All Forum Posts by: Pat Rach

My first property was a house-hack, so I found it on market. I looked at the # of rooms the house had and the rents in the area per room. It made sense for me to live in one room and rent the others to reduce my living expenses significantly. 

Hey Pat, 

I found my first property on-market. If you don't have any experience, I recommend asking around for 'the best real estate agent for investors' in your area. I bought a duplex that needed work, negotiated seller credits, and got in the deal for $5,000 out of pocket. 

Tenants were already in place and paying rent and I was living for free, while paying down a mortgage. I'd be happy to hop on the phone and talk you through some things to think about. Shoot me a connection! 

My first deal can from what we believed was a vacant house (driving for dollars), turned out not to be.  but pretty much every other deal since, including my latest one all came from contacting the owner who is going through foreclosure.

@Pat Rach renting by the room is substantially more work for a landlord, but it also tends to produce substantially more rent income. Lots of properties that don't cashflow as a traditional rental WILL cashflow as a rent-by-room rental.

If you rent by the room, you will need to adjust your lease accordingly--which means thinking about all the various issues that might arise in rent by room situation (for instance--who is responsible for cleaning common areas, what are the rules about having guests, what are the rules about noise, etc.?).  

In my experience, the most common issues that arise in rent-by-room situations are 1) a housemate is making too much noise, 2) a housemate is making too much mess and not cleaning up, or 3) a housemate is having too many guests over (who make too much noise and cause a lot of mess).  These issues are almost guaranteed to occur at some point, so your lease should address these issues pre-emptively. It can be well worth it to hire a cleaner to take care of the common areas, and split that cost amongst the housemates. The lease should have terms about how frequently housemates can have guests, and whether those guests can stay overnight. The lease should also have terms about quiet hours, and acceptable levels of noise (the easiest way to deal with the noise issue is to not allow musical instruments, and to require everyone to use headphones instead of speakers).

You can manage utilities in a variety of ways--the easiest is for the owner to have all the utilities in their name, and then charge the tenants a flat fee for the utilities. Alternatively, the owner can sum the utilities each month, and then divide that number by the number of housemates and charge the housemates accordingly (this takes a little more work for the owner, but it helps ensure that everyone is paying their fair share).

Tenant screening is ESPECIALLY important in a rent by room situation--a bad housemate can make even the nicest property unbearable, so you should definitely study up on tenant screening (but, you should do this regardless of what type of rental you want to operate).

Also, the layout of the property is ESPECIALLY important; some houses simply do not function well in a rent by room situation.  For instance, a small house, where all the bedrooms are right next to each other, and where all the housemates have to share a single bathroom will not function nearly as well as a larger house where the bedrooms are more spaced apart, and where each housemate gets their own bathroom. Square footage, bedroom spacing, and the bathroom to housemate ratio are probably three of the most important things to consider for a rent by room house--I'd strongly suggest avoiding any house where more than two housemates have to share a single bathroom. 

Ideally, you want a large sq footage house with multiple stories, where the bedrooms and bathrooms are on separate floors. For instance, I have a 3-story property that's 5 br 3 ba --1 br/1 ba on the top floor, 2 br/1 ba on middle floor, and 2 br /1 ba on bottom floor. If I rented it by the room, this setup would make it so that no more than 2 people would be sleeping on each floor--this amount of separation would greatly reduce housemate disputes associated with noise problems, cleaning issues, etc., and would make the house much more comfortable for the housemates than a place where all five bedrooms were on the same floor.

Renting out rooms is a GREAT strategy for young adults. Most young adults can't afford their own place anyway, and usually have to have roommates regardless of where they live--if you're going to have roommates anyway, you might as well have roommates who are paying you! (However, keep in mind that the downside of this is that you can't be friends with your housemates in the same way that you could if you were all tenants...if you're the landlord, you're running a business, and this often means you have to be "the bad guy" and enforce rules).

