---
title: "Second Rooming House: $880K In, $1,500 a Week Out (Plus a Warning)"
description: "Second rooming house conversion case study: $880K buy, sub-$100K renovation, four units producing $1,500/week. Plus the warning after 4-5 failed conversion attempts by other clients."
author: Joey Don
date: 2024-09-02
category: Renovation & Development
url: https://premiumrea.com.au/blog/rooming-house-case-study-880k-1500-week
tags: ["rooming house", "renovation", "cash flow", "rental yield", "property conversion", "Melbourne", "subdivision potential", "case study"]
---

# Second Rooming House: $880K In, $1,500 a Week Out (Plus a Warning)

*By Joey Don, Co-Founder & CEO at PremiumRea — 2024-09-02*

> Remember the $820K rooming house I wrote about? The one producing $1,200 a week? This one beats it. Different property, bigger block, better numbers. But I'm also going to tell you about the four clients whose properties couldn't be converted — because that story matters more.

I wrote about our first rooming house conversion a few months back — the Lloyd Avenue property we bought for $820,000 and turned into three units producing $1,200 a week. The response was wild. My inbox filled up with two types of messages: "How do I do this?" and "This sounds too good to be true."

Fair enough on both counts.

So here's the second one. A property on Brook Street, about fifteen minutes southeast of the CBD. We bought it for $880,000. The renovation came in under $100,000. It now produces $1,500 per week across four separate rental units.

That's a gross yield north of 8.8% on the purchase price. Before depreciation. Before the land appreciation. Before the subdivision potential on the 866-square-metre block.

But I'm not writing this just to brag about the numbers. I'm writing it because five other clients tried to do the same thing this year — and four of them couldn't. Their properties wouldn't convert. And in two cases, they'd already committed $20,000 in planning and design fees before finding out.

So this article is two stories. The deal that worked, and the deals that didn't. Both matter.

## The property: what made it convertible

Brook Street. 866 square metres. Four-bedroom brick veneer from the early 1990s. Double garage with rear lane access. Side access of 3.8 metres on the eastern boundary. Zoning: GRZ1 (General Residential Zone, Schedule 1).

The layout was the key. The house had a natural L-shape — the main living area and master bedroom ran along the front, and a separate wing with three bedrooms and a second bathroom extended along the eastern side. The rumpus room at the rear was semi-detached, connected by a covered walkway. This is the kind of layout that a builder looks at and says: "I can work with this."

Here's what we saw that most buyers wouldn't:

**Four natural separation points.** The front wing could become a self-contained two-bedroom unit. The eastern wing split naturally into a three-bedroom unit (keeping the existing second bathroom) and a studio (the front bedroom with a new kitchenette and ensuite). The rear rumpus room was already structurally separate — it just needed a kitchen, bathroom, and its own entrance from the rear lane.

**Wet area clustering.** The existing plumbing ran in two concentrated zones — the front bathroom/kitchen area and the rear bathroom/laundry. Converting to four units without relocating the main sewer line or moving any stacks. That's the cost difference between $85,000 and $140,000.

**Rear lane access.** The double garage opened onto a rear laneway, giving the back unit a completely independent entrance. No shared pathways, no shared doors. Tenants don't cross each other's space.

**866 square metres.** This is well above the threshold for four-to-five-lot subdivision potential in GRZ1. The block has a 21-metre frontage and roughly 41 metres of depth. That's future development gold [1].

## The four units: layouts, costs, and rents

Total renovation cost: $92,000 including all labour, materials, compliance items, and the Building Permit. Here's the breakdown by unit.

**Unit A — front of house, two-bedroom.**
The original master bedroom plus the adjacent living area, with the existing kitchen retained and refreshed (new handles, splashback, $1,200 total). Existing bathroom kept. Added a separate entrance from the front porch. Approximately 45 square metres of living space. Rent: $400 per week.

