Renting to a few single people instead of a family, better cash flow but more hassle?

Question

Okay, so I have a 5 bedroom house that I live in currently and rent out to friends as well.  I'm doing a cash out refi and then buying another one to move into and bring them along with me.

I want to rent this one out.  I was thinking about basically doing the same thing, finding a bunch of my friends and renting each room out individually.  I proabably could make 300 a room (including the office) so that would be a gross rent of $1800 as opposed to the market rate of $1500.  I would also have the $1200-$1300 rental income coming from the new house I'd be living in.

The downside is I would now have 11 checks to follow up with every month, so there's more hassle.  But cash flow would be better.

Has anyone out there tried this?  It's especially nice right next to a college or university, which I am.

One other thing, I'm refinancing Owner Occupied and my plan is to buy the new one a month or so after with FHA 203k OO financing.  This should be fine, correct?  From the lenders I've talked to this isn't mortgage fraud.

Joffrey Long · Answer

1)  If you refinanced and told the lender you were going to occupy it as your primary residence, and you aren't really going to occupy it (for the long term, not just for 6 weeks), then it's owner occupancy fraud.

2)  With respect to renting different rooms to different people, here's a twist you should consider:  What about insurance?  What about liability coverage on your insurance?

Are you covered for regular LANDLORD rental to regular (one household, one family, one couple, one person) type tenants only, or are you also covered or operating a "rooming house?"  -which is what you're doing - if you rent different rooms to different folk.

Problem (and this gets ugly here):   Tenant in room # 3 comes home drunk and beats up or rapes tenant in room # 4.

Tenant in room # 4 (or worse, their estate...ouch)  sues you for failure to provide adequate security and failure to properly screen other tenants, etc., etc.  Big lawsuit.  Real big.  Bigger than all the extra rent you could collect in 131 years.

So, you go to your insurance carrier and seek coverage.

Do they cover you?

Jon K already alluded to some of this, but I'm spelling it out a little differently.

Sorry to get ugly here, but having been sued by tenants who got hurt (not in that way, thank goodness) I'm a little leary.

That's what years and years of being a landlord will do to you.  Take the cheap and easy short cut and check these things out in advance, you don't have to learn the hard way as I did on many things.

Joffrey Long

Michael Renna · Answer

Has anyone heard of Cash@square.com?  It is free and you submit payment via email.  If you have ever paid for anything with a iPhone, you have probably used Square.  This is the same thing and THEY DON'T CHARGE ANY FEEs!!!  I'm thinking about doing the same thing as @Asher Anthes but only 2 roommates for me.  Is there a better way to have the home in a trust instead of owning it personally?

Stephen White · Answer

Asher Anthes my business is all virtual terminal so I think I'm paying higher either way. But I see your point about the fees adding up on the rental payments. PayLease charges $10/month for the account and then charges you fees on top of that so I'd say that option is out for sure.

But listen to this idea! You could have them sign an automatic draft agreement and print the checks yourself. One signature allows you to print and deposit checks with a "no signature required" stamp. If you use Quickbooks or Quicken this will be an easy and nearly free solution. If not, there are a ton of options out there. In a previous business I used Check Writer, a $20 software from Best Buy or Office Depot. We printed 100s of checks per week and authorized every transaction via phone. But in some cases used printed forms that you could easily create and get tenants to sign, giving you authorization to print and deposit rent checks.

This way you can print the checks yourself every month and deposit them with no fees. Your only cost is $20 for the software and $20 for a box of 500 checks. It might even be a 1000 checks but I can't remember. Either way, this would be very inexpensive and super convenient for you.

Jon K. · Answer

Good deal about making everyone split utilities. Making $300 isn't too bad. You're living there "free" and making $300 off of it. Then again, to some people, $300 isn't worth living with 3-4 other people for too many years. Right now, I can see why you would want to do it for a while. Easier now than when you're older.

What about insurance costs? Are the costs more? Are you even covered in such a setting? Will your insurance even cover you in your current place? What about in your new place? More people = more liability, especially with students.

What about zoning? Income taxes?

Jon K. · Answer

I completely agree.

