part of the Dymphna community and that's what they call it there.

Also it helps when talking to REA as sub-letting has a negative connotation atm.

Most of the people I've met doing this successfully worked it out on their own - 1 friend is up to $3,500/week in 10 months.

We are aiming for $25k/week. However the more it becomes a business the higher our overheads reducing individual passive yield down to about 6%.

This is an experiental stepping stone fornud, as I'm interested in the previously mentioned areas. Am looking to build a next gen boarding house in Rouse Hill. Will post about that later in the year once plans are sorted with Council.

 

This particular one is 6 months. Though likely 1 full year.

Have had offers accepted at 1+2+3 year leases and am pushing for 15 year commercial leases.

From what I gather it tends to be mostly 1 year leases at a time.

 

Correct me if I'm wrong, but it's a $60k outlay for a 6 month lease? What happens if they don't renew?

 

This house was profitable at 6 months which is why I took it on. It was also obvious it would last closer to a year.

Majority of that cost is furniture and other items which may be reused.

Only costs I can't recoup are internet and electricity connection fees. Insurance advice cost, and some lost rent as rooms were filled.

 

Or double the rent when they see what a great commercial asset they own (or someone makes a higher offer).

I assume you had to get things in place for the necessary council approvals. You really need a much longer lease.

 

I like it, its a more intensive use of existing property

 

I read of a crackdown in rooming accommodation due to the Rooming House Operators act (2016) in Victoria. Is this legal in NSW? Which insurance companies are you using that allows for it? Also interested to know which management company you are employing and the costs if you can share.

 

What about building a tailor made multi-occupancy place?

You mentioned Rouse Hill, is there any particular reasons why that would be a good place to operate your strategy? What about other Sydney suburbs near train stations, what makes them profitable?

Do you have strategic partnerships with real estate agents to find tenants? Otherwise what is your sourcing method to get the tenants and how do you "manage"?

 

That's an amazing result! Well done! I'm just starting on a lease and re-lease strategy myself....also part of I love Real Estate/Dymphna community. If you don't mind sharing, could I ask:
- What did you spend the $60 on?
- How much do you charge per room?
- What lease terms do you have for each room? Min one week, pay in advance??
- What type of tenants did you target? - backpackers, students etc?
- Where did you advertise?

Your post have given me a lot of enthusiasm to continue towards my own goals! Thank you!

 

This is not a passive income strategy. It takes a lot of work. That said when done properly I have friends who have hit $200-300k/year incomes in 6-12 months. All now pushing for $500k+

It's a stepping stone strategy, I would want to transition out within 3-4 years max.

 

I'd say most suburbs in Sydney now are screaming for lower entry level rental accom.

Central Coast and Newcastle too.

Why profitable? Why get 1x rent from a site, when you can get 20x rent from a site.

Agents. I use them to manage. I find the tenants myself using a lot of platforms. Mostly from word of mouth now.

I have strategic partnerships to get houses. The tenants are the easy bit. Finding the right mix of tenants takes experience. Would rather leave a place empty than rush to fill the rooms.

1 bad tenant will drive out all the good ones. I've had to evict an entire house on 2 occasions whilst I was still learning. It's no longer an issue.

 

How well it goes comes down to the individual (you).

I've seen super profitable places make a loss.
And average places run like clockwork.

I picked up a house which was already been sub-let. Guy was charging $165/week/room and it was only 80% tenanted.

A small tweak and we have over a dozen people applying every day at $220+/week.

Takes profit from $4k to over $20k/year.

 

Hi
I understand in nsw you can set up a house then convert to 4 occupancies each self contained and get approved thru a Certifier is that true ?what land does this apply to - low residential ?and does it have to be 400 m from a bustop etc?
Also What company ensures the subletting you are discussing ?
Thanks wini

 

Wowww.... Had no idea that was possible in NSW.....

 

Hi Wini,

It sounds like you are referring to 2 different legislations.

1. In NSW you can have under 5 (I think up to and including 5) unrelated people in a household, any more and it falls under boarding house legislation. Key word is 'unrelated'.

2. You can have several self contained units in a boarding/nextgen boarding home. This is unrelated to no.1, it is a state legislation.

Proximity to bus stop (where a bus comes hourly between certain times) / train station, it allows for residential zoned properties to have the ability to have a low density boarding house built on site.

The government is/was providing incentives for the next gen boarding homes. Paying $2000/yr for each room for 5 or 10 years I believe. Stopped working in this space so am a little rusty on the boarding house rules atm.

 

Hi NHG, first of all congrats, sounds like you've done and are doing well. Few questions on this:

1) How did you fund this i.e. get a loan? Being a mortgage broker anything unusual can make it difficult to get a loan over the line although perhaps it's more a unique opportunity rather than unusual property

2) Best way to learn more about this i.e. do courses, read books etc?