I’ve gotta admit, this one was a little fun…

I’m looking at a 12 bedroom house at 44 Arthur Street, in Bundoora VIC. Who could possibly need 12 bedrooms, you ask? Students, of course! What I love is that we can expect fairly constant demand for student accommodation, particularly in this area, which is home to 2 large universities.

Like many properties going to auction lately, this one has no price attached. But after a bit of research, I’ve found out that the agent’s expected range for the auction is $670k – $720k, and if Melbourne’s recent auctions are any indication, the property will probably go for a little higher than that.

So with this one, we’re going to work out the max price where the deal still makes sense from a cashflow perspective. Using the same assumptions for our hypothetical investor that we always do (with one or two twists that we’ll get to in a moment), how high can we bid before it’s no longer positively geared?

With impressive rental income of $4441 pcm (gross yield of 7.4% on $720k purchase), and after all your average deductions (depreciation, council rates, etc.), the property is likely to return a decent amount before interest.  Do note I’ve assumed a higher amount than usual for maintenance, and a higher vacancy rate for empty rooms over the summer. Leaves a little bit of room for error.

Also, in my workings, I haven’t included property management fees. This is because, in my opinion, self-management is probably a better strategy when it comes to student accommodation. This DIY approach also seems to be favoured amongst our clients who rent to students, as property managers can get quite expensive in these scenarios and tenants are easily found with the universities just around the corner. Being a little more hands on does require more effort, of course, but also offers more control, which is helpful when dealing with your average bunch of rowdy students… Like me!

There are many risks with student accommodation, but that’s not to say that the risk necessarily outweighs the potential for profit in this situation. I’ve seen quite a few of our clients using variations of the ‘student accommodation’ strategy, and the one thing they all have in common is a fairly healthy profit.

So anyway, what I’ve done here is analysed the likely expenses and current rental income, and if our hypothetical investor was looking for positive cashflow from day one, I wouldn’t recommend going over $790,000 on auction day. This price will have him sitting at a relatively cashflow neutral position, so the further below that figure he is, the better off he’ll be. The cashflow analysis shouldn’t ever be the only factor in nominating a bidding limit, but still, that $790,000 benchmark is not so unrealistic.

So what do you reckon? A viable deal? Click that comment button just below and let me know your thoughts.