**Unit B — eastern wing, three-bedroom.**
Three bedrooms (one with built-in robes), the existing second bathroom, and a new kitchenette installed along the hallway wall. Separate entrance from the side access path. This is the premium unit — largest floor area at roughly 55 square metres, and the only one with three bedrooms. Rent: $430 per week.

**Unit C — front-east corner, studio.**
The former fourth bedroom converted into a self-contained studio. New ensuite bathroom ($12,000) and compact kitchen ($8,500) installed. Separate entrance from the side path, offset from Unit B's entrance by about 6 metres. Approximately 22 square metres. Rent: $350 per week.

**Unit D — rear, self-contained.**
The former rumpus room, roughly 35 square metres. New bathroom ($11,000), new kitchen ($9,500), SPC flooring throughout ($62/sqm), paint, and a split-system aircon unit ($2,800 installed). Entrance from the rear lane via the converted garage area. Rent: $320 per week [2].

**Combined weekly rent: $1,500.**
**Annual gross income: $78,000.**
**Gross yield on purchase price: 8.86%.**

I'll say that number again. 8.86% gross yield on an $880,000 property in Melbourne. Not regional. Not interstate. Melbourne.

The renovation cost per unit averaged $23,000. The most expensive single item was the Unit C ensuite and kitchen combination at $20,500. The cheapest unit to convert was Unit A at roughly $8,000 — it already had a kitchen and bathroom; we just added a partition wall and a separate entrance.

## Why four units, not three? The compliance line

In my previous article, I was emphatic: stay at three tenancies. Three tenancies keeps you under the 1a building classification threshold. At four, you cross into 1b territory — a registered Rooming House — with Council registration, DDA compliance, emergency signage, and annual inspections.

So why did we go to four here?

Because this property's layout made four units structurally clean, each with a genuinely independent entrance and no shared internal spaces. We engaged a private Building Surveyor before committing to the purchase, and they confirmed the conversion would achieve 1b classification compliance at reasonable cost. The additional compliance items for 1b cost approximately $8,000: wheelchair-accessible bathroom modifications to Unit D (wider doorframe, grab rails, hobless shower), emergency exit signage, two fire extinguishers, and a hardwired alarm system upgrade [3].

The maths justified it. The fourth unit (Unit D) generates $320 per week — $16,640 per year. The additional compliance cost was $8,000 one-off plus roughly $1,500 per year in Council registration and annual inspection fees. The payback period on the compliance investment is six months. After that, it's pure profit.

But — and this is the key point — we only went to four because the building could handle it without major structural work. If the fourth unit had required moving a sewer line, building a wheelchair ramp, or constructing a new fire-rated corridor, the cost would have blown past $40,000 and the payback would have stretched to three years. At that point, three units is the smarter play.

> "The difference between a three-unit and four-unit conversion isn't one extra tenant. It's an entirely different compliance framework," says Joey Don. "Don't cross the 1b line unless your Building Surveyor has signed off AND the payback is under twelve months. Otherwise, you're buying headaches for marginal income."

## The subdivision kicker: 866 square metres of future potential

Here's what keeps me up at night — in a good way.

866 square metres with a 21-metre frontage in GRZ1 zoning. The Manningham planning scheme allows a minimum lot size of 300 square metres for subdivision in GRZ1, with a minimum frontage of 7 metres [4]. Do the maths: this block can theoretically accommodate a four-lot subdivision (4 × 216sqm = 864sqm) or, more realistically, a five-lot subdivision with a mix of lot sizes if a development application secures Council approval for varied setbacks.

The current house sits on the front third of the block. The rear two-thirds is flat, cleared, and accessible from the rear lane. A developer — or a patient investor — could retain the front dwelling, demolish the rear structures, and build three to four townhouses behind.

I drove past a comparable project three streets away. An 820-square-metre block, purchased for about $850,000 in 2020, is now mid-construction on four townhouses. The pre-sale prices on two of the completed units: $780,000 and $810,000 each. Estimated development profit after all construction and holding costs: $600,000 to $800,000 [5].

