Any success with rent by the room?
Rental Property Investor 路 Missoula, MT 路 Member since 2019 路 85 posts 路 35 votes
I am looking for a 4-5 bed house in the phoenix area with an ADU for my fiance and I to live in. This househack strategy has been suggested to me considering the scarcity of cash flowing residential multifamily properties. Not saying there isnt any but when they do appear, they go fast and cash buyers prevail.
Has anyone else had good experiences with a larger house (5/3, 5/2) that has been rented by the room in the Phoenix area or other hot real estate market areas?
Hi Bridger, Back ground; most counties/cities have zoning and regs on; max number of unrelated adults allowed in a rental. Some are at 3. ALSO they have regs on rooming houses only allowed in specific zoning, similar zoning as for hotels; only on main streets in business districts AND you have to apply for licensing and blabla as for a hotel..
That said; there is a small movement supporting rent by the room as a small step toward solving affordable housing. You might study up on this Atlanta business that is growing their business with private offerings (funding) padsplit.com
They have a shades of gray solutoin for the unrelated adults, and rooming house zoning that is sort of working in the Atlanta area. Padsplit as a company has greesed alot of palms to be an acceptable violatoin of zoning and business licensing requirments for a hotel. IE City of atlanta is lookign the other way. Suburbs have filed zoning violations againsgt investors I know who have put their expanded bedroom suburbant houses onto the padsplit.com platform. No cease and desists yet, but its touch and go. Legaly all rent by the room operations are in violation of hotel, zoning, and rooming house regs. Like the push to get tiny houses accepted and zoning changed, a "cleanly well run rooming house" business model has yet to get much muninicipal acceptance tracktion.
What to do; this only works where the house has lots of parking, distance from neighbors. 100% of the time its a neighor who turns you in. So if lots of parking, ideally walking distance to busses or transportation to cut down on cars, you might get away with it (legally).
Operationally; this is a can of worms to manage. Midnight drunken brawls happen, but are more infrequent then you might guess depending on your screening. But always complaints about guests (residents) leaving common space a mess, some resident gets mad they have to clean up...
Simple furnishings bought used, a single bed, and dresser. Common area TV/internet. Each bedroom has a electronic combo lock. To evict just put their stuff outside and change the combo lock. Its hotel law not landlord law.
Best of luck.
We don鈥檛 live there. We lived for a while and rented the downstairs. Then we moved into another house and rented the 3 upstairs rooms. This house is in Renton WA(SE of Seattle 1 city).
Did you househack it at first? And very cool, I have family in Bellvue and Snoqualmie
That is all very good advice and input! Your thoughts on setting up the guidelines before they sign the dotted line match everything else I've learned. That seems to be one of the most important steps to ensuring minimal headaches and tenant issues. Getting into a larger SFR to househack seems to always be cheaper than a MFR from the deals I've ran. I appreciate your words and thanks for jumping into the discussion.
House-hacking by room is a topic that pops up when we're late in the real estate cycle; in tier 1 areas multifamilies available are scarce or priced unreasonably so one is 'forced' to rent rooms instead of multifamilies.
Things to consider:
1) Exit strategy - are you forced to live on site and manage it? What if you're forced to move? Don't use overly rozy projections based on self-management and renting it out forever.
2) Higher risk - how do you know which tenant caused the damages or brought in the bed bugs? Make sure to have a security deposit that takes into account the additional risk. Make sure you have adequate reserves to cover unexpected emergencies.
3) Time-intensive - If you live on-site you're a live in property manager on call 24/7
4) Legal issues - know the max occupancy laws for your area. For my area it's 6 adults living in a single family home for San Diego.
I had to house-hack my first home via renting out the rooms in San Diego due to the price to rent ratio being out of whack. That being said, it's been financially worthwhile but also full of headaches. When COVID started, I encouraged all my tenants to move because what's the point in cashflowing when you live in house full of tenants during a pandemic? One of my mentors also encouraged this strategy and was able to buy a property every year or 2 and rent out rooms rather than the house for much more. Whenever he moved out, he made an arrangement with the most responsible tenant on site to become the PM of the house.
1) I will be an owner occupant. I analyze the property as if I am living there as well as when I'm moved onward and using a PM or letting a trusted tenant be PM. I am planning on buying and holding for the long haul. I'm looking for specific locations near airports, hospitals, universities, etc. I also have plans to test air BNB and long term leasing to see what works best.
2) Bed bug addendum's have been brought up throughout this post and other research I've been doing. I will be sure to be upfront on the lease about the guidelines and specifics like that including cleanliness expectations, late rules, eviction notices, communication, maintenance, etc. I am planning on getting into a deal with 0% down VA loan which will save me some upfront capital and can be used for damages and such. It will reduce cashflow going in 0 down but is a good option for me.
