Successfully Purchased 2nd House using Rent by the Room Strategy
Rent by the Room (RBTR) allows me to maximize the rental income from a home, while still having long-term tenants on leases. Instead of renting out the whole house, I rent out each room individually. Vacancies are minimized because I just have to find one person to rent one room at a time, rather than a family or group to rent the whole house. Also, the price per room can be varied which allows me to dial into the market rate each time a new rooms comes available to rent.
RBTR – House #1
I purchased my first home in Denver in 2010 with the intention of renting out the rooms to offset my expenses. At that time, I needed to find something that wouldn't require much work because I had very little cash. I found the home on the open market and it had been newly remodeled so no rehab was required. It was a 3/2 with an unfinished basement and I purchased it using a first time home buyer program through CHFA, which required only $1000 down. My first renter was my cousin and within a couple weeks I had filled the last open room. The rental income covered my mortgage and part of the utilities which was great!
My next step was to save up enough cash to build-out the basement into an apartment and add another renter. After a couple of years I was ready and received 3 quotes from contractors, which I determined to be too high and decided to do the work myself. After a year of construction the project was complete and I found another renter to occupy the basement. At this point, the rental income was covering all of my expenses and providing some positive CF each month. At this point I was living for free!
RBTR – House #2
At this point I had owned the house for roughly 5 years. I moved companies and was now commuting from south Denver to Boulder every day, which was taking a toll. I wanted to purchase another home and move closer to work so I figured I could repeat the model of the first home. The RE market in Denver had grown significantly and I couldn't find another 3/2 home that I could apply the same model to. I decided to find a larger home so that I could rent out more rooms from the start, so I found a 4/2 which would allow me to cover the mortgage from day 1 using 3 renters instead of 2.
Side Note: This is also about the point in time where I joined Bigger Pockets! I began working with Matt McKay, who is a local RE agent and BP member, to talk RE strategies and facilitate the purchase. My two brothers are also RE investors and serve as great resources for honest advice and strategy.
With my salary, qualifying for a second property took some work, but since I had several years of rental income on the books, the first house was now seen as “self-sufficient” from the lender’s perspective, which allowed me to qualify for another owner occupied loan. I made several offers and finally went under contract. Some rehab was required so I re-finished the wood floors and completely gutted and remodeled the two upstairs full bathrooms to make them attractive to prospective tenants. Immediately after closing on the property I began the demo work on the bathrooms that night, with the idea that I could complete the project and have the rooms rented before my first mortgage payment was due. Amazingly enough I had one tenant move in BEFORE the bathroom renovations were complete and the other two moved in within days of project completion.
Converting House #1 to a Stand-Alone Rental
Now it was time to move into house #2. I needed a process to keep the RBTR strategy alive. I offered one of the current tenants whom I trusted the job of property manager. In exchange for a break on the rent, master bedroom, and a garage spot their duty was to manage the property. They are responsible for collecting the rent, finding new renters whenever required, common area cleanliness, and reporting on any required maintenance. After I moved out of the house the extra room was rented within two weeks and the additional CF creates a sustainable income generating property. Success!
General Comments about using RBTR
The RBTR strategy can be great, but it certainly has its’ challenges. It’s not for everyone, but in my case I was young, did not have a lot of cash, and was planning to live with other people anyways so it has been a great way to get into the real estate investing world.
Here are few comments about using this strategy (in no particular order):
- Develop a good tenant screening process
- Discuss rules and expectations before the tenant moves in. It much easier to enforce something that has been previously agreed to.
- Be fair on rent and how to treat your tenants. Quality tenants find quality deals.
- Collect a deposit before the tenant moves in. A deposit does not count as last month’s rent.
- Meet face-to-face and/or skype before the tenant moves in. Texts don’t count as a screening.
- Do not settle for an awkward situation just to get the room filled – it only gets worse
- Try to find tenants with opposite schedules so not everyone is home at the same time
- Try to find tenants with similarities. Sometimes your tenants become great friends!
- My rates for RBTR range from $625 - $750 per month
- If someone needs to move out due to life circumstances, be fair and work with them.
- You can rent your extra garage spaces
- I’ve found all of my tenant on craigslist
- Have a good lease agreement
- Use a background check tool
- Learn to let the little things go