Things to consider when renting in the room

Many people add residential real estate to their investment portfolio. These investments can be single-family homes, condominiums, or apartments. However, some real estate investors feel that they are not making enough money.

If you only own one property, could you make more money from it? Yes, including the return on your investment property or property increase. Consider renting out the room instead of renting out the entire property if you want to improve your bottom line.

Single room rentals give you access to multiple tenants, which means multiple rent checks. While it's a great financial strategy, there are few caveats to renting it this way.

Key takeaways

      There are many benefits to renting a single-family home or other unit to multiple tenants and owners.

      Renters can save on rent and other costs by renting out rooms in single-family homes.

      Despite the increase in rental income, landlords may want to consider the possibility of high tenant turnover.

      More tenants could lead to more calls for noise, damage, and other complaints.

      Homeowners may need to consider additional costs, including heating and landscaping.

Why rent the room?

Most real estate owners tend to rent out their entire property to one person or a single family. As a property owner, you may want to consider this option if the house is your primary residence, meaning you live in the house, or if it is an investment property. Renting a single-family home or other multi-tenant unit has many benefits for you, the landlord, and the tenants.

The basics

Because there are so many people living on the property, tenants can lower their rental costs by sharing the cost with others. Let's say a three-bedroom house typically rents for $2,000 a month. A single tenant may not need as many rooms and may not be able to pay that rent. But if the room was $800 a month, it might be more affordable.

This gives the tenant their own private space, as well as access to the rest of the living space: living room, kitchen, bathroom(s), and any other common spaces. Also, if the landlord charges utilities separately, they can be divided among the tenants, further reducing your monthly charge.

Conversely, landlords can earn more rental income by renting out rooms to multiple tenants. So renting that three-bedroom house to one family for $2,000 will generate $2,400 each month if rented to three different tenants. Renting rooms helps make rental income more reliable for landlords by minimizing the effects of vacancy.

High tenant turnover

Sharing a house with multiple people is a profitable way of living instead of renting an entire apartment on your own. This is especially true for singles and young people, especially in big cities like New York City, where space is at a premium and rents can skyrocket.

Many Millennials choose this type of arrangement because it allows them extra money to use for other things, like paying off college debt, buying a new car, or even saving on a down payment on a home of their own. In many parts of the country, most single rooms can be rented for a few hundred dollars a month, and a decent apartment unit can cost at least $800 a month.

As a result, there is little reason to share a house with a few people without children and little responsibility because the cost savings are enormous.

However, it is more likely that landlords will have to increase the rate of tenant turnover. Yes, this type of housing is certainly in high demand, but for the most part, room rentals are very much a temporary arrangement. After a few months, the tenants will eventually need a place of their own with more privacy and space. Some people may be worried about sharing the kitchen or bathroom with other people for a long time. It can be difficult to date when renting a single room.

As a result, owners may have to replace multiple tenants every three to six months. While it might not be hard to find a replacement, the hassle of listing a rental place, as well as screening potential renters, can be fun.

Additional phone calls

Another thing to consider when deciding whether to rent your property in the bedroom is the extra work required to manage some tenants, not to mention the potential for conflict and drama.

Many landlords are already concerned when they receive late-night phone calls from a single tenant. With more tenants under one roof, it's almost inevitable that a landlord will receive more calls about broken items, complaints, and disputes between roommates. The extra money that rents out the room instead of the entire apartment may not be worth the extra headache and stress.

It's also important to note that renting will mean more people dealing with more damage and perhaps more evictions. That could be a hurdle for real estate investors trying to passively earn income from their property.

Hidden costs

It's all too easy to miss important costs when calculating potential rental property returns per room. This is because the landlord accepts many costs that are typically passed on to the tenant, including lawn care, heating costs, and anything else that may be difficult to measure for individual tenant usage. Without careful consideration of these hidden costs, there is a risk that homeowners will overestimate their return on investment.

In many states, it is illegal to charge a tenant for (water, gas, and electric) unless usage has been accurately and individually metered. This is difficult to do with a multi-tenant rental unit. In the end, the landlord will have to cover these costs.

In some states, landlords may not charge individual tenants for utilities unless usage is accurately and individually metered.

The baseline

One way for real estate investors to increase their rental income is to rent out the room. However, there are several things to consider before implementing this strategy. For example, if two to five complete strangers live in a house, potential conflicts will arise.

In addition, there are some costs, such as electricity and water, that cannot be passed on to tenants when renting individual rooms. Some landlords may not find the bottleneck of high tenant turnover worth it.

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