Co-living: The Future of High Yield and Capital Growth?

12th August 2024

Finance & Budgeting Pre-Construction Investor Design & Trends News & Industry Insights

Learn how co-living offers a smart investment strategy, combining high rental yields with capital growth potential. This article explores the benefits, compliance, management tips, and how co-living can help alleviate Australia's rental crisis.

Co-living: The Future of High Yield and Capital Growth?

Co-living is rapidly emerging as a popular investment strategy, offering a blend of high rental yields and potential capital growth. This innovative approach to property investment transforms traditional homes into shared living spaces, providing affordable housing solutions while maximising returns for investors. Unlike complex investment models such as NDIS, co-living offers a simplified, cost-effective pathway to earning higher rental income with less compliance hassle. This article dives deep into the concept of co-living, exploring its benefits, compliance requirements, property management considerations, and how it can contribute to easing Australia’s rental crisis.

What is Co-living?

Co-living involves fully furnished homes where tenants share common spaces while having their own lockable, private rooms with personal ensuites or bathroom access. It's not a new concept—Queensland was an early adopter, and it’s now gaining traction in Victoria. Unlike traditional investments, co-living properties in Victoria can accommodate up to three tenants without requiring the complex compliance of a class 1B dwelling. Some states can have more than three tenants.

Key Features of Co-living Properties

• Fully (or partly) Furnished: From beds and bedside tables to kitchen appliances, furniture packs make properties 'suitcase ready' for tenants. Some property managers suggest fully furnished is the best way to go as it is more attractive to potential renters. However, there's also property managers that prefer partly furnished (as in the main areas only) with bedrooms to be furnished by each tenant individually; with the reason being that it provides a sense of a deeper commitment by each tenant making a bit harder to just walk out.
• Lockable Private Rooms: Each room offers privacy and security with lockable doors and personal storage.
• Shared Common Areas: Tenants share kitchens, dining, and living spaces.
• Modern Inclusions: Split systems for individual climate control, additional power points, and data points in each room.
• Affordable Upgrades: The aAdditional ensuite, split systems, etc are usually around $20,000 over a normal house design base price. The furniture packages are typically $20,000-$30,000 as a rough guide on top of that - paid separately by the owner to the property management company (nothing to do with the build / builder).

Why Choose Co-living Over Traditional Investments?

• Higher Rental Yield: Multiple tenants mean potentially higher rental income compared to a single-family rental.
• Affordability for Tenants: Ideal for single professionals or those who don't require a full home, helping alleviate the rental crisis.
• Risk Mitigation: Multiple rental agreements reduce the impact of tenant turnover.
• Cash Flow Positive: Potential for positive gearing, especially with well-chosen locations and designs.
• Resale Value: Standard house designs with minor modifications (e.g., extra ensuite) maintain broad market appeal.

How Does Co-living Help the Rental Crisis?

Co-living allows up to three tenants (in Victoria) to share a home, effectively easing the demand for more rental properties. It offers an affordable and viable housing option for professionals, single individuals, and even older demographics who need private but not isolated living arrangements. Co-living can be built in more affordable "greenfield" locations which is great for investors, but also positive for tenants as they are not forced to chose and pay for a whole house they don't need or a city apartment that they don't want.

Compliance and Management

• Compliance: As a class 1A property, co-living homes avoid the stringent requirements of class 1B dwellings. In Victoria, the trigger point for a 1B rooming house is 4 or more tenants, meaning 3 or less can remain a standard class 1A dwelling (a normal house and land package so to speak). In other states this does vary, so be sure to get local advice.
• Property Management: It is not advised to select a standard real estate agent, instead you should  choose a management company with a proven track record in co-living, offering all management and compliance services, tenant management, etc.
• Leases: Each tenant signs an individual lease, ensuring clear terms and responsibilities. For the common areas, there is usually a set of "house rules" that are also signed by each tenant. These rules address power usage, garden maintenance, general tidiness and so on.

Key Takeaways

• Co-living offers high yield and potential capital growth.
• It is a simplified, affordable investment option compared to NDIS properties.
• Helps address the rental crisis by providing affordable housing options.
• Works best with an experienced property management company.

Glossary of Terms

• Class 1A Property: A standard residential dwelling classification with simpler compliance requirements.
• Class 1B Property: A classification for rooming houses with stricter compliance, often required for more than three tenants.
• NDIS: National Disability Insurance Scheme, offering specialised housing investments.

Frequently Asked Questions (FAQ)

1. What are the main advantages of co-living properties for investors?

• Higher rental yields, reduced risk through multiple tenants, and positive cash flow potential.

2. Can co-living properties be sold as traditional homes?

• Yes, the minor modifications (e.g., extra ensuite, lockable rooms) do not limit resale potential to standard families or investors.

3. How much does it cost to convert a home into a co-living property?

• Typically, $40K-$50K for additional ensuites, split systems, and a furniture pack.

4. Do tenants share utility bills in co-living setups?

• Landlord pays the utilities, however this is allowed for and factored into the rental amount the tenants are paying.

Episode Reference

Episode Name: Co-living: The future of high yield and capital growth? Hosts: Colin Bischof and Darren Brennan Guests: None Episode Link: Listen to the full episode

About the Home Building Hub Podcast

The Home Building Hub podcast, hosted by industry experts Colin Bischof and Darren Brennan, is Australia’s premier resource for new home buyers. With weekly episodes featuring special guests, the podcast provides objective, high-quality insights into the home building process—completely free and without sales pitches. From understanding financing options to navigating the complexities of building a new home, each episode is packed with actionable advice and tips.

Explore more episodes at homebuildinghub.com.au and join our growing community of informed home buyers.

Disclaimer

Whilst we’re all about providing value to you, this article should not be considered as legal or financial advice. It contains general information only and is based on the content discussed during the podcast episode. This information is relevant to the episode’s release date and may not be applicable at the time of reading. Always seek independent professional advice tailored to your personal situation before making any legal or financial decisions.