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So you’re buying a house to rent out a room?

I’ve actually received quite a bit of e-mails asking me specifically about being prospective homeowners with the intent of renting out a room shortly after closing.

Here are some things to consider:

  • You’re pretty much starting from square 1, so you’re starting from a clean slate versus being a current homeowner trying to rent out a room
  • Do I tell my realtor my intentions to buying a house to rent out the rooms?
  • Do I buy a bigger house than what I need?
  • Location dictates rent price
  • Convert a single family to separate living quarters

STARTING FROM SQUARE ONE

Let me first start off by saying, that if you’re thinking about renting out a room, you should just do it if you’re single or a newly wed couple without kids. My biggest regret is not renting out a room after I bought my place. I was single, I had a room that was essentially empty for nearly a year before I even thought about renting out that room.  Looking back on it, I cringe at the income I could have earned from that empty room.

The impetus that put the idea of renting out a room was my decision to go back to graduate school. I needed way to make extra money to pay for graduate school instead of taking out additional student loans.

I commend those thinking about renting out a room immediate after joining the ranks of homeownership.  Here’s a post I wrote answering a reader’s question about the topic.

DO I TELL MY REALTOR MY INTENTIONS OF BUYING A HOUSE TO RENT OUT A ROOM?

I strongly feel that informing your realtor your intent to rent out a room to be more advantageous.  I feel a realtor would guide you in what you’re looking for. In most likelihood, a realtor has dealt with buyers who were probably thinking the something.

DO I BUY A BIGGER HOUSE THAN WHAT I NEED?

Since you’re basically starting from a clean slate, I would recommend buying a bigger house than you need.  I also recommend choosing a desirable location where the houses are conveniently located to highways, grocery stores, and so on. This makes it more attractive to prospective roommates than a house that’s more remotely located.

One reader who was in the position had this to say about this point:

We bought this particular house because it worked out great for having room mates. If we weren’t going to do that we probably would have bought smaller.  The house is about 4000sq/f with another 1500sq/ft of covered outside living space including a wrap around covered deck and 3 other private balconies adjoined to other bedrooms. It’s all spread out pretty well so it worked with having lots of people under the same roof with still having plenty of privacy.  My reasoning was that if I bought as big of a house that I could afford, I could maximize the rental situation because the marginal income increased significantly.

Buying a bigger house is recommended, but not recommended if you can’t afford it without the extra income with roommates.

LOCATION DICTATES RENT PRICE

With a desirable location, you can be certain to have more inquires and have a choice of picking your roommate.  In contrast, if you’re located in a remote or less desirable area, you may have less inquires and smaller pool of roommates to choose from.  With more inquires, you can command a competitive market rate for rent prices because if someone wants to negotiate a lower monthly rent, you can turn them away while having more inquires leading to a roommate.

CONVERT A SINGLE FAMILY TO SEPARATE LIVING QUARTERS

I don’t have any experience in this aspect. Some folks asked questions regarding this and I wrote about it.  What I do have experience with is after renting out my spare room, I realized how profitable the idea was.  I then renovated my basement so that I can move into it to rent out the current room I was living in.  I even took out a 0% interest credit card for 12 months to finance $3,600 worth of materials to renovate my basement. I paid back the money within 6-months and there after, the investment paid off.

There’s certainly money to be made by renting out a room, the amount or cost of the renovation should dictate whether you can pay back the initial investment and start turning a profit.  My only advice is to rent out a room or a livable quarter and make some money first before undertaking a full on renovation project in hopes to re-coup your money.