Effective Rent By The Room Strategies
Dan MackinBusiness Member
Real Estate Agent · Erie, CO · Member since 2014 · 1k+ posts · 512 votesAs it becomes more prominent in the US it seems there should be a discussion on renting by the room. Yes, I'm aware that this has been done forever with student rentals, but I'm specifically talking about post-college. What I would like to know from those who are currently involved with this method are the following:
Pros/Cons
Extra expenses
Cashflow difference between rooms or entire unit
Potential headaches
Navigating tenant disagreements
Anything else...
This method fits within the house hacking guidelines and I'm working on a full document outlaying the differences between renting rooms and entire units to adults.
I agree with @Roy N. targeting is the key. It's best to stay with one affinity group. For example Ph.Ds will live nicely with other Ph.Ds, nursing students will group nicely with other nursing students and so on.
Flat rate, all you can eat is the way to go. I like to split average expenses so its:
(Average Monthly Expense * 1.30) / (number of rooms )
So if cable is $100 and I have three room, then each pays $65.
My goal is to give them everything they want at a rate that's cheaper than if they bought it themselves AND make a profit.
So load the place up with luxuries.
Also put digital locks on every bedroom door.
@Dan Mackin, I own a 3 bed/ 2 bath in the San Francisco Bay Area. I started renting out the rooms to friends and my basic strategy is to just charge them a flat fee.
The cons to this approach is that they are able to take long showers and use the washing machine a million times a month but still pay the same amount. I also cashflow a lot less than if I rented out the entire house.
The pros are that I'm able to live in one of the most expensive neighborhoods in the country for a fraction of the price. Instead of paying an exorbitant amount for rent, I pay a few hundred dollars a month for mortgage on an appreciating asset.
I could increase my monthly net income by kicking out my friends and bringing in random people from Craigslist to live instead, but it's much more fun living with people you like.
-Sean
I lived in a situation like this where it was VERY similar to my college living experience with a few differences. College, I was better friends with the people I lived with, the post-college experience was more random, and my group was all kids aged 18-26. Obviously this situation isn't ideal for most people... it worked out for me because rent was CHEAP (~350-400/mo with utilities), and location was perfect (1 mile from work). I saved a lot of money over the year I lived there, as did one of my roommates. The issue is that most people aren't doing that to save money... they are doing it because they don't have other options. I lived with a few kids who were barely scraping by, were total pigs, and were basically totally irresponsible for themselves and especially the house.
I moved out 6 months before the remainder of the group, and no longer maintained it (as it was no longer my responsibility), and when the lease was up the place was totally trashed. We're talking a 4' high lawn, trash everywhere, nothing washed, mold in the bathrooms, kitchen repulsive etc. Basically just a disaster.
We split extra expenses evenly, even the $400/mo x3 months of water due to one persons bathroom leaking and them not realizing it (IDIOTS). I saw the bill and instantly replaced the internals to fix the problem and stopped the waste.
You'll make more, but the headache is going to be far greater than renting the whole unit. There was also a heck of a lot of turnover. I lived with 9 different people in shifts of 4/5 over the course of 1 year... one room turning over each time. It was total chaos, and I wouldn't ever rent something that way, unless you had a bunch of friends living together (college type situation).
Good luck.
@Dan Mackin, I've thought about looking into this in my area, but specializing in providing room housing to those in the senior market. Many of these folks don't want the responsibility of a house, but enjoy the amenities a house offers. They also don't want to live alone. I would think some of the more important considerations is that you have the right type of lease agreement and that your roommates are compatible with each other.
I'd love to know how it works out for you!
A member of our local REI was sharing his story (still in progress) about a 4BR SFR that he acquired and planned to rent out by the room to local military on a week-to-week or month-to-month basis. It's in a middle-class neighborhood near one of our military bases. I don't know how well this would work, but he is former military and he said he's got an inside perspective of what they are looking for in short-term off-base housing. This won't work everywhere, but I have a feeling that he's going to do well and he's on to something that might work really well here in 'Military City, USA' :)
@Dan Mackin You have some local expertise that has been doing this in Denver: @Linda Weygant and @Mark C.
Something I am very interested in. I'll be following the thread!
@Dan Mackin You want to be careful about getting into a situation where you are covered by municipal regulations regarding rooming houses. They have completely different fire code standards amongst other things, and you would face very great liabilities if you were not in compliance and there was a fire. Here in Ontario a landlord was jailed for a few years for repeatedly failing to follow fire codes. That is in a jurisdiction with a far less driven approach to crime and punishment than is seen in many other places.
@Stephen E. Are you referring to OPP officer from my area? There was also a story in the paper here about a local realtor doing the same thing here.