We're not developing this property now. We're collecting $78,000 a year in rent while we wait for the right cycle. But the land bank is sitting there, appreciating, funded entirely by tenant income. When the development economics are right — probably in five to seven years — the exit is worth multiples of the current holding value.

This is the dual-engine strategy: cash flow now, capital on development later. The rooming house conversion isn't the endgame. It's the funding mechanism for the endgame.

## The warning: four clients whose properties couldn't convert

Now the part that matters more than the success story.

This year, five clients came to us wanting to replicate a rooming house conversion. We assessed all five properties before purchase. One worked (a property similar to Brook Street). Four didn't. Here's why.

**Client 1: Insufficient side access.** The property had 680 square metres and a workable layout, but only 1.8 metres of side access on both boundaries. You need a minimum of 3 metres for a compliant separate entrance pathway under Building Code requirements. No amount of design creativity fixes this — it's a physical constraint. We told them to walk away. They did.

**Client 2: Sewer line through the middle of the house.** The main sewer connection ran diagonally through the centre of the building, directly under the proposed partition line between two units. Relocating a sewer line costs $25,000-$40,000, requires Council approval, and adds 8-12 weeks to the project timeline. The conversion became uneconomical. We told them to buy it as a standard rental instead.

**Client 3: Already committed $20,000 before asking us.** They'd engaged an architect and a draftsperson to draw up conversion plans. When we inspected, we found the property was in a Neighbourhood Residential Zone (NRZ), not GRZ. NRZ limits density to two dwellings per lot, and internal conversions beyond two tenancies require a Planning Permit that Council will almost certainly refuse [6]. Twenty thousand dollars in design fees, wasted.

**Client 4: Structural inadequacy.** The house was a 1970s weatherboard with a stumped subfloor. The building inspector found active termite damage in two load-bearing walls and a floor sag of 35mm across the living area. Repairing the structural issues before conversion would cost $45,000-$60,000 — on top of the $85,000 conversion cost. Total renovation blowing past $140,000 destroyed the yield equation.

The lesson from all four: always bring a qualified builder and a Building Surveyor to inspect the property BEFORE you buy. Not after. Before. The inspection costs $500-$800. The mistakes cost $20,000 to $60,000.

> "I've had clients call me crying because they bought a property expecting to convert it and found out it couldn't be done," says Joey Don. "Every single time, the problem was identifiable at inspection. They just didn't bring the right people to look."

## The full numbers

Here's the complete investment breakdown for Brook Street.

**Purchase:**
- Purchase price: $880,000
- Stamp duty (5.5%): ~$47,300
- Legal/conveyancing: ~$2,500
- Building & Pest inspection: $600
- Buyer's agent fee: $16,800
- **Total acquisition cost: ~$947,200**

**Renovation:**
- Internal conversion (4 units): $84,000
- 1b compliance items (DDA, signage, alarms): ~$8,000
- Safety Checks (gas, electrical, smoke): ~$1,000
- Building Permit: ~$3,500
- **Total renovation cost: ~$96,500**

**Total all-in: ~$1,043,700**

**Income:**
- Unit A (2-bed front): $400/wk
- Unit B (3-bed east): $430/wk
- Unit C (studio): $350/wk
- Unit D (rear): $320/wk
- **Total: $1,500/wk = $78,000/yr**

**Annual expenses:**
- Loan interest (IO at 4.5% on $704K, 80% LVR): ~$31,680
- Property management (8.9% + GST for multi-tenancy): ~$7,640
- Council rates: ~$3,100
- Water service charges: ~$1,500
- Insurance: ~$2,600
- Maintenance reserve: ~$3,000
- Land tax (personal name): ~$2,400
- Council registration + annual inspection: ~$1,500
- **Total expenses: ~$53,420**

**Net cash flow: ~$24,580 per year POSITIVE** [2]

That's $473 per week in your pocket. On a cash outlay of approximately $240,000 (20% deposit + stamp duty + renovation), the cash-on-cash return is 10.2%. You read that right. Double digits.

