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.
@Bill Couture what were the biggest headaches you've dealt with so far in your first year? Things you didn't expect?
Hi Dan. The biggest headaches besides deferred maintenance were a couple of the tenants that I inherited. Had to evict a couple non-payers. The property was moving to foreclosure status as the owner had passed away so the tenants figured they'd take full advantage. Though probably not applicable in all areas, even though I'm renting rooms, I still have to go through a standard 45-60 day eviction process. Utility costs were high as well. I also changed the weekly payment system from physically picking up rent (previous owner), to money orders being sent to my P.O. Box which took some getting used to.
Even with the added management stresses (I self-manage the building while working a 9-5), it's really not that bad. I'm hoping to convert an apartment building next door from 1 and 2 bedroom units to single occupancy rooms. The cash flow is incredible and I think I'm at a 25% cap rate.
@Bill Couture Can you describe some the things you look for when thinking about converting a building into a rooming house? Also are there tax incentives to having a rooming house as opposed to a regular rental?
Hi Melissa. There aren't any tax incentives as it's simply a privately owned, low income building. You get the obvious tax deductuons from operating expenses, mortgage interest, depreciation, etc. just like you would any apartment building. If it was owned by a non-profit, say as a veteran's home or a sober loving facility, I'm sure the tax situation would differ. What I look for in converting a building into a rooming house is as followed: property has to be in a commercial zone, property should be in a low income area of town, property should contain at least 10 units (economies of scale), if apartments are presents, can living rooms and common areas be converted to rooms. I'm certainly not the rooming house expert and every town treats them differently when it comes to zoning rules and building codes.
In Canada, there are some incentives - breaks on CMHC mortgage insurance rates, low interest/no interest loans from government, breaks on property tax, etc. - available for folks who are providing affordable housing (either new built or rehab of existing). Not all incentives are available in all parts of the country (some are provincial / regional) and in some places, it is no different than our student rooming house or any other privately owned apartment.
I wouldn't be surprised of there are similar affordable housing incentives in {parts of} the U.S.A. - it would be a matter of finding out what is available in your area and what are the {hidden} costs of accepting such an incentive.
Hi Melissa. There aren't any tax incentives as it's simply a privately owned, low income building. You get the obvious tax deductuons from operating expenses, mortgage interest, depreciation, etc. just like you would any apartment building. If it was owned by a non-profit, say as a veteran's home or a sober loving facility, I'm sure the tax situation would differ. What I look for in converting a building into a rooming house is as followed: property has to be in a commercial zone, property should be in a low income area of town, property should contain at least 10 units (economies of scale), if apartments are presents, can living rooms and common areas be converted to rooms. I'm certainly not the rooming house expert and every town treats them differently when it comes to zoning rules and building codes.
Bill, I'm closing on a apartment/licensed rooming house in the next few weeks. It has one 2 bedroom apartment and 6 rooms. It's completely empty as the seller had some life changes and couldn't manage it and just wanted out, so I'm getting it for an excellent price. It's in a blue collar type neighborhood. The seller used to live in the apartment so it's perfectly set up for an owner occupied situation. I'm trying to figure out how I'm going to manage it and I've heard the argument about having someone on site, but it just seems that 6 rooms isn't really that much to manage if I screen tenants well. What I find intriguing about your comments is that you're self managing.
How are you getting tenants and how are you screening out the bad actors? I noticed that you provide everything just like a hotel which I'd like to model. I'd prefer that they not bring in stuff. Do you have to worry about things like TV's getting stolen? How much time per week are you spending on this property?
Month to month leases for sure.
Utilities in owners name and split evenly between all tenants.
Screen screen screen
Funny you mention m2m agreements. That's what I'm thinking and I'm considering whether it would be better administratively if they paid monthly also rather than weekly. In PA, tenancies over 28 days may be subject to Landlord Tenant laws rather than the actual contract meaning I have to go to court to evict rather than just lock them out. That makes m2m the way to go and yes, screen like crazy. I hadn't thought about splitting the utilities, but it may be easier to fold it into the rent. My building is electric and I'm going to put in one of those blue tooth thermostats so I can control.
