Hey guys, Max here!
If you’ve been considering renting out rooms in your home to make some passive income, this article is for you. I have been renting out rooms in my home for 5 years, I have had 100% success with tenants paying rent.
I make $11,100 a year renting out the extra rooms in my house. In this post we will be going over 7 steps that will help you determine if renting out rooms is the right move for you.
Step 1: Make sure the finances are right
It’s incredibly important to ensure that you have calculated all expenses so that you can be sure you’re maximizing profit when renting rooms. You’ll need to start by adding up all of your expenses. This includes your mortgage, your principal interest, and property taxes. My mortgage expense is just under $1,000, but for easy math, we’ll say it’s $1,000.
At this point, you’ll need to look at the market trends and see how much a room is renting for in your area. You want to shoot a little above the market value, as that will draw better quality candidates. I charge $575, $695, and $650. Altogether that equals $1925.
It’s very important that you do not forget to factor maintenance costs into your calculations. You always want to make sure that’s added in because maintenance costs are included when it comes to homeownership. You don’t want to accidentally calculate a higher profit and deceive yourself. It's better to be conservative in this calculation.
We take the $1,925 in total monthly rental income and subtract the $1,000 in expenses, and you get a $925 profit every month.
Multiply that by 12 months and the annual profit is around $11,000.
This number may vary for you depending on where you live, what the cost of living is in your area, and what the demand is for room rentals.
Calculating the finances is important in this process because ideally, you want to come out of it making a profit that is enough for it to make sense for you to have a roommate. You don't want to only break even, or even worse, end the month with a loss.
Step 2: Find the right tenants
Finding the right tenant is just as important as getting the finances in order. You can’t have just anyone living in your house, especially since you’re going to be living there too.
If they can answer these questions with a resounding yes, you're on the right path.
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- Do you have the first month's rent and security deposit ready today?
This question is important because it helps you determine if they are a fiscally responsible individual or not. If they don’t have the money ready, that shows me that they are not financially responsible and they may not pay rent on time, if at all. This is something you want to avoid!
I’ve dealt with a lot of people who say, “I’m waiting on my paycheck” or “I’m just waiting for my direct deposit to hit, can I move in and then pay you?” The answer is no.
It might sound harsh, but leniency will get you nowhere here. If you relent, they will assume that they can defer their payments every month. That is how you get taken advantage of. You need to assert yourself and set boundaries early on so that you only deal with people who respect you and take you seriously. I do not expect anyone to pay my bills. In turn, a roommate should not expect me to pay their bills.
The next question is, are you working or studying outside of the house?
It might not sound so bad to have a roommate who stays at home in their room for most of the day, but in reality, it can cause more issues that you might not be thinking about.
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It’s important for people to get out in the world, spend time with friends and see family.
With someone home all the time there will be higher utility costs and their mental health may suffer. We all need human interaction and vitamin D. Make sure the roommate is doing something full-time outside of the house.
And then third is, Do we have similar sleep schedules?
Having conflicting sleep schedules makes it very difficult for a roommate situation. I wake up around 5am in the morning, so it’s important to me to have roommates who go to bed relatively early and won’t keep me up all night playing loud music or gaming.
If you’re able to ignore that and sleep peacefully, props to you, I just know that in my household, quiet hours are enforced so that everyone can sleep at night, and no one has issues. Again, the stricter the boundaries and house rules, the more peaceful the home is. That's a win-win for everyone.
If they answer yes to any of these questions, they’re looking pretty good as a candidate. There are many other questions to ask in the screening process. I even wrote a post about 17 questions to ask a prospective roommate here.
If they answer yes to these three, you’re off to a good start and they can proceed to the next step in the process.
Step 3: Be friendly but not best friends
This is an important rule to live by because it is important to have boundaries with roommates.
If you become too comfortable with them, and they with you, they may start to take advantage of your friendship to get leniency on rent or asking for help with other expenses.
You need to strike a healthy balance between assertiveness and empathy.
If you have a great tenant, hopefully they are able to be honest with you. Honesty should be something that is rewarded.