Depreciation deductions add another $4,000-$6,000 in annual tax savings, bringing the effective after-tax return even higher.

This is not normal. A 10% cash-on-cash return on a Melbourne residential property is exceptional. It exists because rooming house conversions sit in a knowledge gap that most investors, most agents, and most property managers don't know how to navigate. The returns are high because the barriers to entry are high — not financial barriers, but knowledge and execution barriers [7].

## Is this replicable? (With the right property, yes)

I'm going to be blunt. Out of every 100 properties I inspect for rooming house potential, maybe 8-10 have the right combination of layout, land size, zoning, side access, and structural integrity. Of those 8-10, maybe 5-6 will pencil out economically once you factor in renovation costs and compliance requirements.

That's a 5-6% hit rate. It means you need to look at a lot of properties. It means you need a builder, a Building Surveyor, and a property manager who understand multi-tenancy before you start — not after.

The properties that work share these characteristics:
- Land: 700+ square metres with 18m+ frontage
- Side access: 3m+ on at least one boundary
- Layout: natural separation points with clustered wet areas
- Zoning: GRZ (not NRZ, not RGZ with restrictive overlays)
- Structure: solid brick or double-brick, no active pest damage, no significant subsidence
- Rear access: laneway or easement for independent fourth-unit entry [1]

If you've got a property that ticks all six boxes, the conversion will likely work. If it misses even one, the risk escalates dramatically.

The Brook Street property ticked all six. That's why it produces $1,500 a week. The four properties that failed missed one or two boxes each — and that was enough to kill the deal.

This strategy works. But it only works when the property cooperates. Always bring your builder before you bring your chequebook.

## References

1. [PremiumRea land assessment criteria. Rooming house conversion minimum: 700sqm, 18m+ frontage, 3m+ side access, GRZ zoning.](#)
2. [PremiumRea portfolio case study. Brook Street property: $880K purchase, $96.5K conversion, 4 units, $1,500/wk combined rent.](#)
3. [Consumer Affairs Victoria, 'Rooming House Standards', 2021. 1b classification requirements: DDA compliance, emergency signage, Council registration.](https://www.consumer.vic.gov.au/housing/renting/types-of-rental-agreements/rooming-houses)
4. [Manningham Planning Scheme, 'General Residential Zone Schedule 1 — Subdivision Requirements', 2021. Minimum lot size 300sqm, minimum frontage 7m.](https://planning-schemes.app.planning.vic.gov.au/Manningham/ordinance)
5. [PremiumRea market observation. Comparable development: 820sqm block, 4 townhouses, pre-sales at $780K-$810K each.](#)
6. [Victorian Government, 'Planning Zones — Neighbourhood Residential Zone', 2021. NRZ limits to 2 dwellings per lot.](https://www.planning.vic.gov.au/policy-and-strategy/planning-reform/residential-zones)
7. [PremiumRea renovation division. Rooming house conversion knowledge gap: 5-6% property hit rate, $80K-$100K conversion cost range.](#)
8. [Victorian Building Authority, 'Building Classification — Residential'. 1a (max 3 tenancies) vs 1b (4+ tenancies, registered rooming house) compliance matrix.](https://www.vba.vic.gov.au/)
9. [PremiumRea property management. Multi-tenancy management: 8.9% + GST fee, 1:50 PM ratio, quarterly inspections for rooming houses.](#)
10. [Consumer Affairs Victoria, 'Safety Checks for Rental Properties', 2021. Gas, electrical, and smoke alarm checks mandatory before tenancy.](https://www.consumer.vic.gov.au/housing/renting/standards-and-repairs/safety-checks)

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Source: https://premiumrea.com.au/blog/rooming-house-case-study-880k-1500-week
Publisher: PremiumRea (Optima Real Estate) — Melbourne buyers agent