This sort of drunken raping/assault/accusation of theft is exactly what came to my mind. Liability is HUGE in "rent a room" scenarios. HUGE! You're having strangers live together. On top of that, they're college students who are more likely to get drunk themselves, and have parties at the property (inviting other drunk people over). Say someone under 21 drinks. Or, one tenant's boyfriend/girlfriend gets drunk and gropes another guy/gal. Or, one tenant gets made another another tenant and makes false accusations about another tenant, a tenant's boyfriend/girlfriend who stays over and took their belongings/acted inappropriately, etc. Or, tenant gets drunk and falls down the stairs and/or drives into the house (my friend had this happen to THREE of his houses. 3 times!). Yikes. You can put locks on all bedroom doors, but there's still potential liability. Another issue is just roommates fighting and one walking out, never to pay rent again. That's the least costly of the above scenarios.

It could even be something more innocent. Susie leaves a candle lit, and it burns down the house. Mikie has never cooked before, and leaves something on the stove... within a few minutes, a spark causes a house fire. Johnny leaves the BBQ pit unattended in the backyard and burns down your house (and the neighbors). (By the way, I NEVER allow fire pits, campfires, trampolines, or pools). Jim gets a hot tub and uses it as a drunken party tub. Bertha slips on the ice out front during a snowstorm. Timmy leaves the front door unlocked and there's a break in. Mikie overflows the toilet and floods the bathroom. Tasha's friend smokes on the front lawn and drops a lit cigarette that sparks. Sarah's electric toaster catches on fire. Ok, I'm scaring myself....

There's a million different things that can go wrong for even the best tenants, and a million and one things that can go wrong with bad/drunk/forgetful tenants. You want to make sure your insurance covers all of these occurrences if this sort of rooming house situation.

You don't want to get standard homeowner insurance just to have something happen and realize you're not covered in a rooming house situation like this. ... then you lose everything (house, contents, etc.). Or, worse, the house gets destroyed AND your tenants get hurt and sue you big time.

Definitely get good insurance that covers "rooming houses" like yours.

And, definitely have a strong lease that tries to disclaim liability as much as possible (get good insurance too).

My insurance would be cheaper if I DIDN'T live with my tenants. It's more expensive for me since I own it, and I live here. If I rented it out as a SFH, my insurance would be much cheaper.

I do have roommates myself. I screen as well as I can, do it month to month, have good insurance, find people above 22 years old (too young = party, whiny drama), and have a lease that hopefully would help protect me as much as possible if something were to happen. (And, I have good insurance... I make it a point not to let my tenant's know I have insurance. I want them to assume I'm not worth sueing and to *think* they signed away my liability.)

Asher Anthes · Answer

Jon K.  Right now I charge a rent price per room, and then I split utilities at the end of the month between everyone.  So, a typical month goes like this:

Gross rental income from 5 people: $1750
PITI: $885
Utilities + Cable and Internet: $550
CASH FLOW: $315

Keep in mind, I'm living in a nice big master bedroom with my own bathroom in this same house.  So, not too bad a deal.

I do know there could be complications renting to a lot of single people.  I would probably try to find someone I already know to be the lease holder, and then have them collect rent and pay me monthly, so I didn't have to worry about a bunch of checks and roomate drama.  Utilities would be in his/her name.

I think I still may be able to get 1700-1800 total in this situation.  I may still look at doing a single family for $1500.  We'll see once it get's closer to time.

Stephen  White  I try to stay away from paypal in my other business simply because I don't like paying 2.9%.  I'd rather the small hassle of depositing many checks once each week in the bank thats 2 minutes away.

I may be interested in something like Pay Lease.. is that a service by paypal?  I just don't want to pay 2.9% or even 1.9%.  In my opinion, the few minutes it takes to collect checks and deposit them is worth saving what would be over $1,000 in fees yearly if my annual gross rents were around $40,000.

Thanks for the input guys!

Stephen White · Answer

Asher Anthes well to be honest PayPal is probably my all-time favorite merchant service provider because they're so clear about their fees.. but you're asking a lot of your tenants if they don't already have an account. The simplest solution (that I've seen) designed specifically for collecting rent electronically is Pay Lease.