3) I'll be living on site and will be available (as will my fiance be) 24/7. My goal is to maintain good relation with tenants and have excellent communication. Happy tenants will save you money in the long run. I will provide the best service that I can!!
4) For tempe, AZ are,
Occupancy load; sleeping room. Every rental housing unit shall contain at least one bedroom or living/sleeping room of appropriate size for each two (2) persons. Every room occupied for sleeping purposes by one person shall contain at least seventy (70) square feet of habitable room area and every room occupied for sleeping purposes by two (2) people shall contain at least fifty (50) square feet of habitable room area for each person.
(e) Occupancy load; rental housing unit. Every rental housing unit shall provide at least two hundred twenty (220) square feet of floor area for the first two (2) occupants and one hundred (100) square feet of floor area for each additional occupant. The floor area is to be calculated on the basis of total dwelling unit area.
Thank you for making some excellent items to consider going forward. This post is intended to be a response to your list as well as a reference for myself in the future!! I appreciate you jumping into the discussion.
@Spencer Cornelia do you live in the property? I have a 3-1 that I don鈥檛 live in... would this strategy work?
The first house I bought was a 3/2.5 home in phoenix and I rented the other two rooms out by the room. The income from those two rooms paid the entire mortgage, HOA, and a a tiny bit of utilities. Financially it's amazing, but there are a few things to keep a look out for.
1. There will be drama. This is especially true the more people you try to cram under one roof. If you are trying to go for 4 or 5 people I would stop and consider if a general theme for the home would work so that the people living there have at least something in common. Do you live next to Luke AFB where everyone could be military? Live in the hipster Roosevelt district and can target struggling artist types, Tempe college students etc? The more people have in common the less likely there is going to be significant drama.
2. Furniture. This is especially important since you say you want to live in the ADU with your wife. This means the main home would need to have decent furniture and appliances available, at minimum in the common areas but likely some bedrooms as well. Not many people want to live with 5 random strangers while simultaneously sitting on milk cartons as chairs. You will want to provide basic amenities like included washer/dryer since living conditions are already less than ideal with that many roommates so you don't want the added hassle of them needing to go downtown to a laundromat.
3. Fridge/kitchen space. You WILL need at least a second fridge in the garage or something similar to accomodate 5 different grocery lists.
4. Parking. Some HOA neighborhoods don't allow for street parking, one of my units in the Mesa area is like this. Make sure that your home can accomodate 6-7 cars.
5. Outdoor space. I know most backyards are dirt/rocks in phoenix, but having a home with some sort of a finished backyard can be a big deal as it adds more livable 'space' to the home. This is important if you have 4-5 people in the house as everyone needs a place to get away sometimes so the more they can spread out the better.
6. You will generally get people who are more nomadic in nature. It's more common for a roommate to suddenly vanish in the middle of the night without paying rent. Don't let anyone fall behind on rent or you will likely never see them again. Always charge at least some sort of security deposit, and the first months rent up front upon movein.
7. Keys. People will come and go, make sure you get all keys back prior to them leaving. Consider having a lock that can be easily rekeyed or a pin code enabled lock such that you can easily change things, especially after a drama filled hissy fit where one tenant suddenly leaves out of anger/frustration.
8. Pets. Consider a no pets policy. Having a pet isn't such a big deal but when 5 people all bring their cats/dogs the place turns into a zoo. Not only that but just like not all people get along, not all of the pets may get along either.
9. Keep everything on a month-month basis. No long term leases, ever. You want to be able to get rid of a tenant who is causing problems in the home asap as it can quickly create a hostile environment for the other 4 people living there where now you have all 5 people contemplating wanting to move. Personally I did week-week leases since I can evict someone in 7 days as opposed to 30 days if month-month. To avoid actually collecting money every week the lease agreement stated that the term was week to week, but if you paid in advance for 4 weeks worth of rent on the 1st of the month, you would receive the remaining days of the month at the discounted rate of being free. So all of the people I ever had paid one bill on the first of the month like a normal renter did, but technically they were on a week to week schedule for eviction purposes. I'm not sure exactly how legal that is, consult an attorney, but I never had any problem getting rid of someone within 7 days, and I never had anyone attempt to challenge me on it.
10. Bathrooms. Bedrooms are obviously important, but so are bathrooms with 5 unrelated people. If it's a 5/2.5 home then the person with the master bedroom suite is likely going to be happy, but are the other 4 people going to be content all sharing the one remaining shower?
11. Guest Policy. 5 people is bad enough, now imagine all 5 trying to bring over their boyfriends/girlfriends for overnight visits or move in with them. What if one person likes to host parties and is constantly bringing a bunch of friends over to hang out?