Hi Greg. Congratulations on the rooming house purchase. I just purchased my second rooming house as the lure of the extra income is too good to pass up. I honestly spend roughly two hours per week on my 14 unit (13 SRO's, 1-2 bedroom apartment and that time is spent on texting tenants for collections and communicated with the tenant that does the weekly cleaning. Even if you turned your 2 bedroom apartment into 2 individual rooms giving you 8 total, I wouldn't plan on having a property manager on-site. I'd maybe pick out the tenant you have the best relationship with to have them keep an eye on the place out of the goodness of their heart (no compensation!) Maybe someone in the property is willing to do the cleaning/Supply purchasing in exchange for discounted rent. I give my live-in resident/cleaning guy $75 off his $125 rent per week. If that's not an option, hiring a cleaning person to do the work one day per week for 2 or 3 hours. Probably will cost you $50. Install some fake security cameras, or real if you don't mind the expense, to keep eyes on the place.
Most of the tenants are connected to others in the community looking for the same type of housing. Might be a coworker at their blue collar job, their buddy at the American Legion Hall or somebody in their AA group. Best form of advertising is word-of-mouth so let everyone in the house know when a vacancy is approaching. I'll post an ad on Craigslist as well but utilizing the existing tenant pool has been my best resource. I always do credit checks for apartments but not for rooms. I do a free criminal background check through the state's judicial website and will not allow prior violence, larceny, child issues. I always ask how long they plan on living there and shoot for six month's minimal. 80% of my tenants work but you'll get 1 or 2 that are on social security disability and/or retired.
I put nice 32" flat screen TV's in each room that I'll buy used for around $100 from Craigslist or from the local pawn shop. Never had an issue with theft but I have thought about etching "property of Bill Couture" or something similar into the top of the TV base so they can see it.
I buy a 10 cubic foot fridge for every room and provide WiFi along with HD cable and all utilities. Twin sized bed for most rooms with a full size for the larger rooms.
Let me know what other questions I can help with. I love this stuff!
Bill C.
Hi Greg. Congratulations on the rooming house purchase. I just purchased my second rooming house as the lure of the extra income is too good to pass up. I honestly spend roughly two hours per week on my 14 unit (13 SRO's, 1-2 bedroom apartment and that time is spent on texting tenants for collections and communicated with the tenant that does the weekly cleaning. Even if you turned your 2 bedroom apartment into 2 individual rooms giving you 8 total, I wouldn't plan on having a property manager on-site. I'd maybe pick out the tenant you have the best relationship with to have them keep an eye on the place out of the goodness of their heart (no compensation!) Maybe someone in the property is willing to do the cleaning/Supply purchasing in exchange for discounted rent. I give my live-in resident/cleaning guy $75 off his $125 rent per week. If that's not an option, hiring a cleaning person to do the work one day per week for 2 or 3 hours. Probably will cost you $50. Install some fake security cameras, or real if you don't mind the expense, to keep eyes on the place.
Most of the tenants are connected to others in the community looking for the same type of housing. Might be a coworker at their blue collar job, their buddy at the American Legion Hall or somebody in their AA group. Best form of advertising is word-of-mouth so let everyone in the house know when a vacancy is approaching. I'll post an ad on Craigslist as well but utilizing the existing tenant pool has been my best resource. I always do credit checks for apartments but not for rooms. I do a free criminal background check through the state's judicial website and will not allow prior violence, larceny, child issues. I always ask how long they plan on living there and shoot for six month's minimal. 80% of my tenants work but you'll get 1 or 2 that are on social security disability and/or retired.
I put nice 32" flat screen TV's in each room that I'll buy used for around $100 from Craigslist or from the local pawn shop. Never had an issue with theft but I have thought about etching "property of Bill Couture" or something similar into the top of the TV base so they can see it.
I buy a 10 cubic foot fridge for every room and provide WiFi along with HD cable and all utilities. Twin sized bed for most rooms with a full size for the larger rooms.
Let me know what other questions I can help with. I love this stuff!
Bill C.
@Bill Couture
Thanks so much for the information!
This property fell into my lap mainly because the previous owner couldn't manage it due to some personal problems they had, so I'm getting it for a very good price. They had turned the third floor back to an apartment even though the place is licensed for six rooms. I may take your suggestion and turn the one apartment into room rental as well, but I'm definitely going to run it with the 6 licensed rooms it has now. I see this as a huge opportunity even though folks claim these tenants are the lowest, but I'm not going to rent to felons and drug addicts. I turn down a lot of working people at another building I own simply due to insufficient income and many of the folks who live in this other building have roommates or family they live with to cut costs. There are many people with $1500 of monthly income who can only afford a room and who need to park somewhere that's set up with a bed, TV, laundry and etc.
