Rent by the Room

10 Replies

Hi,

I've begun exploring the option of buying an investment property with the intent to rent by the room. Where can I find more info on how to safely and legally accomplish this? Google has not turned up much. So far, I have checked the Fair Housing Act and I can rent to same-sex occupants without violating it (apparently if you have shared living/common areas you can restrict your room rentals to one sex only). I have also checked my local municipal code and there are no restrictions on the quantity of un-related folks living together.

The reason I wish to pursue this option is purely from a cash generating standpoint. I can meet the 2% rule (just barely) in my area with a SFR, but I am only going to get $800-900/month depending on the neighborhood. So while my percentages are fine based on investment amount, I'd like to get a little more bang for my buck so to speak. I checked my area and you can rent a room in a person's house for $400-500/month. I did not see anything advertised for a whole house that rents by the room.

Here are the various clientele I am considering:

Student - we have several small colleges in the area. However, because the colleges are small, most of the students are either adults returning to school or kids who are bunking at home until they get their core classes done and move off to a larger university. So I'm not sure how large the rental pool would be for this and I would be limited to specific neighborhoods near the schools.

Military - We have a huge military base nearby with mostly mid-career folks stationed here. I actually work on base, and know many of the folks there are on temporary assignments (3 years or less) so they come unaccompanied (without their family). Additionally, with every mid-high ranking officer come the junior officers to take care of them who have a much smaller salary and are always looking to save a buck. I can also get with the housing office and market through them. I would be limited to neighborhoods near the base (well, maybe not, but it would be a big selling point).

Disabled- We have a shortage of group homes in the area for the infirm. I have been approached by a friend of a friend who runs a home health care management company. Their clients are mostly folks who can't mentally fend for themselves, but are still physically capable of many things (they can bathe, feed and dress themselves; but can't shop, administer their meds or cook for themselves). Most are entitled from Medicaid to 8 hours of care per day (either babysitter or nurse type) and if three live together then they are cared for 24/7. In this scenario, the management company is responsible for ensuring the home is approved by the state as living quarters (and any licenses that go along with it) and I would either rent directly to the management company (for market value of a whole house, which wouldn't help me) or by the room to each individual (where I could charge the area's going rate and increase my cashflow).

Here're my questions:

1) What types of things need to go in the lease when you have shared common/living areas vs. a regular lease?

2) Are there any other ways to increase cash flow other than by the room rentals? I am in a rural area, which limits me a little bit. And no, I have no interest in investing elsewhere right now.

3) Should I consider different types of insurance right now? I have liability through my rental's homeowners policy.

4) Are there things I should do to the property (like installing locks on each bedroom) that are specific to by the room rentals?

5) Anyone have direct experience with this and have any tips?

@Andy Luick has experience in this area. Maybe he will chime in.

@Amy E.   We have a few here in Raleigh and they do quite well. I know a guy that has a few of them. As far as I know the legalities are specific to your local area (i could be wrong), one example is that he had to purchase the property next door and convert it to parking in order to give 9 people a place to park being the street parking wasn't enough. I also assume there are some restrictions to the amount of bathrooms available and the amount of tenants/sqft

The units I looked into have rent of about $450 -$600/month (different room sizes and some have private bathrooms) in downtown Raleigh, totaling ~$6,000+/month for the entire unit. Not bad if you ask me. Once you learn how things work in your specific area, you can get a few going for some nice cash. I would advise you to do all males or all women, no mixing men and women. Your resident selection will be key here.

@Amy E.  I have few of these I manage in Raleigh, NC, and I don't really like the setup from a management perspective.  I find myself playing the role of "mom" to children who don't belong to me more often than I'd like.  For the owners of these properties, I know they cash flow well, so it can be a good investment for them.  In Raleigh, we have a city law that allows no more than four unrelated people to live together, so I would check that rule in your town.  It seems to come up in college towns more than others, so that may not be a factor in your area.

Amy,

We have two house which are rented by the room at the moment.  One is a large duplex (4 & 5 rooms respectively) where our clientele is mostly international students.  We rent the rooms here furnished.  My sister-in-law lives in the upper unit and serves as Den Mother to keep the ship on-course.

We have a second house which we normally rent as a single unit to a group of students.  Due to circumstances late in the summer, our original tenants backed out of their lease and we were compelled to rent by the room for this year.  (this has happened a couple of times before).  We plan to return this house to a single lease for summer/autumn 2015.

We are negotiating on a third house on the same street which, after an energy efficient renovation, may be rented by the room.



Originally posted by @Amy E.:

Here're my questions:

1) What types of things need to go in the lease when you have shared common/living areas vs. a regular lease?

You will need to furnish the common areas.  We usually furnish the bedrooms as well.  You will also need to set the rules for the common areas and specify quiet hours (i.e. no laundry after 22:00) in your house rules which accompany the lease.   You will either need to stress in the house rules/lease that the tenants are responsible for cleaning the common areas in addition to their own rooms (and police it) or bake the cost of a weekly cleaning service into your rents.  We have done both and over time, we've moved mostly towards the baked-in cleaning service.