12. Utilities will need to be in your name, and you will want to provide strong wireless internet, as well as some sort of basic streaming service like Netflix at a bare minimum for entertainment purposes. Don't charge for utilities, keep the rent at a fixed price that already accounts for estimated costs such as utilities.
13. There's plenty more topics to consider, imagine yourself in their shoes living in a home with 4 other random strangers. Try to reduce the number of problems you can think of to a manageable level, or instead of a 5 bedroom place maybe go a little smaller with a 4 or 3 bedroom that is generally more manageable and not pack people in like sardines.
@Ben Zimmerman
That is some of the most solid advice yet. Like the 13 commandments. I really appreciate this nugget of information and will always look back to this when setting up my situation for rent by the room. Well done sir, thanks for the input. 馃憤馃憤 I'd like to keep in touch.
@Bridger L Logan I鈥檓 using this strategy for my home now, so I live for free. But there are things you need to consider, like: everyone has to follow house rules to avoid drama, excessive use of kitchen and bathrooms leading to plumbing issues, being on call 24/7 with any problems, etc. Otherwise, I think this strategy is a good practice to help you feel if you really want to be a landlord.
@Vee Vu
Thank you for the advice and jumping into the discussion Vee! There are so many things to consider and I appreciate all the helpful words from you and the rest. Best regards
@Bridger L Logan! Oh man!! I鈥檓 literally under contract to do this in the next 30 days in Scottsdale. I鈥檇 love to hear how your experience goes.
@Scott A Holman Jr.
I'd like to hear from yours as well! Keep in touch
What went wrong? Has it since turned around?
@Ray Lai
Great info! Which neighborhoods in SD are you seeing the most beneficial rent to price ratio? I am thinking of doing the same.
For San Diego, central areas around Clairemont Mesa/ Serra Mesa / Kearny Mesa / Linda Vista. You want to consider the quality of tenants you get and being in a central area means people can get to their jobs / school conveniently. Things to consider
1) Number of bedrooms / bathrooms / space for your tenants you can get for the $ you spend. I bought a 4/3 and only rented out 2 of the rooms for sanity so that everyone could have their own bathroom. I also bought another fridge as well. I turned the extra room without a bathroom into a workout room as a bonus amenity. I'd rather rent out my 2 rooms for more, than 3 rooms for less and overall more but deal with another tenant. The house is comfortable renting out to 2 tenants with their own bedrooms and an extra fridge.
2) You should wait until after this COVID bust. 30% of mortgages in the United States were laid or in default in April / May. Inventory should increase and prices should dip. Also mortgage rates are dropping. I just refinanced my 3.875 30 year to a 30 year fixed. So you got lower prices and lower interest rates coming. Start doing your due diligence.
3) Your focus should be more on $$ paid for amount of bedrooms / bathrooms. As long as the neighborhood isn't sketchy, it's OK. You don't want sketchy areas because you will get crappy tenants and smart females won't want to live there (too dangerous at night). So that rules out areas like City Heights / Skyline / etc.
4) Parking - make sure you scope out the parking situation before you buy. I only rented out 2 out of my 3 rooms because parking ain't the easiest in my hood.
5) I rented to professionals (and one PHD student) so that's why I chose the neighborhoods I listed. If you have a different strategy you might consider different places.
@Bridger L Logan me and my wife started off like this. We bought a large 3 bed 2 bath with an in-law suit. The in-law suit was rented already and payed half the mortgage. We were then able to turn a garage into a master bedroom and a laundry room into a big bathroom. We moved a couple of people in by the room and had our bills, mortgage paid for and even our grocery bill. Totally recommend it. I鈥檝e got loads of houses now.
Thats a very innovative way to create another room to rent out! Have you stuck with SFR or do you have any MFR?
Such great information on this topics. Sounds like for the most part it tends to be successful. Good luck, @Bridger L Logan. Keep us posted.
Thank you very much!
@Bridger L Logan I have a mix of multis and sfr. I also look for properties with larger lots that I can put tiny houses on or convert sheds. So larger houses with larger lots (for parking). I bought a house that I split into 2 units and converted the shed into a tiny house. I don鈥檛 worry about the electric because I use that for short term rentals. It makes a killing.
@Bridger L Logan hey, all i do is rent by the room. i have a bunch of BP blogs on the subject too. happy to help in any way that i can.
I have read some of your stuff recently. I appreciate you reaching out! I'm sure I'll have things in the future to bounce off you.
Another option if you are looking to rent rooms and there are hospitals in your area is to market to travelling nurses, using a website like https://www.furnishedfinder.com/ These are shorter term leases, usually about 3 months, and you are renting to professionals who are in an area for work. The higher turnover may be worth the higher caliber of renter.