Subletting in the Bay Area

[Braden Evans]

Situation Overview:

My brother has been living in the Bay Area for 7+ months now, and I will be moving there in May 2019 after graduation. We plan on living together and have been looking at apartments to rent. We're both trying to get our feet wet in real estate, and recently found a 5 bedroom house in renting at $5,200 a month. That would mean roughly $1,040 per room.

Our idea:

We believe this is a steal given the local market. It seems most rooms rent for roughly $1,400 per month. Our idea is to sign for the entire home ourselves and sublet out the other rooms at perhaps $1,350. This would mean our personal monthly rent would be cut down from $1,040 to $575 (This equates to $465 in monthly savings per person).

Thought Process:

I've been reading as much as I can on best practices on subletting to gain perspectives of both the landlords and ourselves. Here's what I've gathered:

1. Transparency - We need to be totally upfront about our plans to sublet with the owner and get an agreement in writing.

2. Tenant Quality Control -  Landlords are extremely worried about quality control of their tenants so people on BiggerPockets have suggested on other forums to let the landlord have the final approval on all possible tenants we qualify.

3. Risk of the possible vacancy on our parts - This would be a big risk on our parts by taking over the entire lease. However, my brother's church group is extremely well connected meaning young, single adults from the same community like to live together. His church group's values also consist of no drinking, smoking, partying, etc. so I believe there would be an advantage to us finding like-minded people to give the landlord high-quality, easy to manage tenants.

Core benefits for both parties:

We see this as being valuable for both the landlord and us as they get peace of mind knowing we're fully responsible for all rental income damages for all tenants, and we would gain value by the increase in personal cash flow, as well as learn the ropes on tenant management.

Other than what I've described above, what am I missing?

Are we stupid to do this? Or is this a good opportunity? Would this be a bad decision to make given our circumstances?

What other best practices or pitfalls would you suggest I and my brother look at before getting into something like this?

Any advice or recommendations would be greatly appreciated!

[Robert C.]

@Braden Evans, A few things come to mind about your idea just thinking from the landlord's perspective. 

For one, they're probably still going to want you to personally qualify for the house on your own credit. The landlord will want to know that if your business model doesn't work out that they will still get paid. Certainly showing a minimum of reserves may help if you don't have the income/credit to support. I could be wrong, since landlords do come in all shapes, but owners have been spoiled by a great renter pool over the last number of years and can have high expectations. 

6 bedrooms in Menlo Park is a pretty big house with probably a lot of maintenance expenses. The owner may want their renter to take care of most if not all of it so they don't have headaches. Also, your renters may want certain things in place, like working internet. Those types of expenses will either have to come out of your pocket, or you may have to add to your rental price. 

$6200/month is really low for an SFR of that size in Menlo Park. I wonder if there is either location or deferred maintenance issues. Just a heads up. If it is a true diamond in the rough, it may rent fast.

As I'm typing this... I'm thinking of some rentals I manage in Redwood City. We get a lot of facebook folks since it's right next door to Menlo. I might be interested in working something out if the location suits you (in particular I'm thinking about a 3-bedroom apartment we just remodeled). PM me if you like, and I can send details. I thought about renting out the rooms individually, but have been avoiding because of the additional management it would take. 

Good luck with the property visit, and welcome to the Bay Area!