2) Are there any other ways to increase cash flow other than by the room rentals? I am in a rural area, which limits me a little bit. And no, I have no interest in investing elsewhere right now.

There are downsides to renting by the room:

a) you carry the utilities;

b) As Dawn mentioned, you end-up dealing with roommate drama as each roomer has a relationship with you and not with each other.

c) Wear and tear on your property will be greater and it's more challenging to hold someone accountable for damages, especially to common areas or chattel.  Case in point, I arrived at one of our student rooming houses yesterday to discover that the handle had been broken off the storm door.  {Not so} surprisingly, no one in the house has come forward or knows how it became broken.   I already have a good idea how it became broken - we had an unseasonably warm day with heavy rain early in the week followed by a flash freeze as temperatures returned to seasonal ... I suspect the door froze shut and someone reefed on the handle to try and pull it open.

Sometimes the additional net revenue gained from renting by the room is not sufficient to compensate for the additional management effort.

3) Should I consider different types of insurance right now? I have liability through my rental's homeowners policy.

Your landlord's insurance should cover the property and common areas. We insist that roomers carry tenants insurance for their personal belongings.  One caution: some insurance companies will not provide tenant insurance to roomers or if there are more than 2-3 roommates.

4) Are there things I should do to the property (like installing locks on each bedroom) that are specific to by the room rentals?

While it's not ascetically pleasing, your roomers will most probably insist on having locks installed on their bedroom doors.   If you have a visit from a by-law officer, or if the house is appraised for refinancing, both will most likely interpret locks on all the bedroom doors as a rooming house.   Many lenders (at least here in Canada) will not take mortgages on rooming houses, particularly in student areas.   You also need to verify that the zoning allows you to operated a rooming house, if not, you may have a stipulation of no more than X (often 4) unrelated adults being permitted per dwelling unit.

5) Anyone have direct experience with this and have any tips?

Yes, and see above.  I would recommend having an on-site super/den mother, whom you trust, living at the house.  In the case of students, it helps if this person is a few years older than the tenants.

I have a friend that does this and she is always busy showing rooms and taking phone calls from different roommates. It is a lot more management intensive. 

@Roy N.  I may have the same scenario coming up, so I'm reading & learning as much as I can. How do you handle utilities? Is it under the landlord's name? If utilities are set to be a constant per month, what if tenants go over, how is this handled? Split amongst the tenants? I'm trying to come up with a system on how to handle this scenario,  since I'm in a college town.

Originally posted by Account Closed I may have the same scenario coming up, so I'm reading & learning as much as I can. How do you handle utilities? Is it under the landlord's name? If utilities are set to be a constant per month, what if tenants go over, how is this handled? Split amongst the tenants? I'm trying to come up with a system on how to handle this scenario,  since I'm in a college town.

 Daira:

If you are rooming (renting by the room), then the landlord carries the utilities, so you need to bake it into your rent level.  We've renovated our student housing to be more efficient (programmable thermostats with a max and min temperature preset); LED lighting (fixed, not LED bulbs in traditional fixtures); low-flow toilets and faucets; HE laundry units and humidistat controlled fans bathrooms.  

We do monitor the utilities consumption and it took us a couple of years to establish a baseline (as we continue to make efficiency improvements).   Our lease does have a clause reserving the right to recover costs associated with excessive resource/utiltity consumption (hence the need for a baseline). Many students are on their own for the first time and have no idea how to manage their consumption - i.e. how much does that 20-minute hot shower really cost.  We will warn the entire house if there is a significant overage or if they are trending higher than the norm.     So far we have not had to bill for an overage.   

It also helps to have a "den mother" living on-site, who can help keep things under control.

In our student apartments and houses rented as a single unit, we offer a "utilities budget" agreement as a supplement to the lease.  In this agreement we set an amount the tenants pay into the budget each month (in advance).  The utilities remain in our name, but we provide the tenants with copies of the utility bills each month/quarter as they occur; giving them full visibility of their consumption.   

Every three months (quarter) we reconcile.  If the amount the tenants have paid into the fund exceeds the cost of utilities we offer the tenants with a choice to:

a) leave the surplus in the budget in anticipation of higher utility bills in the coming months (i.e. winter); 

b) apply the surplus to the next months rent; or

c) refund the surplus (only an option at the end of the lease).

If the cost of utilities exceed the contributions by the tenants (it's only happened 3-times), we invoice the tenants and the under-run is due at the start of the next month.

The Utilities Budget gives the tenants the convenience of a single payee, but does not leave the Landlord holding the bag for careless resource usage.

How do you handle evictions/non-payment in this scenario? Thank you!

@Crissi Peters

Depending on the tenancy legislation in your jurisdiction.  Many times roomers are treated the same as any tenant, so the notice, termination and eviction process would be the same.  Occasionally, roomers have fewer rights than tenants may be easier to evict.  In our experience, the former is the most probable.

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