I do not know american laws well enough to comment on those situations mentioned above, but If you are in Ontario this is not a good option unless owner occupied. When owner occupied the laws apply differently.
If you do not have a legal and properly zoned rooming house you are open to huge fines, potential litigation and little recourse on your tenants.
Also on a another note, it would depend on area but most rooming houses attract a much lower quality of tenant and you're much more likely to deal with headaches. Mind you they have much better cash flow.
@Samuel Sedore There have been several cases along these lines. The one I am thinking of involved a resident dying because another resident was drunk and his lit cigarette was disposed of such that it set the place on fire. The tenants were negligent but it turned out that the landlord had been inspected by the Fire Department and they had set out areas in which he had to be compliant. He lied about having undertaken the necessary improvements and all of this led to him being found guilty and sentenced to I believe several years of imprisonment.
I would never operate a rooming house. You are right that rooming houses in general attract a desperate class of tenant. I don't care how much they might cash flow, living with those kinds of problems is just not worthwhile. Student housing may be better but still is liable to produce much more strife than renting to individuals and working families. Screen carefully and that can be a stable business.
On fire I now exclusively use the sealed ten year lithium battery models in all of my units. I place a combined smoke/CO ten year battery smoke alarm on every level and I place a ten year battery smoke alarm in every bedroom. Code in Ontario just requires one CO detector in the unit, to be placed outside of sleeping areas, and then one smoke alarm on each level. If you watch the news stories as i do you will find the courts routinely hand out fines of $1,500 for each smoke detector that is missing or that has bad batteries. A talking ten year smoke alarm costs $37 at Home Depot in Canada, and I can completely equip a townhouse with all these alarms for $300 (I just did one this past week). Whenever I get a new unit the first thing I do is have my handyman remove all existing battery powered smoke alarms, replace hard wired ones if they are past due, and install ten year lithium models throughout as indicated. I also supply a fire extinguisher in the kitchen. I know some people worry about liability from providing these but my own view is that I would like to minimise fire damage to my property and to the extent that an extinguisher might do that then they are worthwhile.
Fire is serious business and fire inspectors mean business. Only foolish landlords would ignore the regulations in this regard.
There are may types of rooming houses ... if you search on here, there are a couple of threads where I've put them in 3-4 categories (I tend to waiver whether there are really four): student, institutional (i.e. employer such as a factory or hospital), and social (those on the edge of society.
I disagree with your categorization - it is overly broad.
We have a student rooming house and almost bought another last month (save the deal came apart at the 11th hour). In our house, we provide furnished rooms and target the international student. We have minimal issues (have asked only two tenants/roomers to leave in almost 5-years). IMHO, the key is both who you target - international students tend to be more serious as they (their family) are spending large sums of money to come here and study - and having a live-in "Den Mother" who keeps the ship on-course.
Our student rooming house produces far less drama than our other student rentals. Our only significant issue arose because we wavered from our target market and accepted a roomer who was not a student (international or otherwise) and, as it turned out, had cognitive challenges. This roomer brought bed bugs with her, but said nothing about them - until they spread into an adjacent room and were noticed by another tenant. That lesson came with a $5K price tag (the new bathroom planned for the upper unit had to be delayed), but we won't deviate like that again and we have implemented routine room inspections as a result.
Other types of rooming houses require different management styles and skill-sets. We have considered a rooming house that serves a local institution/employer and think we could make the transition to manage that type of house. Social rooming houses who cater to those on the edges of society are outside our expertise and appetite.
BTW: I'm surprised that fire-code in Ontario does not require you install hard-wired detectors with battery backup. We use fully interlinked detectors in all our smaller properties.
@Roy N. If it works for you then that makes sense. I know others have different experiences but I have always thought student rentals take up too much management time relative to other forms of rental property. I realise this is your business and that you have optimised your approach to managing student rental property, but I have limited management time available. Therefore renting to carefully chosen individuals or families makes more sense in my circumstances.
Ontario permits the basic smoke alarms with 9v batteries. I read around and my understanding is that some states such as California now prohibit use of such smoke alarms and instead require the ten year battery models (or hard wired as you suggest). I look at it as a practical matter. Ten year batteries substantially reduce my maintenance time and maintenance costs, and it increases safety for tenants. It means the smoke alarm is more likely to be working when needed and it also cuts down on tenant tampering (taking out the battery to stop nuisance alarms or to power their kids' remote controlled car or something - crazy things happen).
In any event, I hope that the rooming houses continue to work out for you.
We're off topic, but I totally agree. Half of the rentals that I walked through had the alarm sans-battery because the idiot tenant needed a TV remote more than a smoke alarm (usually these are smokers, too). I bought dual-detection 10-year sealed units for my rental.
