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Renting your property out by the room can be a profitable strategy, but you need to be aware of the risks involved. We asked two experts for their guidance on how you can make it work.

Chris Rolls, managing director of Rental Express, looks at the risks involved in renting your property by the room and shows you ways to avoid them and increase your rental returns

Over the last few years there has been a push by some property investment 'experts' to use certain strategies to maximise rental return to increase the speed at which they become cash flow positive.

While it makes sense to implement strategies that maximise the returns you get from your investment property, it's important you weigh up all the facts before implementing aggressive and sometimes costly changes to your portfolio in the process of trying to increase your rental return.

One method that has been recommended to a number of investors has been renting normal residential properties to individual tenants on a room-by-room basis. Typically the owner makes some changes to the fixtures and fittings of the property and then markets it as 'student accommodation' or 'boarding rooms'.

For example an investor may own a five bedroom house that is renting for $480 per week. Their reasoning - and often the reasoning of so-called property experts - is that by renting out each individual room to a separate tenant, they can probably collect $125 per room per week, immediately increasing their rental return to $625 per week. The tenants then share common facilities such as bathrooms, kitchen and living rooms.

While this sounds good in theory, in practice the results are often much different. This is because there are a lot of unconsidered factors that come into it read more at Your Investment Property Magazine

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1) Using property experts
Just because you have bought and sold a couple of houses with profit, does not mean you are an investment expert. Don't listen to friends and family blindly - usually they have an opinion about investing, often despite that they are not doing it themselves. Property investing is too important an expenditure to take chances with - talk to property experts, investment advisors, finance brokers and study property reports before you make a decision.

2) Waiting for the price to come down

Property generally always goes up in value. It may plateau or slips back a few %, but across the board - prices are steadily claiming. So, if you wait until the prices from 10 years ago return, you will wait a long time. You are in most cases better off buying now rather then in 6 month as often you will pay more down the track - effectively reducing your capital growth. Having said this, the best time to invest is when you are ready to do so. Sooner than later is usually best.

3) Emotional vs commercial decision

When selecting and deciding on an investment property - do yourself the favour of approaching this simply as a commercial decision based on figures, returns, vacancy rates etc not what colour the walls are, whether you would want to live in it or that it is in easy reach so you can mow the lawns on a weekend. The more emotionally detached you are, the better it is. Investing is done from the head, a home is bought from the heart.

4) Old vs New

Unless you are a tradesman and have loads of time to spare to perform renovations, repairs and maintenance, you probably are better off buying a newer investment property. Apart from the work and expense, your depreciation schedule is more substantial on a new property than an older one. After all, it is about letting your money do the work - work smarter not harder.

5) Managing the Property Yourself
Unless you are rather experienced in this area and have access to the industry tools to ensure you do end up with the best tenants possible - don't do it yourself. Firstly, if you do select a 'lemon' for a tenant, this can easily turn into a lengthy process in front of the tenancy tribunal, loss of rent, loss of access to the property, presentation costs etc And, after all you want to work smarter not harder. So, get a good property manager to look after your investment. The % you pay them will outweigh any losses by far and peace of mind is worth a lot!

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