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Have you ever thought about slightly lowering your rent if your roommate agrees to rent long term?

Most people get into the mindset of getting the highest rent possible and forget about the other half of the game: the rental term.  In order to maximize your rental income, you really have to consider both.  Your real annualized income is a factor of two key components:

1.  The Rent Price

2.  The Term, or The Length of Time A Roommate Stays

Your total rental income is the product of these two elements.  Obviously, you want to get the highest rent possible for your area—and you want a long-term renter so that you get that income month after month without fail.  The best combination of these two factors will produce the highest rental income for you.

Let’s take the example of two potential roommates I had to choose between a few months ago.  We’ll call them Rachel and Amy for the purpose of our analysis.  Both roommates were a good fit for my spare bedroom, and so choosing between them was a pure financial decision.

Rental Income scenario with Rachel:

Rachel was moving in for only 9 months, but she was willing to pay my full asking price of $600.

Rental Income scenario with Amy:

Amy, on the other hand was looking to live in my townhouse for 12 months, but she could only afford to pay $575, and so asked me if the rent could be reduced a little if she agreed to stay for 12 months.

I chose Amy as a roommate over Rachel because the total rental income would be higher.  Picking Amy as a roommate would provide me with $6,900 ($575 X 12 months) of rental income versus $5,400 ($600 X 9 months) with Rachel.  If it took me a month to replace Rachel, that brief vacancy would still bring my 12-month total below the income I got from Amy.  And don’t forget the cost of advertising for a new roommate, plus the time and trouble of scheduling appointments, multiple showings, rental agreements, screening, and selecting a new renter.

As you can see from this example, the term is just as important as the rent price.  A roommate who rents for a longer length of time at a slightly lower rate may generate more rental income than someone who pays a higher rent price and stays for a shorter time.  Of course if the difference in the rental price were significant, you would have to balance to short-term income with the probability of filling the vacancy quickly in the current rental market.  The most important thing is not to let your spare room go unoccupied, because if the room you are renting out is vacant, it will not provide any rental income.

Like any other business, the rental game is all about the bottom line.  You can risk losing income with a high-priced short-term lease, or you can take the security of dependable monthly income to the bank.

{ 3 comments }
  • Zuleika Donahoe June 16, 2010, 1:50 pm

    You have made a very good point. This applies to any rental income. I’ve had consider this for my rental property as well. You can lose a lot of income if you hold out for the higher rent price

    Reply
    • Mike June 17, 2010, 6:47 pm

      You always have to keep both variables in mind. Glad you enjoyed the post!

      Reply
  • Clifford June 30, 2010, 10:04 am

    Mike, thanks for stopping by my site!

    You’re doing a good thing here. Renting is a great way to either boost your income or, in your case, accelerate your mortgage pay down period.

    This is great article. Most people get blinded by the higher rent without thinking in terms of vacancy. If your room goes unrented for a month, or even two, that extra $25/month you would have received for 9 months would be gone before the first vacant month had passed.

    Reply

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