Comparing the investment potential of buying a rooming house versus investing in an NDIS (National Disability Insurance Scheme) property involves considering several factors. Here's a comparative analysis from a property investor's viewpoint covering off the 10 most important points you will need to consider.
1. Location
Rooming House: Subject to local council rules that can allow them to be built on a standard residential lot without council consent or require a development approval within specific zoned areas. Land has to be relatively flat to comply with disabled access and car parking.
NDIS: Can be built all over Australia however, similar to rooming houses, the land has to be relatively flat to comply with disabled access and car parking.
2. Price
Rooming House: The cost to build rooming house is $2,500m2. To comply with the rooming house regulation (1b) the additional cost is $40,000 to $50,000 over a standard residential house.
NDIS: The cost to build an NDIS house is $3,000m2. To comply with the standards of a NDIS house the additional cost is $90,000 over a standard residential house.
When you add the price of land in the overall price can vary considerably . Land prices in strong regional areas start from $350,000 making the entry point for both NDIS and rooming houses $850,000.
3. Income Potential:
Rooming House: Rooming houses typically generate income through rental payments from multiple tenants. In Victoria you can rent up to 9 bedrooms whereas in Brisbane you are limited to 5 bedrooms.The income potential can be significant if the property is well-located and managed efficiently. Having multiple income streams can lead to lower vacancy rates as you still have the other tenants providing income when one tenant ends their lease. However, vacancy rates and high tenant turnover can affect income stability. Rates per tenant range from $275pw in Geelong region to $400pw in middle ring Brisbane suburbs like Wynnum. The higher the weekly income the higher the land price is typically. The costs of running a rooming house can be quite high as the owner is responsible for all outgoings such as electricity, wifi, garden maintenance and cleaning of common areas. Total outgoings including rental management is approximately 20% of total income.
NDIS Property: NDIS properties provide rental income through long-term leases with disability service providers (SDA) typically 5 years with the options for further 5 year leases. The SDA then sign annual leases with complying tenants. Once the tenants move in they generally extend year to year. The government will guarantee rent for up to 90 days if a tenant breaks their lease. These leases are often secure and come with regular monthly rental payments from the Government (guaranteed until 2039), providing stable income for investors. A 3 bedroom design with 2 x high physical tenants qualify for up to $83,871 per tenant per annum with a carer and further some SDAs require each tenant to provide additional income support of $11,500 per tenant. Property management is between 12-15% of turnover and the owner must pay the usual holding costs such as rates and commercial insurance meaning outgoings will range from 15-18% of turnover.
4. Tenant Management:
Rooming House: Managing multiple tenants can be demanding, involving tasks such as tenant screening, rent collection, maintenance, and dealing with disputes. This requires active involvement or the engagement of a property management service who will often use a set of 'house rules' to ensure that tenants can cohabitate with limited disputes between them. Priced charged for rooming house management start at 8% and go as high as 12%.
NDIS Property: Tenants in NDIS properties are typically managed by disability service providers (SDA), reducing the landlord's involvement in day-to-day tenant management. The key to successfully managing an NDIS property is keeping tenants seperate as much as possible through design of private living spaces (they don't like to live together) and working with the right SDA who can find the right tenants for your property who can cohabitate in common areas like a shared kitchen or laundry. Prices for NDIS management are between 12-15%.
5. Regulatory Requirements:
Rooming House: Rooming houses are subject to specific regulations regarding safety, sanitation, and tenancy laws. Compliance with these regulations is essential. Local councils require an annual safety and sanitary inspection and you will also be required to conduct an annual fire safety inspection. As a rooming house operator you will need to apply for a license in Victoria which will allow you to own and operate multiple rooming houses. You also need to register your rooming house on the Victorian rooming house register.
NDIS Property: NDIS properties may also have regulatory requirements, but these are often related to disability accommodation standards and lease agreements with service providers. Compliance with NDIS regulations is crucial for eligibility to receive NDIS funding.
6. Property Maintenance:
Rooming House: Maintenance responsibilities for a rooming house can be higher due to the number of tenants and the wear and tear associated with multiple occupants. Regular upkeep and repairs are necessary to ensure tenant satisfaction and property value.
NDIS Property: Maintenance responsibilities may vary depending on the terms of the lease agreement with the SDA. Some providers may handle maintenance themselves, while others may require landlords to maintain the property to specific standards.
7. Market Demand and Capital Growth:
Rooming House: Demand for rooming house accommodation may be influenced by factors such as population growth, employment opportunities, and housing affordability. Rooming house demand is very high at present due to the extremely low vacancy rate across Australia and the high cost of renting a 1 bedroom unit. Capital growth potential depends on the property's location and market conditions however with interest rates at their current peak in the cycle prices are expected to continue to grow in 2024 after prices grew nationally by 8% in 2023. Rooming houses also have the added bonus of being land tax exempt in Victoria for property investors effectively allowing a property investor to own multiple rooming house properties in Victoria with zero land tax applicable.
NDIS Property: Demand for NDIS properties is driven by the need for disability accommodation and support services. With the rollout of the NDIS, there is a strong growing demand for suitable housing options for people with disabilities. Capital growth potential may be influenced by factors such as government policy, NDIS funding, and demographic trends. The areas with the most untapped demand are those areas where the land prices are higher due to higher barriers to investment.
8. Finance
Rooming House: Finance for a rooming house will depend on your design. Valuers will either identify your rooming house as residential or commercial which will then determine your loan to valuation ratio (LVR) and the loan you will use. In order to maximise the likelihood of your rooming house being determined residential you can ensure your design has no additional kitchens in the bedrooms and there are a maximum of 5 bedrooms. Commercial loans require a high deposit (30%) and a higher interest rate (+1.0%).
NDIS House: Finance for a rooming house is always done with a commercial valuation and commercial finance however funding can be up to 90% of the valuation as opposed to a commercial rooming house loan which is more likely at 70%. The bank will also include the government guaranteed funding for each participant in the serviceability calculation making it a lot easier to obtain finance for an NDIS house.
9. Risks:
Rooming House: Risks associated with rooming houses include tenant turnover, property damage, regulatory compliance, and economic downturns affecting rental demand. The correctly designed rooming house can also be rented out as a family home if the demand for rooming is low.
NDIS Property: Risks may include changes to NDIS policy or funding after 2039 and potential vacancies if you do not select the right service provider to find you suitable tenants who can cohabitate. The house can be easily converted into a co-living house if the government funding for NDIS is no longer continued after 2039.
10. Cashflow
With all these factors taken into account what does the cashflow look like if we invest in an $850,000 rooming house and an equivalent priced NDIS house with 100% debt funding?
Rooming House: Approximately $500 per week positive cashflow
NDIS Property: Approximately $1,500 per week positive cashflow
When choosing which property to buy you should always take into account your personal circumstances before making any final decisions including talking to your financial advisor or broker. Want to know more about rooming houses or NDIS as an investment option then please message us to discuss here.