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Want to Pay Off Your Mortgage Faster? Rent Out Rooms in Your House
How do you turn a spare bedroom into cash?
The Penny Hoarder has previously shared tips for renting to friends and family, and advice on renting rooms to travelers. But if you want a more consistent income, aim for long-term tenants. How lucrative can this strategy be?
I paid for my first home twice over by renting out rooms.
Yes, over the years I earned at least twice as much in rent as I paid for my home. Once I paid off the mortgage loan after five years, I lived for free — and had extra income. I was able to travel while my tenants deposited their rent directly into my bank account.
Were there problems? Sure. Some tenants were loud, others were messy, and one woman went to jail. But there weren't many financial issues. I had about 16 different roommates over the years, and the worst financial problem I had was one of them moving out without paying me the last $10 he owed.
How I Rented Rooms in my House
I don't want to insult anyone, and some of my tenants became great friends, but in my experience, many people who live in a rented room have trouble handling their finances — that’s one reason they’re renting rooms instead of their own places. I wanted to keep my my boarding house operation as simple and easy as possible, so these three rules were crucial:
- Don't take a security deposit.
- Rent according to the renter’s paycheck schedule.
- Include all utilities.
You may want to arrange things differently — and I’m not a lawyer or legal advisor, so take my advice with a grain of salt — but here’s why I stuck to these rules.
First, a security deposit isn't so important when you live in the same house as your tenants. You're there to monitor what's going on, after all. Plus, the extra financial burden might scare off good renters who have income but don't know how to save. Finally, laws about security deposits (when you can keep them, what to do with them) just complicate matters. It's easier to avoid those complications.
My renters received weekly paychecks, so I charged by the week. The reason is simple: people don't always plan well, so it's best to get the money while they have it. Most of my roommates paid on time with few problems, but some of them would have had trouble saving up for monthly rent. If you rent to someone who gets a paycheck every two weeks, charge a bi-weekly rate.
Include all utilities in the rent. I would never do it any other way. Who wants to argue about which person is using too much electricity or when the bills have to be paid? If the heating bill goes too high, just raise the rent and forget about it. My renters who had previously shared bills with roommates appreciated the simplicity of a weekly payment that covered everything. Some of them stayed for years.
How Much Should You Charge?
I had small rooms, and the last time I rented them out was 10 years ago, so my rates were low compared to today's norms. I charged $65 per week for one room (the size of a large closet), $75 per week for another and $80 per week for the largest bedroom, which became available once I got married and built an efficiency apartment on the back of the home for my wife and myself.
If you do the math, you'll notice that those rents add up to $11,700 per year. The cost of running my home was about $3,500 annually. That was for taxes, insurance, utilities, maintenance — everything. I estimated that having other people in my home added less than $20 per week to my costs, so most of the rent was pure profit.
To determine what you can charge, check Craigslist’s “rooms/shared” category, under “housing.” If some offers aren’t clear, call the owner and ask. You want to be competitive with the places and terms that are most similar to yours.
In many areas you'll get more than $100 per week when you include utilities. On Craigslist for our area (near Sarasota, Florida), these are the first few ads that show up as I write this post:
- $120 per week (with a pool the tenant can use)
- $450 per month (plus the tenant’s share of utilities)
- $650 per month (with private bathroom and all utilities included)
Another advantage of charging by the week is that it makes the rent look lower than it is. For example, renters will see $125, multiply by four weeks, and think it is $500 per month. But 52 weeks times $125, divided by 12, equals $541.67 per month. I told my renters what the monthly tally really was, but they still thought of it as four times the weekly rent.
Can You Live With Others?
Renting out rooms isn't for everyone. If you need a lot of privacy or have a hard time dealing with multiple personalities (yes, sometimes in the same person) you should probably look for another way to make extra income.
Even if you like having people around, you have to lay down some house rules. I posted mine near the front door. Here are some of them:
- Be quiet after 9 p.m.
- Keep drugs out of my home
- Respect other people's possessions
- Wash your own dishes
- No shoes in the house
You might be worried about who you'll get as renters. If your intuition is trustworthy, rely on it when interviewing people. You’ll also want to call references, like employers or past landlords.
Of course the single best tool you have for screening potential tenants is right in front of you: the Internet. Mugshots.com is a good place to start — it's amazing how many people's faces show up on the site. You might not rule out everyone who has committed a crime, but the type matters (a pot bust in college isn't a big deal to me, but violence or stealing from a past landlord would definitely be a no-go).
Google the person's name as well, using any possible spellings and adding any known cities of residence. My wife and I were once ready to rent our condo to a woman when one final search using a different middle initial turned up a news story about her stealing drugs from the hospital where she worked.
What About the Law?
Renting rooms is sometimes in a gray area of the law. Generally, if your city or town allows you to rent houses, you can rent rooms. However, some communities have ordinances limiting the number of unrelated people living in a home.
In my opinion it's discriminatory to say three unrelated quiet people can't live in a house while next door a noisy family of twelve is perfectly OK. I tend to ignore unjust regulations, usually without consequence, but since you could get into serious trouble, you should probably investigate your local laws and follow them.
Your tenant has rights just like any other renter, but my guess (not a professional legal opinion) is that, in a dispute, a judge will favor the landlord a bit more when he is renting a room in his own home.
Renting a room by the week makes it more like a hotel than an apartment in the minds of tenants, so I never had to resort to legal measures to evict anyone. I only had to ask two people to leave in 10 years, and there were no hard feelings. Treat people well and communicate clearly, and you can avoid most problems. But it's still a good idea to have an attorney in mind, just in case.
How to Find Renters
Finding renters used to be trickier, but now it's as easy as placing a free ad on Craigslist. In addition, tell everyone you know that you have a room for rent — you may find your friends are able to vouch for potential tenants. My favorite strategy to fill an empty room was to ask past or present tenants who were quiet and paid on time if they knew of anyone looking for a room.
You can advertise on fee-based websites as well. When I checked Roommates.com, there were a surprising number of profiles for people who want to rent a room near me. You can sign up for free to see if there are many renter postings in your area, and then pay a small amount for a three-day trial in order to be able to contact them.
Make Even More Money Renting Rooms
If you want to make even more money, you might consider whether you can create additional bedrooms. I know a guy who made two bedrooms in a basement (with windows) for an investment of less than $2,000. If he rented each one for $120 weekly, they would pay for themselves in two months — and then generate over $12,000 in annual rent.
Your Turn: Would you consider renting rooms in your home to make extra income? If so, would you like to learn the eight other ways I earned money from my renters?