Why Having Roommates as an Adult (and an Investor) Is the Best

Roommates—and lions and tigers and bears, oh my!

When considering living with roommates, there are a few types of people in this world:

Share a space with strangers? All set with that!
Um, no. I am looking for my own space. I’ll pass.
Oh, you mean a boarding house? No, thanks.
I haven’t had roommates in like 10 years. No.

I have heard it all over the years—from people thinking I am crazy to people just simply not even beginning to comprehend how or why someone would consider this arrangement.

On the flip side, over the last seven years, I have had very little vacancy. In fact, I cannot remember a time where it took longer than 30 days to fill a space. Thus, the demand and the skeptics are both there.

I have been talking about the benefits for years and want to share the three main ones with you. Living with roommates:

Helps solve a nationwide problem
Reduces risk
Increases cash flow

Let’s dive a little deeper into each.

3 Arguments in Favor of Living With Roommates

Having Roommates Helps Solve a Nationwide Problem

I have not talked to someone in every city in the country, but I have talked to many across numerous states. Everyone agrees on one thing: their city has an affordable housing issue.

I am not talking about solving the homeless crisis necessarily. Instead, I am speaking about the blue collar, lower-wage-earning, honest people who are looking for quality places to live.

Can you find a place for $500 a month just about anywhere? Probably, yes. Can you find a quality place that is clean and well managed for $500? OK, that might be a bit harder. This is where my secret formula comes into play. (I am a math nerd, so I hope you can follow complex mathematics.)

Renting a single unit by yourself for $500 will, most likely, yield you a dingy apartment with a landlord who doesn’t care. Renting a shared unit with two roommates for $500 each will dramatically increase the odds of securing a clean and well-maintained space with a landlord who cares.

Here’s some math:

If Unit 1A with one occupant rents for $850 per month, the level of service will be X.
If Unit 1B rents to three occupants paying $500 per month each ($1,500 total), the level of service will be Y.

If the standard of service of X is less than Y, and 99.9 percent of humans desire better service over poorer service, is it more statistically probable that any natural human would desire Y over X or X over Y? This strange paradigm is present in many places throughout our daily lives.

Consider the following:

The Ritz Carlton is $750 a night; Motel 6 is $59 per night. Where will you receive better service and why?
A steak dinner at Morton’s for two costs $350; dinner for two at McDonald’s cost $14. Where will you receive better service and why?

Generally, you will receive better service at the higher-priced places because they are better able to afford quality staff, materials, food, training, and the like. Renting by the room is not any different—or, with the right landlord, it should not be, at least.

I am able to provide an excellent experience for my residents, because with the extra cash flow, I am able to be higher up on my contractor and service person’s importance list. This is because they know they get paid on time, and they know I am willing to pay a premium for quick, on-demand service. I am able to offer residents a safe space for them to reside for less than the cost of an entire private unit—with the “catch” that they will need to share the common spaces with roommates.

The reality is, residents are paying less than it would normally cost to rent by the room while simultaneously receiving the same level of service they would if they were renting the entire property. However, along the same vein, the landlord is receiving more money.

Wait—the resident pays less but the landlord receives more? That is right. The resident pays less but gets more, and simultaneously, the landlord also gets more. Everyone wins.

Having Roommates Reduces Risk

How many of you have heard the argument for multifamily versus single family? It usually goes something like, “With single family, when the tenant moves out, all your cash flow is gone. With multifamily, even if someone moves out, you have other units that are still paying.”

I want you to think about renting by the room as a supercharged version of that argument.

Here is an example:

I have a three-family property. I am renting whole units out. If one person leaves, I would still have two more units to provide income.
I have a three-family property with three bedrooms per unit, and each bedroom is rented separately. If one person leaves, I have eight others still paying.

It is that simple. The inherent risk with rentals, vacancies, and losing income has just been micronized. The argument of multifamily versus single family is a very valid one, but this strategy mitigates those risks—even with single families.

Having Roommates Increases Cash Flow

For most of us, cash flow is our driver. I know some areas and some investors are driven by appreciation, but the majority of us are here for the cash flow and the potential to obtain financial freedom. This strategy gets you there faster.

Following are some examples.

Landlord has the option of renting out a building one of two ways:
- Option 1: Rent out entire units
- Option 2: Rent out individual bedrooms
Property to be rented: Duplex with three bedrooms per unit
Income generated per month:
- Option 1: $850 per unit
- Option 2: $1,500 per unit
Difference per unit monthly: $650
Total difference monthly: $1,300
Total difference annually: $15,600

The Bottom Line

With all great things, there are drawbacks. I would say there is marginally more management and maybe more turnover when implementing the rent-by-the-room strategy.

Yes, you do run into situations where roommates don’t get along. Yes, there is the dreaded food stealing on occasion. But once you get past these items and the criticism, you are left with a strategy that you can take almost anywhere. This strategy is a win for you, your resident, and the community at large.

How do you feel about renting? What do you think about renting by the room?

Discuss in the comment section below.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.