Today we have a guest post from Max at MaxMyMoney.org about how he saved a hefty sum by renting out spare rooms in his house. House hacking certainly has it's perks folks, as Max thoroughly lays out below. As far as ideas on negotiating with roommates and handling joint housing costs, there are two chapters dedicated to this in Financial Fives.
I have rented out rooms in my house for over five years now.
Since I began, and through many (avoidable) mistakes, I have taken in over $80,000 in rental income and tenants have paid every month 100% of the time. I have also saved over $100,000 at 27 years old.
In this post, I am going to show you each step I took to succeed and how you can too.
When Life Gives You Lemons...
Let's take it back a little.
I am 22 years old and employed at my first "big boy" job. I am working in the "stable" insurance industry and as I look to the next 10 years of my life, I see lots of handshakings, promotions, and financial security.
It's a scorching August day and I am daydreaming about my birthday celebration that will be taking place on the weekend. My daydreaming is interrupted by my manager asking me to meet him in his office. I don't think much of it, as we have impromptu meetings quite often.
I see the HR representative sitting in a chair off to the side and think to myself "that's unusual, am I in trouble?"
One single piece of paper is sitting on the desk with a familiar signature. It's the one I see on my paycheck every two weeks.
The next few minutes were surreal and I don't remember the details besides reading the top line of that paper titled "termination notice."
To say I was blindsided is an extreme understatement. The next decade of my now fantasy life evaporated in one short meeting and I felt utterly hopeless.
I spent a few days feeling sorry for myself and my situation. On the third day, I made a call I thought I'd never have to make, ever. "Hey dad, I know I said I was great last week but can I borrow $1,000 to pay my bills?"
Thankfully he obliged and my month's expenses were taken care of...on credit.
On the fourth day, I finally changed out of my pajamas, shaved and began what turned out to be the most important online research I've done in my life.
I found out what a "side-hustle" was, and how many other people were making money from something other than a traditional 9-5 job. This was all brand new to me. I remember thinking "this guy makes $500 a month just by renting out his spare bedroom? That's $6,000 a year. What if I rented out my back room?"
The rest, they say, "is history." The obsession to find non-traditional income began and five years later that desire is stronger than ever. I have a system that brings in over $1,900 per month passively with me doing very little work.
It wasn't always that way, though. In the first year, I didn't have a system and was terrible at picking roommates. My choices led me to deal with every bad roommate possible. From loud music at 2 in the morning to a messy kitchen every day.
Now, I have a system that is on autopilot and I take in profit each and every month.
I have concluded there are 5 main components that have helped find the ideal roommate, ensure everyone's safety, and ensure rent is paid each and every month.
1: How to Find the Ideal Roommate For You
When I first posted my spare room online I received over 20 calls in the first day alone! On the first call, I was excited and already counting how much money I was going to make. The conversation started out fine until he told me he didn't have any money and wanted to exchange cleaning for the rent.
The next few phone calls all had a significant deal-breaker. One had a cat (I'm allergic), one didn't have a job, and the other tried to bargain the rent cheaper.
After these first few phone calls, I felt really discouraged and put my phone on do not disturb the rest of the day.
At the end of the day I looked at my phone and I had 15 voicemails and over 20 missed calls. Every single one of those 15 voicemails was from someone who wanted to live for free or had a deal-breaker in their situation.
Soberly, I began to think to myself, "is it possible I created this problem?" After contemplating that for a while I concluded that of course I was the problem here. But why?
A few months earlier, while still working in insurance, I remember writing down all my financial goals with deadlines and details. I am very specific in my personal goals and aspirations. What if I apply that same laser-like focus to finding the right roommate for me?
I began writing out everything I wanted in a roommate: honesty, employed, communicates directly, and many other characteristics. I then wrote an advertisement that incorporated all these traits. I deleted the failing ad and posted the new and improved one the following morning.
On the second day, I received a call from a guy who had all the traits I wanted and a few more. He lived with me for over three years and was the perfect roommate. The only reason he moved out was because he finished college! If you want access to the exact ad I used to get the perfect roommate you can get it here.
Long story short, the more specific you are, the better result you will have.
2: I'll Take Phone Screening For $400, Alex
The ad was working at filtering through a lot of the unqualified applicants. But I still was asking vague questions and I ended up taking in a problem roommate that I had to evict. I wish I avoided that, as it was very uncomfortable for everyone. "Hey dude, can you like, leave?"
