Rooming House
Investing in a rooming house: how a valuation can land $190,000 below the price
6 min read · By Daniel Lagden · 25 October 2026
The short version
- The rent roll an agent quotes is gross income. A valuer works from net income, after vacancy and every outgoing.
- In the example, an 8.67 per cent gross yield on the price is only 5.47 per cent net.
- If the valuer's yield is higher than the net yield at the price, the valuation lands below the price. At 6.5 per cent the example comes in $189,538 short.
- The lender lends against the lower of the price and the valuation, so the shortfall becomes cash. Here that is $132,677 more than planned, before duty and costs.
You find a rooming house at $1,200,000. The agent quotes a gross yield of 8.67 per cent, and you plan on a 30 per cent deposit. Then the valuation comes back about $190,000 short, and your cash requirement is $132,677 higher than you planned. Nothing about the property changed. The valuer simply worked from net income and a market yield, not the agent's gross figure.
This gap catches rooming house investors out, and it is predictable. The worked example below shows how it happens, so you can run the same check before you sign.
The rule: if the yield a valuer applies is higher than the net yield at the price, the valuation lands below the price. The agent's gross yield tells you very little about that.
How does a lender value a rooming house?
It depends on how the lender classifies the property. A smaller rooming house that fits a lender's residential policy is generally valued like any investment property, on comparable sales. A larger or purpose built one is usually treated as commercial or specialist lending, and the valuation leans on the income it earns: the net income is divided by a yield, with comparable sales as a cross check where they exist. Lenders differ on where they draw the line, which is why the classification is worth settling before you commit.
This example uses the income approach. A residential valuation can also come in short, when the price includes a premium for the room income that comparable house sales do not support.
The example
These figures are illustrative and not a market benchmark. Yields vary by location, condition, compliance and the valuer, so treat the three yields below as a range rather than a quote. Marketed gross yields on rooming houses are often in the high single digits or low double digits, so the 8.67 per cent here is not an extreme figure.
- Price: $1,200,000 for an 8 room rooming house.
- Rent: $250 a room a week, which is $104,000 a year.
- Vacancy allowance: 8 per cent.
- Outgoings: $30,000 a year, covering rates, insurance, utilities bundled into the room rate, cleaning, management, maintenance, compliance servicing and land tax where it applies. This is at the lean end, and a valuer may allow more.
- Valuation approach: net income divided by a market yield.
- Lender: lends 70 per cent of the lower of the price and the valuation.
Step one: from rent roll to net income
| Line | Amount |
|---|---|
| Gross room income (8 rooms at $250 for 52 weeks) | $104,000 |
| Less vacancy allowance (8 per cent) | $8,320 |
| Effective income | $95,680 |
| Less outgoings | $30,000 |
| Net income | $65,680 |
Net income is what is left once the property has paid its own running costs, before any loan repayments. It is the number the valuation is built on.
Step two: the valuer divides net income by a yield
The yield is the yearly net return, as a percentage of the price, that buyers in that market want for this type of property. Valuers call it the capitalisation rate, or cap rate. Divide the net income by it and you have the value. A higher yield means a lower value, because the same income is worth less to a buyer who wants a bigger return. Rooming houses often attract higher yields than ordinary houses, because they take more management, carry compliance costs, turn tenants over faster and appeal to a smaller pool of buyers.
| Yield used | Valuation | Shortfall against the $1.2m price | Loan at 70 per cent | Cash you need, before duty and costs |
|---|---|---|---|---|
| 5.5% | $1,194,182 | $5,818 | $835,927 | $364,073 |
| 6.5% | $1,010,462 | $189,538 | $707,323 | $492,677 |
| 7.5% | $875,733 | $324,267 | $613,013 | $586,987 |
What the shortfall costs you
You planned on an $840,000 loan, which is 70 per cent of the price, and $360,000 of cash. At a 6.5 per cent yield the lender lends $707,323, so the cash you need is $492,677. That is $132,677 more than planned. These figures are before stamp duty, legal fees and other purchase costs, which you need on top. If your contract has no finance condition, or the condition has expired, you find out after you are committed.
Why the headline number misleads
The agent's pitch shows a gross yield of 8.67 per cent on the price. After vacancy and outgoings the net yield on the price is 5.47 per cent. A valuer who applies a yield above about 5.47 per cent will value the property below the price. Between 5.5 and 7.5 per cent, each one point move in the yield shifts the value by roughly $135,000 to $184,000, and the move is bigger at the low end. This also assumes the valuer accepts your net income. Valuers set their own vacancy, outgoings and management allowance, and if their net income is lower, the valuation drops further at the same yield. The gap between gross and net is the whole story, and it is why the rent roll is not the number to build your plan on.
How do you protect yourself?
- Build your numbers on net income, with a vacancy allowance and every outgoing, not on the rent roll.
- Ask for the last 12 months of actual receipts and actual outgoings, not the agent's projection.
- Get a view on how the lender will classify and value the property before you go unconditional.
- Make sure the finance condition is long enough for a full valuation to come back, and for you to act on it.
- Hold a cash buffer sized to a realistic shortfall. In this example a 6.5 per cent yield meant about $133,000.
- If the valuation comes in short, use the figure when you renegotiate, and ask the lender whether you can have a copy of the report. It shows what the income supports.
Illustrative figures only, not a market benchmark. Lender policy on rooming houses varies, and valuers choose their own yields. Current as at October 2026.
Run the numbers
Frequently asked questions
Why is a rooming house valued on income?
When a lender treats the property as commercial or specialist, the valuer leans on its sustainable net income, because the asset is priced as an income stream rather than as a home. Comparable sales are thin for this kind of property, so they are usually a cross check rather than the main method.
Does every rooming house get an income valuation?
No. A smaller rooming house that fits a lender's residential policy is generally valued on comparable sales, like a standard investment property. Where the line sits differs between lenders.
What is a capitalisation rate?
It is the yield a buyer in that market expects from a property's net income. Divide the net income by it and you have the value.
What if the valuation comes in short?
The lender lends against the lower figure, so the gap becomes cash you have to find. You can fund it, use equity in another property, renegotiate the price, ask whether a different lender sees it differently, or walk away if your finance condition allows it.
Test your numbers before you go unconditional
Send us the property, the price and the rent roll and we will give you our view on how a lender is likely to classify and value it, before you are committed.
Check my rooming house finance optionsGeneral information only. This article does not take into account your objectives, financial situation or needs, and is not credit assistance or financial advice.
