The following is a guest post from Mike from RentingOutRooms.com. In this post, Mike shares with us the strategy he used to pay his way through college using creative real estate investing. While this path may not fit for everyone, it’s another tool to add to your investor toolbox that may come in handy for you or a friend/family member in the future. Don’t forget to leave a comment below the post and share this on your Facebook wall!
Renting Out Rooms to Create Unlimited Possibilities
I didn’t have the intention of renting out rooms when I first bought my house.
I simply bought it because I thought it would be a better alternative to renting. The idea of renting out a room first materialized when I decided to attend graduate school and was faced with the choice of taking on additional student debt or trying to make more money to pay for tuition.
Because I already had a decent chunk from my undergraduate studies, taking out more loans was at way in the back of my head. Although, it would have been the easiest (just simply sign a bunch of papers), but in the long run it would have been the more expensive option.
The Extra Room
I was living by myself in a two-bedroom house. Needless the say, the other room wasn’t being utilized. With an extra room going empty, I thought about the prospect of renting it out to a roommate to make more money.
After sleeping on it for a few days, the decision boiled down to either: get a roommate and make more money or take on student loan debt and dig myself out.
The decision was simple. I needed to get a roommate.
I first thought about having a friend rent a room from me, but then I thought about all the things that could go wrong. Arguments over money and having mutual friends pick sides if an argument ever arose. So I quickly abandoned the idea.
Off to the Internet
I felt nervous posting an advertisement for a room to rent because of the unknowns involved. I’ve known about Craigslist and other roommate subscription sites so I posted an advertisement looking for a roommate.
It took a week or so to find a roommate, which was much faster than I anticipated.
Skeptical At First
Despite meeting my roommate prior to move in, it felt like freshman year over again on move-in day for my roommate. I didn’t know what to expect with the new roommate. Were we going to get along? Was he going to be messy or even worse be melodramatic?
I think it was seeing his personal belongings and his awful body odor that made me really contemplate whether it was the right move. After a few weeks, I became accustomed to his schedule and knew what to expect sharing my house with him.
Fast-forward 10 months.
Things were working out. We were getting along for the most part, even watching TV shows together like the “The Office.” Most importantly, he paid rent on-time and in-full, which was instrumental for attending graduate school.
I think at this point, it was working well enough to call it a success – things were going smoothly, and the house wasn’t trashed. At this point, I decided to renovate the basement so that I can move down there and rent out the bedroom I was residing in. This allowed me to take home twice the bacon and pay for two graduate classes and accelerate my pace towards graduation.
The renovation took a few months and about $3,500 to finish. Most it was material to finish the sheet rock, electrical work for heating, ceiling, and carpet.
I had no money to renovate my basement, however, I did have great credit and was able to secure a 12 months 0% credit card to finance the renovation project. Most folks would be apprehensive about taking on this risk in hopes to make future rental income.
Two things compelled me to take this risk:
I was able to find a roommate much faster than I anticipated when I rented out my first room giving me confidence that was demand for room rentals in my town.
I was going to charge $600 a month and my payback period would be about 6 months before I can turn a profit. Given the 12–months term at the 0% rate, I had a buffer of several months before I would be in crunch between finding a roommate and paying off the credit card.
Almost immediately after finishing the basement, I again found a roommate within a week. With the two rooms rented out, I was able to pay for graduate school and start paying back the 0% credit card.
I continued to rent out the rooms because it proved too lucrative to pass up the income. My current living situation still allowed me to do so(I wasn’t married nor had children living with me).
Instead of using the money for graduate school, I used it to accelerate my mortgage payments. With the accelerated payments, I was able to refinance to a 15-year, 3.3% mortgage, which I wasn’t able to do before since I was underwater on my mortgage.
Right now, I’m doing pretty well without a penny in loans from graduate school and a mortgage that’s right side up. I really believe that I have a lot of options moving forward including buying a rental property with the equity I’ll have in my current house. At the current moment, I plan to take a little time off from working to do a little traveling and enjoy life.
Key Take Aways
My situation won’t be identical to others, but I want to share some thoughts so that you can apply them to your situation.
- After having 13 roommates cycles in and out of my two spare rooms, I got more comfortable with each new roommate moving in. The first step to building this comfort is to simply start. A lot of homeowners are apprehensive, which leads me on to the next takeaway.
- For anyone starting out and feels apprehensive, set a fixed term such as 3 months so that you’ll know you’re going to get your space back at the end of the term no matter how bad the situation is. From the experience, you can judge how you’ll cope with sharing your house and whether it’s your “cup of tea.”
- In my case, I didn’t set a finite period for my first roommate. Remember, I wanted to pay for graduate school – I wasn’t just going for a trial roommate period, I needed someone long term so that I can pay tuition while I attend classes.
- Don’t get discouraged if you don’t find a roommate within a week. I think I got lucky when I found suitable roommates within a week. Out of the 13 roommates that I’ve had, it took as much as a month to find a roommate.
- If you’re single and have a house that’s bigger than what you need, start renting out a room shortly after you close. I’m kicking myself for the opportunity cost of waiting 10 months before starting to rent out my spare room. The extra money will be instrumental to setting up your personal finance goals.
Do you have any questions or comments? Be sure to leave a comment below!
Mike is a “live-in landlord” who rents out individual rooms for extra cash. He was motived to rent out his spare room to pay for graduate school rather than taking on additional debt. With the lack of advice to help him get started, he started a blog at rentingoutrooms.com where he writes about the topic so that others can benefit from his experience.