If they have been on time every month paying rent, and something happens and they come to you and are honest, then you can have a conversation with them and find a solution. If it’s a one time thing, there is no need to punish them.
As the homeowner, you must model honesty in your actions and your roommate will be far more likely to show you that same honest. Actions speak louder than words.
You don’t need to be best friends with them to achieve this level of mutual respect, just make sure you’re exchanging pleasantries and being cordial when you see them.
You certainly don’t want to foster an environment of hostility.
I’ve dealt with both.
It’s much better to have a good relationship with your roommates because then, when something happens, they’ll come to you two weeks before the rent is due and not 5 days after.
Foster an environment that encourages being proactive and honest, not reactive and defensive.
Be friendly yet assertive. It's very possible to do both.
Step 4: Price the rooms slightly above market value
Before you do any pricing, you need to figure out what fair pricing in your area is.
I would look at Craigslist, Facebook and Zillow. They have a bunch of rental and room advertisements, and Zillow actually shows you the whole home rental prices. So divide that by how many rooms you have.
Or you can actually go on Craigslist and see what rooms are going for in your area. It's under the “rooms/shared” tab.
That will give you a really good estimation of what your room would go for in the open market.
The reason I go about 10% above market value is that if you have a comparably priced room in a semi desirable area, your phone will start ringing off the hook.
This happens because people don't read the advertisement and they are only looking at pricing. And having a little higher price is your hedge to avoid all these phone calls from people who simply are not the right person for your room.
Worst case scenario, no one calls, but I’ve never had that happen. If nobody calls, just lower the price to what you think the market value is. You will just need to put more effort into the screening process to make sure that you will be renting to the right person.
I put a room up for $575 for a week. Lots of phone calls and a lot of unqualified people.
Then I put it up for $650.
The $650 garnered a lot fewer phone calls.
However, these calls were from more qualified people compared to the less expensive room.
Almost the exact same advertisement, almost the same pictures, just tweaked a little to do my test.
The one with the lower price received so many more phone calls, but they were not ideal tenants.
The higher price usually works out. It's better to have fewer phone calls and use your time wisely on more qualified prospects than to have a ton of phone calls from people who simply have no business calling.
You need to be able to see that they have the funds. If they don't have the funds or they're fudging the numbers, that's going to be a lose-lose situation.
Step 5: Verify income
Physical or PDF pay stubs are really important. You can actually see that they are indeed working, where they're working, and get more of an indication of their situation. So always verify income.
If they have a traditional bank account, they are usually more fiscally responsible. You don’t want someone who is between jobs or who has been unemployed for an extended period of time. In my experience, those people are unreliable tenants and may try to take advantage of you in the future.
You can also see how much they make, on average, and if they will be able to comfortably pay rent every month on top of other expenses they may have.
Step 6: Have the fastest internet
Almost everyone is streaming some type of video, whether it be Netflix, Hulu, or YouTube. You want to be able to make sure that everyone has a flawless streaming experience.
You want to make sure your Internet speeds are like The Marriott and not Motel Six. Let me tell you, there's a huge difference.
I used to have 250 megabits per second (MBPS) download speed. I upgraded to one gigabit (1GBPS), which is fast enough for everyone to be streaming videos at the same time. Pay the extra money. It's totally worth it.
Step 7: End the relationship on positive terms
You always want to end things on positive terms because you never know where you're going to see that person again. Never burn a bridge unless completely necessary (which is pretty much never).
Be supportive. If they’ve decided it’s time for them to move on, they're upgrading their life. That should be what you want. No one wants to be renting a room for their whole entire life. Be excited for them!
If you do have to evict, always make sure you ask someone to leave, don't be belligerent or emotional. Always make sure to convey “it's not you, it's me.” I have found it much better to put it back on me than to ever point the finger. Even if you have had conflict, do not bring it up.
The hope is that you've built enough goodwill with this person that they will understand. If you set boundaries and expectations up front, if you make sure everyone's on the same page, have everyone sign agreements and ask the right questions, you're going to have fewer problems than if you don't do any of those things.
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