Renting Out Rooms — A Rental Cash Cow
I can’t think of a better way to explain renting out rooms than as a cash cow. Far and away room rentals have been one of the most profitable ways we’ve found to make money on rental properties.
Properties that may not have been suited to generate enough income to be attractive as rentals otherwise. That might be a bit confusing so let me explain.
With a normal half duplex that isn’t suited and where I operate out of, I may be able to get $1,000, on the low end, maybe $1,400 on the top end in monthly rent if I rented it to a family. With a mortgage payment of around $1,000, taxes of $150 per month insurance around $30, that really doesn’t make much sense as a rental property and I will probably end up losing money.
However as a rooming house with five separate rooms I rent out, everything changes.
I’ve got several long term tenants in this property who I’ve kept the same rent for a couple years for as they take good care of the place and treat it like a home, not a rooming house. I’ll use these numbers to give you an idea.
I have five rooms in the property. Two rent for $170 per week, one for $175 and two for $200 (the newer tenants and the current going rate). Each week that becomes $910, in four weeks that becomes $3,640 which is significantly more than the $1,400 max I would make from a single occupant.
Now I do supply internet and cable and I do pay for all the utilities, and my maintenance costs are higher, but I still clear over $1,500 a month when it’s full. Note I did say when it’s full!
Normally in properties like this you have much higher turnover, so it’s important to stay on them and fill vacancies ASAP. This particular property though my last vacancy was almost five months ago, for a week, and before that it was probably four months prior again! Did I mention cash cow?
It’s Not All Rainbows And Unicorns Though
It’s not always like this though. I do have problems. I do have to evict tenants, there are more things that break due to more wear and tear, but when they work, they do work extremely well!
Plus, as I pointed out earlier, it takes a property that wouldn’t really work as a profitable rental and turns it into something that works like gangbusters.
So, if you’re stuck with a property that doesn’t quite cover the expenses and that you can’t sell maybe you need to entertain the prospect of running your own rooming house!
If you liked this article, you may also want to check out this one Renting Out Rooms – Rooming Houses As a Rental Option
Or check out my Rooming House Resource page by clicking on the following image,
I want one room for one month 150 Euro
Really? My daughter wants a pony too!!
Sooo, the funny part is I actually do get emails like this. Not sure if this person is serious or not, but here’s some issues. First, I don’t negotiate. My price is my price, the only way I negotiate is upwards, so how’s $175 Euro’s for two weeks?
Part two, this guy has no idea where my properties are, so why bother? Oh, unless it’s a scam…
I get emails like this at my regular sites quite often as well, but usually they wish to pay for six months in advance by wire transfer. They also like to include extra for me dealing with the movers and some incidentals. The scam part being once any transactions are processed they suddenly have to back out and they offer to let me keep a portion of the payment and only want a portion refunded.
Once you’ve refunded you find out a couple weeks later the original transaction was fake and you’ve now paid someone to rip you off as your money is long gone. So be very aware of opportunities that sound too good to be true.
Bottomline, Waheed, if this is a serious email, you’re out of luck….
Bill
Struggled with property insurance for the last several years. Any tips or idea to get rooming house insured ?
We had to move to a commercial insurance package rather than regular home insurance. It was more, but it allowed us to move forward.
Bill
My house was prior frat house next to college, with 17 rooms of 22,000 square feet. I am renting rooms out to the college kids.
Student rentals can be huge! and with 17 rooms I am betting there is also a bit of cash flow involved….
Bill
Bill,
I have about 10 rooming houses and 3 regular rentals and a full time job. I still need financing to get loans and the job is good for that. The money I save from the rooming houses go toward another house purchase coupled with a signature loan. In essence, I save about 15k up from the rooming houses, call a bank and borrow 15k, and then buy a house for 20k and have 10k for repairs. Then I will do this again and again; however, still having the signature loan to pay on for 5 years for each. The cap on the signature loan, I was told is 50k. I guess my real question is, how do I know when I can leave my job?
Buying properties this way helps me to take advantage of the buyers market. I understand if I weight and save up money I could buy each property cash, this just seems like a better plan, your thoughts about this method……?
.
Hi Jameel,
It sounds like you have a system and a plan in place to get where you’re going which is the big part of the battle. I was in a similar situation when I started as I needed my job to qualify for mortgages.
As to when can you leave your job, perhaps you’re asking the wrong question here. Maybe it should be at what level of cash flow can I comfortably leave my job, or what monthly commitments do I need to have satisfied to leave my job.
To get answers to those questions, maybe you need to start by asking questions of people who can help you.
If you’re going to continue to purchase properties, when will you be earning enough qualified income from the rentals that you don’t need the job to qualify. You might need to talk to a mortgage broker to determine this. You may even already be there, or you may need a couple years of rental history to qualify, your broker can guide you.
If you leave your job, will you have enough income to maintain your current lifestyle? This might require a combination of looking at your income and talking to an accountant to make sure any tax implications are dealt with and that your money is properly accounted for. If you’re operating via a company it may come down to paying yourself a dividend, or salary and that is where the accountants expertise will help your unique situation.
