Rent by the Room

[Amy E.]

Hi,

I've begun exploring the option of buying an investment property with the intent to rent by the room. Where can I find more info on how to safely and legally accomplish this? Google has not turned up much. So far, I have checked the Fair Housing Act and I can rent to same-sex occupants without violating it (apparently if you have shared living/common areas you can restrict your room rentals to one sex only). I have also checked my local municipal code and there are no restrictions on the quantity of un-related folks living together.

The reason I wish to pursue this option is purely from a cash generating standpoint. I can meet the 2% rule (just barely) in my area with a SFR, but I am only going to get $800-900/month depending on the neighborhood. So while my percentages are fine based on investment amount, I'd like to get a little more bang for my buck so to speak. I checked my area and you can rent a room in a person's house for $400-500/month. I did not see anything advertised for a whole house that rents by the room.

Here are the various clientele I am considering:

Student - we have several small colleges in the area. However, because the colleges are small, most of the students are either adults returning to school or kids who are bunking at home until they get their core classes done and move off to a larger university. So I'm not sure how large the rental pool would be for this and I would be limited to specific neighborhoods near the schools.

Military - We have a huge military base nearby with mostly mid-career folks stationed here. I actually work on base, and know many of the folks there are on temporary assignments (3 years or less) so they come unaccompanied (without their family). Additionally, with every mid-high ranking officer come the junior officers to take care of them who have a much smaller salary and are always looking to save a buck. I can also get with the housing office and market through them. I would be limited to neighborhoods near the base (well, maybe not, but it would be a big selling point).

Disabled- We have a shortage of group homes in the area for the infirm. I have been approached by a friend of a friend who runs a home health care management company. Their clients are mostly folks who can't mentally fend for themselves, but are still physically capable of many things (they can bathe, feed and dress themselves; but can't shop, administer their meds or cook for themselves). Most are entitled from Medicaid to 8 hours of care per day (either babysitter or nurse type) and if three live together then they are cared for 24/7. In this scenario, the management company is responsible for ensuring the home is approved by the state as living quarters (and any licenses that go along with it) and I would either rent directly to the management company (for market value of a whole house, which wouldn't help me) or by the room to each individual (where I could charge the area's going rate and increase my cashflow).

Here're my questions:

1) What types of things need to go in the lease when you have shared common/living areas vs. a regular lease?

2) Are there any other ways to increase cash flow other than by the room rentals? I am in a rural area, which limits me a little bit. And no, I have no interest in investing elsewhere right now.

3) Should I consider different types of insurance right now? I have liability through my rental's homeowners policy.

4) Are there things I should do to the property (like installing locks on each bedroom) that are specific to by the room rentals?

5) Anyone have direct experience with this and have any tips?

[Roy N.]

Amy,

We have two house which are rented by the room at the moment.  One is a large duplex (4 & 5 rooms respectively) where our clientele is mostly international students.  We rent the rooms here furnished.  My sister-in-law lives in the upper unit and serves as Den Mother to keep the ship on-course.

We have a second house which we normally rent as a single unit to a group of students.  Due to circumstances late in the summer, our original tenants backed out of their lease and we were compelled to rent by the room for this year.  (this has happened a couple of times before).  We plan to return this house to a single lease for summer/autumn 2015.

We are negotiating on a third house on the same street which, after an energy efficient renovation, may be rented by the room.

Originally posted by @Amy E.:

You will need to furnish the common areas.  We usually furnish the bedrooms as well.  You will also need to set the rules for the common areas and specify quiet hours (i.e. no laundry after 22:00) in your house rules which accompany the lease.   You will either need to stress in the house rules/lease that the tenants are responsible for cleaning the common areas in addition to their own rooms (and police it) or bake the cost of a weekly cleaning service into your rents.  We have done both and over time, we've moved mostly towards the baked-in cleaning service.

There are downsides to renting by the room:

a) you carry the utilities;

b) As Dawn mentioned, you end-up dealing with roommate drama as each roomer has a relationship with you and not with each other.

c) Wear and tear on your property will be greater and it's more challenging to hold someone accountable for damages, especially to common areas or chattel.  Case in point, I arrived at one of our student rooming houses yesterday to discover that the handle had been broken off the storm door.  {Not so} surprisingly, no one in the house has come forward or knows how it became broken.   I already have a good idea how it became broken - we had an unseasonably warm day with heavy rain early in the week followed by a flash freeze as temperatures returned to seasonal ... I suspect the door froze shut and someone reefed on the handle to try and pull it open.

Sometimes the additional net revenue gained from renting by the room is not sufficient to compensate for the additional management effort.

Your landlord's insurance should cover the property and common areas. We insist that roomers carry tenants insurance for their personal belongings.  One caution: some insurance companies will not provide tenant insurance to roomers or if there are more than 2-3 roommates.

While it's not ascetically pleasing, your roomers will most probably insist on having locks installed on their bedroom doors.   If you have a visit from a by-law officer, or if the house is appraised for refinancing, both will most likely interpret locks on all the bedroom doors as a rooming house.   Many lenders (at least here in Canada) will not take mortgages on rooming houses, particularly in student areas.   You also need to verify that the zoning allows you to operated a rooming house, if not, you may have a stipulation of no more than X (often 4) unrelated adults being permitted per dwelling unit.

Yes, and see above.  I would recommend having an on-site super/den mother, whom you trust, living at the house.  In the case of students, it helps if this person is a few years older than the tenants.