Are you looking for a way to get your foot in the door in real estate without a lot of cash? Have you considered getting roommates for building equity?
The best kept secret in real estate is buying a personal house and renting out all your spare rooms. This is a great way for those who have W2 income, qualification to FHA, VA, USDA loans, and a conventional 5% down payment to get started in real estate.
For many of us, 2-4 units are not feasible for many reasons: location, price range, numbers compared to single family, etc. We at least have never been able to find one with our numbers that fit our model. To date, single family home purchases have made more sense for us. They have had better numbers.
Building Equity Through Roommates
To most people this would ruin their plan. Quite the contrary, single family homes can be an excellent starter home for investors.
- Cheaper – Personal home loans only require 3.5% (FHA) or 5% (Conventional) down.
- Easier to Get Qualified – It is much easier to get qualified to live in your personal than it is to buy a pure investment.
- Great Future Value – Single family homes have great resale, so when life evolves, your house continues to be an asset.
- Often Time Better Area/Value Than Multi-plex – In my experience multi-plexes are unusual so they are often very expensive.
We have many friends who have been super successful this way. They are able to cover their mortgage and utilities by renting out the 2-3 spare bedrooms. This way they are still living rent “free,” but own single family homes that do two things:
- Appeal to Potential Roommates Now
- Appeal to Traditional Whole House Rentals Later
Appealing to potential roommates now allows them to live rent free, the same as a 2-4 unit would do.
There is a downside, you have to live with people in your space and house. On the other hand, you do have to sacrifice for your craft, but you don’t want to sacrifice your craft. So it is important that what you buy now will appeal to the people that you rent your whole house out to.
The nice thing about this model is that it appeals to many different types of people and financial paths:
- Investor – Who wants to get in the door but is just starting out.
- Young Professional – Who is not an investor but doesn’t want to throw rent away when a mortgage makes sense and wants to save as much money as possible.
- Business Professional Who Is Never Home – Allows them to have a house to come home to without paying the upkeep.
- Young Couple Building Up Their Finances – Perfect way to fund a dream home when the salary is only supporting a starter home. This way one can grow into the house while already owning it. You simply don’t renew the tenants when you want all the space.
- ETC– This model fits more people than this blog post has space.
With everything in life, there is a downside. People other than yourself are going to live in your house. You can’t just kick them out when you are unhappy. So it is really important to screen and set up boundaries so you set the best relationship possible. Are you ready to start building equity through roommates?0
Craig Dangler says
I am glad you mentioned the part about other people would still be living in your house as a downside. I know single people may be more inclined and different mindsets, but for me the negatives outweigh the positives. I like being able to walk around my house in whatever clothes or no clothes i want and have any conversation i want without any eavesdropping. I also think roomates might affect my ability to focus on investing.
Thank you for your comment, I appreciate you taking the time to write and I totally understand your position. My goal is just to provide as many options and “idea” as possible. While I am sure there are many that will agree with you, for some, the ability to save an $500-$600 per bedroom or $1500-$1800 a month or $18,000- $21,600 a year for a 4 bedroom house with 3 bedrooms rented is worth the loss of privacy. We shared a rental house for a year early into our marriage. While it had its moments, it provided us with the ability to save 20k. The 20k was our “so I am comfortable to buy a house fund” when we bought our first house, a VA with 0 down foreclosure that needed a lot of work in Virginia Beach. Later, it became the downpayment money for our first pure rental. Lively cheaply (rental with roommates, fixer upper, mother in law suite, etc) has allowed us the opportunity to rapidly increase our investment stash.
Pyrrha Rivers says
I can second the opinion that it is a good alternative for some.
When I left GA for Japan I had a house with a mortgage. I refinanced it to spread the balance over 20 years and make the payment $500 per month. I rented it to my daughter authorizing her to rent out the extra rooms. When she did it well, she lived rent free, had her utilities covered and even had a bit of cash for her pocket. When she did it poorly (Not screening roommates well because they were friends) Things went off the rails very quickly. Not only was she stuck with the rent and utilities but also with the stress of a breaking friendship.
For me, the rent she paid covered my mortgage and I was able to double my payments through my W-2 earnings. I paid the house off a year ago and now have a HELOC which I used in part for my new rental. The inconvenience of having other people in your space if you do it correctly, brings along the reward of getting you closer to financial freedom.
Thanks that article made me look at roommates in a whole new light, even though I’m been considering renting out one room for a while! Thank you for your insight. That was very helpful.
PS I signed up for the newsletter/blog. Looking forward to it.
I just came across your website and I am hooked to it. You provide lots of valuable information. I was wondering if we decide to get roommates, do we have to show the rents as income on tax returns. Do we have to go through depreciation recapture and capital gains etc. when we sell the house? I understand that you cannot give tax advice but just wanted to get some information.
Thank you for your kind words! I am glad you like the website. I definitely recommend you sign up for the free newsletter and check out our Facebook page, Reluctant Landlord. Those are both amazing ways to not miss out of any of the great tools that come out almost daily!
If you own the house, roommates rent are considered income. As for the second part of your comment, those are excellent questions. Let me do some research and I will write an article on it. This way I can cover the subject in-depth!