If a tenant takes out the battery, the landlord is not only liable for fines during an inspection, but also liable for the death of the moron that took them out and died in a fire.
So to bring it back on topic :-)
The sorts of things I'm looking to get listed out here are great strategies for increasing cashflow, lowering vacancies, etc. What creative methods have you utilized to make these rentals the least hassle as a landlord while still reaping the benefits of the higher overall rents.
Do you supply internet as part of the lease?
Do you supply cable?
Are utilities part of the lease or split each month?
Questions along these lines.
I agree with @Roy N. targeting is the key. It's best to stay with one affinity group. For example Ph.Ds will live nicely with other Ph.Ds, nursing students will group nicely with other nursing students and so on.
Flat rate, all you can eat is the way to go. I like to split average expenses so its:
(Average Monthly Expense * 1.30) / (number of rooms )
So if cable is $100 and I have three room, then each pays $65.
My goal is to give them everything they want at a rate that's cheaper than if they bought it themselves AND make a profit.
So load the place up with luxuries.
Also put digital locks on every bedroom door.
oops, I meant $ 43.33 each.
Ignore my math but follow concept.
When you are renting rooms (aka a rooming house) it is typically all inclusive w/r to utilities. We also include Internet and "television" (along with a flatscreen television in each lounge/living room) in our offering and just bake it all into the rent.
This does not mean that we do not monitor and endeavour to control resource consumption - we are always making improvements to the building envelope; have installed LED lighting; use low-flow plumbing fixtures; have programmable thermostats and our own building monitoring system.
Our objective is to provide our student tenants with a quiet, healthy accommodations complete with all the needed amenities at a cost which is less than a residence room at the university itself.
In that light, @Al Williamson is steering you in the right direction - provide them with amenities not at your cost, but at a cost less than they could procure the service themselves.
@Dan Mackin Actually I think fire safety is integral to your plans for a rooming house. If you don't look after these issues you are looking at massive potential liabilities. The idea is to make money - safely.
@Dan Mackin Actually I think fire safety is integral to your plans for a rooming house. If you don't look after these issues you are looking at massive potential liabilities. The idea is to make money - safely.
There must have been a paragraph about eschewing fire safety above someplace?
Fire safety is never anything you want to neglect. Here we use interconnected {smoke, CO, etc}, hardwired (w/ battery backup) detectors in all our units {hardwired is a code requirement, it just makes sense to install interconnected units with battery backup}.
In a rooming house you will most likely be required to have a full alarm system with hardwired detectors, pull stations, and emergency lighting. In new builds/conversion you may even be required to have a sprinkler system. Check with the Ontario Building code, provincial fire codes (call your local fire marshall) and any local ordinances/by-laws (your municipal planning/inspection office).
@Roy N. This is one reason I have not been tempted to rent by the room, the fire codes are very different. In a regular single family residential property Ontario requires smoke alarms on every floor and a smoke alarm and CO alarm outside sleeping areas. That is pretty much it. I do more than this as outlined above but one reason for greater requirements for rooming houses is they have a greater history of fire related incidents. No smoke without fire as they say.
Here those greater measures are only necessary if the property is zoned/designated a rooming house, boarding house or group home. There are lots of landlords around who rent smaller properties (1 - 4 rooms) by the room and only have hard-wired (and maybe not even that) detectors. Here, there is only a requirement for CO detectors if the house has a gas/oil/wood furnace, water heater, fireplace/fixture or appliance.
One of the reasons we prefer to rent most of our student properties by the house or unit. We were fortunate, in the case of our international student house, the fire alarm system was already in-place when we purchased it ... as it was for the one we almost purchased last month.
@Matt Geerts do you have a link to the model smoke detector that you bought?
@Cresundo Whitaker His model would be different than yours as the manufacturers make different models for Canada and the US. The certifications vary between the two countries. I made the mistake of buying some smoke alarms in the US once and ended up taking them out of a property and throwing them away because of insurance concerns. I believe that the issue was that they had to be CSA approved, not UL.
Oh, man I did not realize he was in canada. Thank @Stephen E.
I own a 13 unit rooming house in Connecticut that was established as a rooming house in the early 1900's. I furnish all of the rooms and I include all of the utilities (heat/ac, hot water, cable and Internet (WiFi)). I rent to the lowest members of the income scale but I honestly haven't had that many issues. I installed coin-op laundry and converted all of the common area lighting to LED with auto shut off sensors. All appliances (10 cu. Ft. fridge in every room) as well as televisions have been upgraded to energy star. I have one Internet and one cable line for directv for the entire building. I have 13 directv boxes which confuses the heck out of them when I have to call with billing questions. I'm happy to answer any questions. I've owned the building since February 2015.