Appraiser came back at 2,650 whole house, sponsor is underwriting 4,600 in rooms

Question

Looking at taking a piece of a single house deal and the financing doesn't line up with the operating plan. Purchase price 420k, it's a 4/2 with two bonus rooms converted, so six lockable bedrooms. Sponsor's rent roll shows six rooms at 725 to 800 each, call it 4,600 a month with utilities and internet bundled in. The 1007 rent schedule came back at 2,650 for the house leased whole, and the DSCR lender is sizing the loan off that 2,650. At the leverage we wanted the loan doesn't work.

Two things I want to hear from people who have actually financed these. Has anyone had a per-room rent roll accepted at underwriting, and what documentation moved the needle? And how are you modeling vacancy when one empty room is 17 percent of gross? The sponsor is carrying 5 percent flat, which reads like a placeholder to me.

Rena Expert · Accepted Answer

Some DSCR lenders will size off a per-room rent roll, most won't on a 1-4 unit single family, and the ones that will generally want executed leases already in place with a few months of collection history in bank statements, not projections. The 1007 is doing what it's built to do, which is compare your house to other whole-house leases in the neighborhood. Ask the lender directly, in writing, whether their guidelines allow room-by-room income on an SFR and what seasoning they need. If the answer is no, the gap gets closed with more equity, not with a better argument.

On vacancy, 5 percent flat isn't a model. Run it in days. Six rooms with an average tenancy of nine months is eight turns a year, and if each turn sits 21 days between the old lease ending and the new one starting, that's roughly 168 vacant room-days against 2,190 available, so about 8 percent before you've priced a single concession. Add the turn labor, the deep clean, and repainting a bedroom that gets a new occupant every ten months.

The expense side is where these deals usually get sold short. With utilities, internet, and common-area cleaning bundled, operating expenses commonly land far above the 35 percent people carry for a standard rental, and per-tenant utility use isn't something you control.

The part I'd push hardest on is whether the local zoning code caps unrelated adults in that district, because six unrelated occupants exceeds the cap in a lot of single-family zones and how the ordinance applies to your specific property is a question for a local land use attorney. If the operating plan is illegal, the appraisal disagreement stops mattering. Confirm whether the two converted bonus rooms have legal egress too, since a room without it isn't a bedroom to the city or to an insurer.

paulgrant17 · Answer

Before the financing question, six rooms means six screening files and six move-ins a year or more. My first rental is a whole-unit lease and I've been buried in reading about screening for one household. Does the sponsor have a written standard for who gets a room, and who talks to the existing housemates when someone's application comes in? One bad placement in a shared kitchen can walk two other rooms out the door at their next renewal.

diane_kowalski · Answer

The exit is the other half of this. Your buyer's appraiser will pull the same whole-house comps you just got, so the income density doesn't show up in the resale price unless the buyer is another room operator who is willing to pay for the rent roll. That's a much smaller pool than the pool for a 4/2 house. I'd want to know what the sponsor's assumed exit cap or price per square foot is and whether it quietl... whether it assumes an operator buyer without saying so.

ehernandez74 · Answer

What were the two bonus rooms before? If one is a converted garage or a basement room without a window that opens, you're marketing five rooms, not six, and the whole 4,600 falls apart. I'd want permit history pulled before anything else.

tashaford30 · Answer

I've been building a spreadsheet for exactly this and switched to per-room days occupied instead of a portfolio vacancy percentage. It changed the picture a lot. At 30 days of downtime per turn (which is what a couple of managers told me is realistic for a room that isn't furnished and photographed well), six rooms turning at eight times a year puts you near 11 percent. Your sponsor's 5 percent would need every room to fill inside two weeks, every time, all year.

kevin_lombard · Answer

Question on the utilities line, since it's bundled here. If one housemate runs a space heater all winter, does the operator just eat the bill, or is there a cap written into the room lease? 4,600 gross with an open-ended utility obligation reads differently to me than 4,600 with tenants on their own meters.

Appraiser came back at 2,650 whole house, sponsor is underwriting 4,600 in rooms

6 replies