I'm not sure why but a lot of real estate investors I know won't touch rooming houses. That's fine with me; because that means more profits for you and me!
I'm a huge fan of multi-unit properties. There's a good reason – more units equals more cash flow. If one tenant in a four-plex moves out, your cash flow goes down 25%. But if your tenant in a single family home moves out, your cash flow goes down 100%.
Of course, many sellers recognize this, so multi-unit properties often cost more than single family homes. But here's an interesting twist you may not have thought of: what if you could turn a single family home into a multi-unit property? You can – and you should.
Early in my real estate investing career, I did this a lot – and reaped serious profits doing it. It's a great way to generate a lot of positive cash flow in a short period of time. Best of all it takes very little work on your part.
With the right property, you can easily create separate rooms for five or six tenants in one house – and that means collecting five or six rents each month. If you find the right neighborhood, and the right house, this can be a very simple and lucrative addition to your portfolio.
Here are my tips to get started with Rooming Houses:
- Look for neighborhoods that are low to moderate income, and already have a mix of single family, multifamily and commercial properties. Neighborhoods near colleges and universities work well.
- The best property has four bedrooms and at least one bathroom upstairs, and a room downstairs to create at least one or two more bedrooms by putting up a few simple walls. Just as with other properties, look for cosmetically distressed properties, but walk away from any major structural issues.
- Find out what the local ordinances say about Single Room Occupancy regulations, such as the tenant to bathroom ratio and the windows requirements in bedrooms. Each municipality has its own rules, but they're usually pretty easy to accommodate for little money. Leave one room downstairs as common living space, and put up walls to turn the other downstairs living spaces into individual bedrooms.
- One other improvement you have to make is furniture: tenants expect SRO rooms to come furnished. But we're not talking anything fancy – a double bed, a bedside table, a lamp, a chest of drawers, and a mirror. You can find these things at secondhand stores and yard sales – or negotiate a bulk deal with a furniture store to furnish all the rooms at once.
You see how easy it can be to buy a distressed single family home and turn it into a multi-unit cash cow. You generate a bunch of positive cash flow, and you provide a clean, safe place to live that low income people can afford. It's good for everybody – and it's especially good for beginning investors working toward their financial independence.