Boarding houses are an emerging property investment class in Australia. Here is how financing works, which lenders will consider it, and what you need to know before you buy.
Boarding houses have quietly become one of the more interesting emerging investment property categories in Australia, driven by a chronic shortage of affordable rental accommodation in major cities, changing planning rules that make boarding house development more viable, and growing government support for affordable housing supply.For property investors, a boarding house offers a different risk and return profile to a standard residential investment. The rental yield can be significantly higher than a standard residential investment, but the lending landscape is more complex, and most investors are unfamiliar with how lenders assess this type of property. This article covers the basics of boarding house financing in Australia and what to expect if you are considering this type of investment.
What is a boarding house for lending purposes?
A boarding house, also called a rooming house or shared accommodation facility, is a residential property where multiple tenants rent individual rooms, typically sharing common areas including bathrooms and kitchens. In New South Wales, boarding houses are regulated under the Boarding Houses Act 2012 and require registration with NSW Fair Trading if they have five or more occupants.
For lending purposes, the classification of a boarding house matters significantly. A standard residential lender, including most major banks, will assess a property based on whether it is classified as residential or commercial. A boarding house can fall into either category depending on factors including the number of rooms, the nature of the tenancy arrangements, the zoning of the property and whether it is purpose-built or a converted residential dwelling.
Properties that are purpose-built or purpose-adapted boarding houses with multiple separate lockable rooms are typically assessed as commercial or specialised residential by lenders, which means standard residential lending criteria do not apply. This narrows the field of lenders willing to consider the application and changes the deposit and loan structure requirements.
Why are boarding houses becoming more popular as an investment?
Several factors have converged to make boarding houses a more attractive investment class than they were a decade ago.
The housing affordability crisis in Sydney and other major cities has driven significant demand for affordable shared accommodation. Workers, students, new migrants and lower-income earners who cannot afford standard rental properties need accessible accommodation options, and boarding houses fill that gap. This demand creates strong rental occupancy rates and resilient income, even in softer rental markets.
State government planning reforms have made it easier to develop or convert properties to boarding house use in many areas. In NSW, the Affordable Rental Housing State Environmental Planning Policy (SEPP) allows compliant boarding houses to be developed without requiring a development application in certain zones. This has reduced the planning risk for investors and developers.
Rental yields on boarding houses are often significantly higher than standard residential investments, reflecting both the income from multiple tenants and the additional management complexity. Gross yields of 8 to 12% are not uncommon for well-located boarding houses, compared to 2.5 to 4% for standard Sydney residential properties.
Finally, the National Disability Insurance Scheme (NDIS) has created a specific category of specialist disability accommodation that is closely related to the boarding house model, and some investors are developing properties specifically to serve this market with government-backed rental guarantees.
How do lenders assess boarding house finance applications?
Lender assessment of boarding house finance applications varies significantly depending on the property type and the lender’s appetite for specialised residential security.
For standard residential properties that happen to have an existing boarding house use, some lenders will finance the property on standard residential terms if the property could reasonably revert to a standard dwelling. This typically applies to smaller properties with fewer rooms in residential zones.
For purpose-built or purpose-modified boarding houses with multiple rooms, separate locks, and planning approval for boarding house use, most lenders treat the property as commercial or specialised security. This means commercial loan LVRs typically apply, with a maximum of 65 to 70% LVR compared to 80 to 90% for standard residential. The interest rate is also typically higher, reflecting the perceived risk.
Lenders assess the income on a commercial basis, looking at the actual rental income from the property, the occupancy rate and the management arrangements. Properties managed by a specialist boarding house manager or registered provider are viewed more favourably than owner-managed properties.
The location and zoning of the property matters significantly. Properties in residential zones may have council or planning restrictions on boarding house use that could limit future options, which concerns some lenders. Properties developed under the AHSEPP or in appropriate commercial or mixed-use zones have clearer planning status and are viewed more positively.
Can an SMSF purchase a boarding house?
This is a question that is coming up more frequently as boarding house investment grows in profile, and the answer is nuanced.
An SMSF can in principle purchase commercial property, and a purpose-built boarding house that is classified as commercial property for lending purposes could in principle be purchased through an SMSF under an LRBA. The key requirements are that the property is held as an investment (it cannot be used by a related party), the loan structure meets LRBA requirements, and the lender is comfortable with the SMSF as the borrowing entity and the boarding house as the security.
In practice, finding a specialist SMSF lender willing to finance a boarding house as SMSF security is challenging. The combination of SMSF lending complexity and specialised property type narrows the market of willing lenders considerably. It is not impossible, but it requires careful lender selection and a well-prepared application.
Trustees considering this path should take legal, tax and financial advice before proceeding. The compliance requirements for both the SMSF and the boarding house operation need to be managed carefully and the two sets of obligations should not conflict.
What do you need to know before financing a boarding house?
If you are considering a boarding house as an investment, there are several things to clarify before approaching a lender.
Start with the planning and zoning status of the property. Confirm with the local council whether the property has current approval for boarding house use, whether that use is permissible under the current zoning, and whether any conditions apply to that approval. Planning uncertainty is one of the primary reasons lenders decline boarding house applications.
Understand how the property is managed or will be managed. Professional management by a registered provider significantly improves lender appetite. Self-management is not a barrier, but it requires more documentation and may limit the lender options available.
Get an accurate picture of the current or projected income. Lenders will want to see the rental income on a per-room or per-tenancy basis, the current occupancy rate, and any vacancy periods. The income documentation for a boarding house is more complex than for a standard investment property and needs to be prepared carefully.
Finally, understand the deposit requirements. Most boarding house applications will require at least a 30 to 35% deposit, or 35% equity if refinancing. Factor this into your purchasing calculations alongside the higher stamp duty that applies to purchases above certain thresholds and the ongoing compliance costs of operating a registered boarding house.
