How to measure cashflow when renting out rooms

Question

Hello all. This is my first post here so I apologize if it is in the wrong place. I recently graduated college and renting a place near where I work. The part of the city where I live has a relatively good rental market with a lot of young professionals renting houses/rooms, but not very many buying houses. I began thinking of purchasing a home with multiple bedrooms, living in one bedroom, and renting out the remaining rooms. I still am trying to think of this as an investment property, and maybe that isn't the correct way for me to think about the house. My first question would be is that the correct mindset to have regarding my primary residence (that it is an investment property)?

My second question is, how should I measure cashflow in this situation? I have come up with a few ways which I have included below, and I am sure that there are countless other ways as well. If anyone has any suggestions, I would welcome the advice. Thanks

Cashflow 1: Rental Income - expenses

Measure cashflow as if I didn't live there

Cashflow 2: Rental Income + What I currently pay in rent - expenses

Measuring the cashflow difference between owning a house and my current living situation

Cashflow 3: Market Rate Rent - expenses

This would measure what I think the market rate rent is of the house that I bought. In this method I would be counting the rent that I "charge" myself as income

Al Williamson · Answer

@Zachary Miller welcome bruh!

Hey, you're talking about a house and it's value is not based on a capitalization rate. You would need a 5+ unit building to worry about that type of thing.

Your calculation on cashflow is only relative to how it improves your life or builds your bank account.

All your listed ways are valid. You can use English units, metric units, paces - they all measure length. Don't over think this one.

Zachary Miller · Answer

@Derek Carroll thanks for the reply. Do you have any specific recommendations as to how I should analyze potential properties?

For instance, lets say that I can find a house that, if I were to rent out the entire house, would net a positive cash flow. With my living in one of the rooms, I lose the income from that room. From my initial calculations based on recent house sales and rent prices, it may still be possible for me to have a cashflow of about 0 while living in a house. This would equate to me living in a house for free, a huge savings from my perspective. This would not make a great investment deal if I were to look at it purely as such, due to not having a significant, positive cash flow.

If I were to factor in the opportunity cost, as you put it, the best forgone conclusion in this case (continuing to rent) would be that I would lose liquidity in some funds used as a down payment, but I would also have reduced living expenses and equity in a home. I feel like I should consider the opportunity cost in my calculations, but I am somewhat unsure of how to do so. I understand that cashflow is not the correct term for methods 2 and 3 listed above, but basically what I was wondering is whether people recommend that I use cashflow or some other metric given my situation. Thanks!

Derek Carroll · Answer

@Zachary Miller you should absolutely think of this as an investment.  While it's non traditional, nothing ever is standard.  Don't expect to sell it based on investment income so make sure that you're buying and selling based on typical single family metrics.  If you can rent out rooms then even better.

for cash flow calculating, it's pretty simple, only count actual cash in and actual cash out.  don't use the other averages and market estimates or opportunity cost/savings here.  Use cash flow metrics for two purposes 1) find actual cash flow, at the end of the day ( obvious but i had to say it).  if a property gets you $500 per month after paying all your bills then its nice to know. 2) determine cash on cash return. this will help you compare investment opportunities to find which will be the best use of your dollars.

as far as looking at the rent you currently pay, that's an opportunity cost type calculation that you would do separate from cash flow, but certainly worthwhile to do.  Many times i'll do 2 or three types of analysis on a deal.

Brian Mathews · Answer

Hopefully the casino won't be in your neighborhood.     That likely will depress property values rather than increase them due to the overall types of people they attract and business associated with that.   I'm not sure that renting rooms classifies as an investment property.   It surely can help you pay down your mortgage faster if you are wise about it and apply your roomies nt money t

Zachary Miller · Answer

Hey Jeffery. Thanks for the advice. You bring up a lot of really good points. I hadn't thought about targeting multi's specifically but that is worth looking into further to see if it is feasible. The neighborhood that I am in doesn't have a lot of multi's, but I believe that there are a few duplexes.

As for the exit plan, I had thought about going in with a buy and hold strategy. I believe that the rental income would be able to have positive cashflow if the entire house was rented out. If that doesn't work out, the addition of a new casino in the city has generated a great of development funds which have been directed to this neighborhood in the next couple of years should (at least in my opinion) allow the housing values to appreciate enough to keep up with inflation at the very least if I later decide that my future family's situation makes keeping the house unfeasible.

Zachary Miller · Answer

Hey Al. Thanks for the reply. I probably was just over thinking this one. Being that my house will be my largest purchase to date, I have a tendency to over complicate some of these things. Thanks again!

How to measure cashflow when renting out rooms

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