Here in PA, a tenancy over 28 days might fall under Landlord Tenant laws rather than hotel contract law. That leaves a bit less flexibility in that you can't just "lock them out", but I don't see that being that big of an issue as long as one keeps the agreements on a m2m basis. Are you just operating under landlord/tenant in your state as far as your arrangement with the tenants?
@Bill Couture
Thanks so much for the information!
This property fell into my lap mainly because the previous owner couldn't manage it due to some personal problems they had, so I'm getting it for a very good price. They had turned the third floor back to an apartment even though the place is licensed for six rooms. I may take your suggestion and turn the one apartment into room rental as well, but I'm definitely going to run it with the 6 licensed rooms it has now. I see this as a huge opportunity even though folks claim these tenants are the lowest, but I'm not going to rent to felons and drug addicts. I turn down a lot of working people at another building I own simply due to insufficient income and many of the folks who live in this other building have roommates or family they live with to cut costs. There are many people with $1500 of monthly income who can only afford a room and who need to park somewhere that's set up with a bed, TV, laundry and etc.
Here in PA, a tenancy over 28 days might fall under Landlord Tenant laws rather than hotel contract law. That leaves a bit less flexibility in that you can't just "lock them out", but I don't see that being that big of an issue as long as one keeps the agreements on a m2m basis. Are you just operating under landlord/tenant in your state as far as your arrangement with the tenants?
Greg:
Even if your lease is month-2-month, that is the rental period, not the duration of the tenancy. Check your local legislation to see if you have any provisions for a long-term tenancy, whereby the tenant inherits additional rights if their tenancy exceeds a given duration.
Also check to see if Roomers/Boarders are afforded the same rights and obligations as tenants under local tenancy law ... until 8-10 years ago, roomers/boarders here were not covered by the Residential Tenancy Act and did not have the same rights and protections as tenants.
@Bill Couture
Thanks so much for the information!
This property fell into my lap mainly because the previous owner couldn't manage it due to some personal problems they had, so I'm getting it for a very good price. They had turned the third floor back to an apartment even though the place is licensed for six rooms. I may take your suggestion and turn the one apartment into room rental as well, but I'm definitely going to run it with the 6 licensed rooms it has now. I see this as a huge opportunity even though folks claim these tenants are the lowest, but I'm not going to rent to felons and drug addicts. I turn down a lot of working people at another building I own simply due to insufficient income and many of the folks who live in this other building have roommates or family they live with to cut costs. There are many people with $1500 of monthly income who can only afford a room and who need to park somewhere that's set up with a bed, TV, laundry and etc.
Here in PA, a tenancy over 28 days might fall under Landlord Tenant laws rather than hotel contract law. That leaves a bit less flexibility in that you can't just "lock them out", but I don't see that being that big of an issue as long as one keeps the agreements on a m2m basis. Are you just operating under landlord/tenant in your state as far as your arrangement with the tenants?
Greg:
Even if your lease is month-2-month, that is the rental period, not the duration of the tenancy. Check your local legislation to see if you have any provisions for a long-term tenancy, whereby the tenant inherits additional rights if their tenancy exceeds a given duration.
Also check to see if Roomers/Boarders are afforded the same rights and obligations as tenants under local tenancy law ... until 8-10 years ago, roomers/boarders here were not covered by the Residential Tenancy Act and did not have the same rights and protections as tenants.
Roy,
Noted on the distinction between the rental period and the duration of the tenancy. Tenancies over 29 days here in PA may result in the tenant inheriting some additional rights and per my research, avoiding that means they have to vacate for at least 48 hours before the duration reaches 29 days otherwise those additional rights accrue. That's really not practical IMO, so I'm just inclined to operate under landlord tenant rules with any duration exceeding 29 days. If I have to go to court on that basis and the magistrate says landlord tenant doesn't apply, then my default position is lockout under the Innskeeper rules. Unfortunately, there's not much case law in this area in PA where longer term rooming house tenancies are concerned. Here's a writeup in the issues we have to deal with here. Of course, these fine distinctions are unknown to tenants, so the flip side is operate under Innskeeper rules at the outset unless challenged:
http://www.shumakerwilliams.com/overstaying-their-welcome-the-difficulty-evicting-long-term-guests/
@Penny Clark
I’m interested in renting by the room to seniors as well. Did you end up going down that road?