Buy the licensed house at a premium, or license a cheap one yourself

Question

Two houses in the same submarket right now. One is a 10 room licensed rooming house asking about 90k more than comparable single family stock, license current, inspection file clean, resident roster stable. The other is a big old 7 bedroom asking near market for a plain house, in a district where the use looks permitted with a special exception, and nobody has run it as anything but a family home.

The premium on the first one is basically payment for someone else's permitting time. In some states and cities the license runs with the operator and has to be reissued anyway, which means the premium buys goodwill and a code-compliant building rather than a transferable asset, so that has to be confirmed in writing with the licensing office before it's priced in. The second one is cheaper going in and the fire and egress work is unknown until a plan reviewer looks at it. I've seen conversion budgets triple on sprinkler and stair issues.

The case for paying the premium is that you get cash flow from month one and no hearing where neighbors show up. The case for the cheap one is that you control the layout, you can size rooms and baths to the churn you expect, and the basis stays low enough that a bad year doesn't kill you.

I keep going back and forth on which risk is cheaper to carry over a five year hold.

priya_n21 · Answer

I want income without a second job, so the licensed one wins for me on the simple grounds that a permitting fight is a job. The premium you described works out to something like nine thousand a room, which sounds like a lot until you price six months of carrying an empty house through a hearing calendar. What I can't tell from your post is whether the operating one is stable because the operator is good or because the building is good, and only one of those transfers.

Buy the licensed house at a premium, or license a cheap one yourself

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