If you plan on purchasing more properties, what other options to you have for financing? Private loans? Investors? You may be able to get private money for higher interest rates, but it may be worth it. You have to understand your cash flow and your costs.
Alternatively, you can wait as you mentioned and make paying off properties a priority. Once you’ve got a few paid off your cash flow will far exceed your expenses and potentially make it easier to access more money either via mortgages or lines of credit on your free and clear properties.
I’d just make sure you have an exit strategy at the back end. Rooming houses can wear you out over time. The number of tenants you have to deal with magnifies the good and the bad. More cash flow, but exposure to more opportunities for bad tenants. This brings it full circle to what your long term plan is.
So not sure if I answered your question or just gave you more to think about!
Bill
Hi Bill,
I was wondering if “Rooming Houses” are in fact illegal? I recently spoke to a mortgage broker who advised me that renting rooms within a house while not living there is illegal and would get shut down if tenants call 311 to report. But I see rooming houses all the time? What are the laws around renting the individual rooms within a house? And what are your thoughts on taking the risks of renting this way? Could we apply the Innkeepers Act to our lease agreements?
Hi Sam,
I see you posted the identical question on a couple of my sites. Since I’m here now, I’ll answer it here.
A blanket statement like Rooming houses are illegal is the equivalent of saying all tenants are bad. Or all landlords are evil. It’s just not completely accurate and a little shortsighted.
The important part for any landlord who goes down the route of operating a rooming property is to understand the local rules and bylaws and this is probably what’s tripping up your mortgage broker. Rules, bylaws, zoning and how they are enforced differs from state to state, county to county, province to province, city to city, town to town and even district to district.
Understanding how the rules work in your region allows you to know what or how you can operate a shared accommodation property. Perhaps where your broker lives it’s illegal, but perhaps more realistically he tried obtaining a mortgage on a rooming property for someone and found it’s a bit more difficult as not every lender will provide mortgages for those types of properties.
And understanding those rules is part of your homework if you wished to proceed down the road of operating a rooming house. My thoughts don’t really matter, although at one time I’ve operated as many as 55 individual rooms spread across nine separate properties and know it works.
It can be a lot of work at times, but the trade off is it provides significant cash flow to balance it off. So for me the risks/ trade off of time and less quality tenants worked out quite well.
Since I know the region you’re from I can also tell you the Innkeeper’s Act could apply, but that depends on the property, how you license it if you license it or are required too in your specific municipality. If it’s a regular house where you rent rooms out of, you will typically be held to the sames Residential Tenancy Rules as normal tenants.
Bill
It has been on my mind for some time,how to go about 1= buying 2 is it worth it 3=?
Hi Vincent,
Buying requires you to be able to get financing. If you can get financing on a second property, you can likely get financing on a rooming house. The difference being some lenders won’t finance a rooming house so you may need to go through a mortgage broker and you’ll need to explain specifically what the property will be to them.
Is it worth it? Perhaps, what’s your end goal? Is it a retirement vehicle, is it a job replacement vehicle? Or is it something you want to just experiment with?
If it’s to be used as a long term retirement strategy you may be better off looking ta a suited property. Suited properties are easier to deal with and make for a simpler long term plan.
If you’re looking at a way to get out of your job, depending on your current income, you may only need two or three rooming properties with high cash flow to replace your monthly income from a full time job. The catch being you may need the full time job to get additional financing for more properties.
If it’s just an experiment, it may not be worth it. It can take a lot of work to get a property set up as a rooming house and much of the benefits really start rolling in two, three or even four years later. I’ve established relationships with companies who bring workers in and I’ve created many other relationships in my area that create a steady stream of repeat and referral clients that make filling the rooms even easier. People just know I have a short term solution and tell their friends!
Hope that provides some food for thought!
Bill
I have a question is there rules and regulation that the city have in place for renting out rooms or calling your property a boarding house…..?
Hi Eldridge,
There quite often are and it depends on where you are located and how the local rules are set up governing rooming/boarding properties. These can be either mandated federally, by the state, province or county and even by the municipality.
Sometimes due to all the different parties involved, there can often even be overlap and confusion depending on which set of rules you look at. Some places position rooming houses under general rental property, some deem them as fitting into the same category as bed and breakfast properties and others set them up uniquely under their own category.
Since it varies so much, you almost have to contact a couple levels of government around you to try and get all the answers.It may be as simple as getting a General Business License to operate the property, or you may have fire and zoning codes you have to get approved and permitted for before you can get a specific rooming/boarding house permit to operate where you are located.
Once you get this far, you may also run into other legislation that restricts how many individuals can live in the property depending on zoning, licensing or local bylaws and/or even restrictions on how you can deal with evictions due to the type of rental it is. Some areas position rooming properties as entirely different than regular rental properties and they have specific legislation dealing with the roles of tenants and landlords and the specifics on dealing with evictions, rental increases and housing conditions.
Now realistically many of the smaller operations are never licensed and still operate, but if you are running it as a business or as part of bigger company, you’ll want to make sure you know the basics at the very least.
Hope that helped answer your question, or at leas pointed you int he right direction,
Bill
Just interested.