Jon K. · Answer

I'm surprised you can't get a little more than $300 a room. Is that before taxes?

Is it $300/room plus they pay their own utilities?

If you don't live in the house with the tenants/roommates, they're more likely to damage it more, run up the utility bills, etc. than if you're a live-in roommate.

More people = more damage, more utilities, more fights, more noise complaints, more parties, more hassle among roommates.

Say you get the $1800 in rent by renting the rooms. You'll get more property damage with college kids than you will with single family tenants. Plus, you'll have people coming and going, sometimes moving with little or no notice since they're young and easily move. It might be difficult to find people willing to live in all of your rooms-- you might have one tenant who isn't friendly, or you might have all guy tenants (so girls don't want to live there), or you might just have trouble finding reasonable comparable roommates (some might be party types, other study types).

You could have more vacancies in the summer. I wonder if all of this vacancy, increased property damage, increased time showing/screening tenants, increased cleaning you'll have to do when someone moves out to prepare it for the next tenant, etc. doesn't make that $1800 "rent a room" vs. $1500 "single family home" number a little less desirable.

Are they paying the utilities themselves? You definitely DON'T want to include utilities in rent. No way. I've done the roommate thing where I paid the utilities myself, and tenant/roommates generally took advantage of the situation and the utility bills were much higher than they should have been.

Plus, it's easier to find 2 tenants than to find 12. The more tenants, the more work... and the greater number of people you have to deal with. More time for you showing the property, screening tenants, cleaning each time one moves out, etc. You'll have to deal with their messes, and probably have to hire it cleaned (or clean it yourself) each time someone moves out in order to prepare it to show to prospective tenants.

I wonder if there is any liability in renting out a room by room situation where you don't also live. If you rent to 2 girls and 2 guys, what if something happens between them or one claims something happened? Or, they throw parties and something happens? Or, if they underage drink?

You don't live there... what liability is there in renting out rooms to total strangers? Does that make it a boarding house or rooming house, and what issues does that mean in your area?

You'll have tenants claiming someone ate their food, didn't clean, didn't pay, threw a wild party, broke their XBox, drank underage, moved their boyfriend/girlfriend in, snuck in a pet, and similar roommate issues.

You could even have zoning issues.

In my previous town, 4 or more unrelated people living together would be a rooming house, which has to pay additional sales taxes on rent as if it were a hotel. Plus, my old neighborhood itself wouldn't have allowed that. My previous area also considered rooming houses as commercial properties, meaning 1) my neighborhood couldn't have a rooming house and 2) you had to pay higher property taxes (about double, if you didn't live in the house and it was a rental property). Maybe your town doesn't do that.. my old town was weird.

My old college town often had rentals where the landlord rented to one tenant, then that tenant would get plenty of roommates. My college town didn't care and didn't penalize the landlord or tenants for having so many unrelated people living together. In fact, one of my neighbors had probably 11 or 12 roommates living in a small house. Nobody seemed to care.

What does your insurance company think you of you renting out rooms in a house you don't live in who are strangers to each other?

Will you insurance company even cover such a situation, and at what increased cost for the insurance?

While I've seen it done before, most college houses in my area rent rooms only if they live there. If not, usually they rent out the whole house and let tenants find their own roommates.

I think I would do one year leases if I was you. Let tenants deal with roommate drama themselves. If they have month to month leases, it might be a huge hassle replacing people all of the time.

I have roommates now. I mistakenly included "bills paid" in my rent. Big mistake. Roommates are a huge, huge hassle and it's a pain to find roommates who aren't crazy, who don't suck, who pay, and who don't destroy the place. But, it is nice money and I would say go for it.

Asher Anthes · Answer

I do want to look into the online payment system.  Whats a good one that you reccomend?  Do they charge fees?

Thanks

Stephen White · Answer

Cant comment on the fraud stuff.. but I think the idea is right to rent out individually. You already have experience and success with this way and there are great tools to help you stay organized and keep things easy. For example I would recommend an app like LandlordApp to keep you organized and a rent pay system that they can pay online instead of you rounding up checks.

Renting to a few single people instead of a family, better cash flow but more hassle?

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