Renting to tenants by room?

Question

I'm considering an investment property (Providence RI area).  All the numbers seem good, but something I've not encountered before:  they advertise and rent each apartment by the room.  So instead of a 3-family having three tenants under lease, each bedroom is leased out to an individual.  Apartments are nicely furnished (except bedrooms of course), and landlord replaces the toaster if it breaks, for instance.

It seems appealing (more stable rental income, more profitable margins, etc.)  but I've only had experience renting out mulit-family's by the entire unit.

Has anyone had success or failure with the 'rent-by-room' biz model?  Good/bad/ugly?

Thanks in advance.  I'm a new member here (MA, RI, CT investor) and LOVE this biggerpockets thing!   Be well, have fun!

Dave

Joe Norman · Answer

I don't have first hand experience with the rent-by-the-room model, but one word of caution is to do your due diligence and make sure the building is properly licensed  for that use. Here in Baltimore there is a special license needed to do this that is different than the standard rental license. Good luck!

Anthony Thompson · Answer

@David Bellenoit it can work out better rent-wise, but it’s definitely a lot more management intensive. I know a few people who have rented buildings by the room (students in one case, not just students in another), and they all agreed on that point.

I also know one specific instance where someone paid a high price for a building because the previous owner rented it by the room, so the P&L looked great, and then they had so many issues they decided it would be much easier to go back to a standard per-unit rental.

Unfortunately the overall rent was lower so they had essentially paid a premium for the previous owner’s management model and then had to switch to a lower income scenario. It worked out great for the previous owner/seller, not as much for my acquaintance, the buyer/new owner.

If you want to be cautious/conservative, I’d recommend doing the numbers as if you were renting it out on a per-unit basis rather than the per-room basis, and see if the purchase price still makes sense.