Lastly, it's very important to understand that some neighborhoods will work great for rent by room, and others won't.  First of all, some cities/neighborhoods have laws against rent by room.  Just as importantly, some neighborhoods do not attract the type of tenant who will want to do rent by room. Usually, rent by room tenants are college students or single people in their 20s, so the property has to be in a neighborhood that attracts those types of tenants. For instance, a neighborhood right by a college campus, and/or near a trendy area that has the types of bars/restaurants and other amenities that attract young adults.  ...most young adults don't want to live out in a suburb surrounded by families and retirees, they want to be surrounded by other young adults; so it's important for the property to be in that type of neighborhood (otherwise, you may end up with a lot of vacancy).

Good luck out there!

I rent by room house hack and have had a lot of success with it. For Utilities, I pay for them and just account for those cost in the total room rent. There was some tweaking initially as I didn't know exactly how much the utilities would cost with a fully rented out house. Generally, everyone keeps to themselves, but I have had some tenants that get along well and spend more time together in the common spaces. Anything you can do to reduce tenant conflict is definitely a must. I have had a tenant that was a terror and made all the other tenants want to leave. I now only offer month to month leases just incase you encounter someone that is not a good fit. I provide some shared supplies (garbage bags, toilet paper, paper towels, dish soap, hand soap), and ask tenants to write their name on any food they don't want to share, or put at on their designated shelves in pantry. When searching for my house hack I specifically looked for homes with layouts that would allow the most privacy between rooms (I went with a dual entry house with basement 3 beds in basement, 2 beds upstairs). I ended up adding a small kitchenette to the basement laundry so that the houses almost functions as a duplex. 

@Pat Rach I have done this and it is the best strategy for young investors! Its the most profitable. Let me know if I can help answer any questions for you!

 I love to hear how you are doing things.  This is all my company does and we make way more money with way less money AND our renters get way more for way less.  I've spoken w/very few people who understand the things you just wrote about setting up a HH for success.  Are you planning to keep that going and do you syndicate in order to HH multiple times a year?  I'm up in Estes Park, CO.  Are you setup in the Springs? 

Pat- I love the direction you are going with this and you've gotten some great advice.  Feel free to DM with specifics, or set up a call, or check out my stuff. I'd love to help ease your learning curve with any specifics like lease development, pm software, books, etc.  Be brave- life favors the bold, prepared, & patient! 

I am currently rent-by-room house-hacking.

I was in a similar situation as you. There was very little supply and high demand for small multifamily properties in my market, so I turned to rent-by-room because you basically turn a single-family house (that costs less than a multifamily) into multiple "units" by having multiple tenants.

In our case, we just pay for all utilities and have the rents increased a bit to compensate. Otherwise, you'd have to get billed, then divide up the total, then bill the tenants. OR you would have to have one of the tenants get billed, then they would have to chase everyone else down every month for their portion. Just paying for utilities yourself is much less of a headache.

Yes, we have a rental agreement that is a little different than for a traditional long-term rental. The main difference is just that the lease describes their private areas (bedroom, private bath if applicable) and the shared areas (living room, kitchen, etc) and their responsibilities for each.

Something else to think about. It may be worth providing thinking about ways to reduce tenant conflict. For example, we label/assign all shelves in the fridge, pantry, and freezer. That way, it is less likely for someone's food to get stolen, AND when a roommate moves out, we can just sweep their whole shelf into the trash.
Also, we provide all shared supplies (toilet paper for shared bathrooms, dish soap, trash bags, etc). That way tenants don't have to worry about if it is their turn to purchase a supply.

@Pat Rach It is definitely possible. A few years ago I had a property that was 3 bedrooms and each bedroom had its own bath. I did 2 separate 12-month leases for 2 of the bedrooms and then did the basement room as an Airbnb with its own private entrance. 

In my experience, individual room renters are the best kinds of tenant. They usually keep to themselves, aren't disruptive, and take care of the house. 

As far as utilities, in that situation I had the 12-month tenants split the utilities and then I reimbursed them a portion each month since I was running the Airbnb separately. However, it is way easier to just bake the utilities into the rental payment. Way less complex. Hope this helps!