The phone screening can either be a huge time suck or it can help you find the ideal roommate very quickly.
I ask 22 questions when I speak with someone. There are two important questions you want to ask that will help you weed out the unqualified people.
What is your current job/how long have you been there?
You definitely want people who are doing something outside the house. In the past I have made the mistake of choosing someone who didn't leave the house very often and let me tell you, you want everyone to leave the house as much as possible. Humans were not meant to sit inside all day alone. Community and human interaction are vital to our mental health.
What I really want to hear is that they are working at a job outside of the house and have been there for at least 6 months. This shows me they will be out of the house often and they also have consistency. Think about it like this: if they go to work on time and can hold down a job, they are much more likely to pay rent on time. If someone is job-hopping and cannot keep a job longer than a few months, this shows that I may be "inheriting" that bad behavior and they might not pay rent on time. That's something I definitely don't want.
How much money do you have saved in the bank?
Yes, I ask them point-blank how much money they have saved. Some may see this as intrusive, I see it as having high standards. They need at least the first month's rent and security deposit to move in. If they don't have at least that saved up, they immediately are on my "no" list. Each time I have lowered my standards on this it has been a bad decision. I have had to chase the rent money and remind them to pay. This is stressful and makes for an uncomfortable living environment for everyone. The higher I raise my standards the more I meet the ideal roommate I talked about earlier.
Don't lower your standards, ever.
If you do not like their answers you can simply end the phone call (nicely of course). A 20-minute conversation can be shortened to two. What will you do with the other 18 minutes?
How I end the conversation politely is by saying "I only have roommates who are gainfully employed for at least 6 months and have enough money saved up for the first month's rent and security deposit. If you can meet that criteria give me a call back and we can talk."
I've told this to many different people. They never call back. That saves you a ton of time that would have been spent having wasteful conversations.
I ask over 20 questions when phone screening and each one gives me valuable insight into the applicant. You can get access to that full list of questions here.
3: Agreements/Contracts
Having a written agreement is necessary to make sure everyone is on the same page.
I remember buying my first car. It was an old Toyota Camry but it was going to be all mine! Once I put my name in ink it was "for real."
When someone signs a contract, things become "real." Everyone is far more likely to follow through when there is something in writing.
It doesn't matter if it's your best friend from grade school or someone you met online. Have a written agreement to cover yourself and make it "real" to your roommate.
I have a thorough, fillable rental agreement you can use yourself here.
4: House Rules
"The only rule is there are no rules."
That's a recipe for disaster. You must have written rules.
One of my first roommates would bring over a new nightly guest about 3 times a week. This made for a hassle in the morning for the shower. "Who has the long blonde hair?" Definitely not me or him. Having overnight guests can put a strain on everyone's morning routine. When people are thrown off their routine, they can become unpleasant to be around.
After he moved out I implemented "no overnight guests, ever."
Again, learn from my mistakes. Make sure you have house rules in place so everyone is on the same page on everything. It will help you avoid stressful situations.
Here are the house rules I use. You can use it as a framework and change it for your lifestyle.
5: Keep Your Standards
After doing this for over 5 years I've realized whenever I lower my standards, dumb things happen.
Do your best to hold your standards as the norm in every situation. The more you respect yourself, your house, the agreements, and your roommate, the more they will respect you and follow through on their side of the deal.
Always Moving Forward
Taking the leap and becoming a landlord has helped me grow both financially and as a person. While I've collected over $80,000 in rent and saved $100,000, I am just getting started and very excited for the future.
I went from being super stressed out about money and borrowing money from my family to now teaching others how to get passive income from their spare bedroom.
Being a landlord doesn't have to be scary or confusing. It can help you grow financially and develop as a person. This is a win-win situation!
After five years and over 30 roommates, I have dealt with pretty much everything when it comes to room rentals.
I have created a step-by-step course where you can learn how to rent out your spare bedroom, protect yourself, and get passive income every month with minimal effort.
If you have never rented out a room before or have and you didn't have a good outcome, this course is for you!
This course will take you from being unclear and confused by all the conflicting information out there to having clarity and knowing exactly how to rent out your spare bedroom.
For a limited time, I am offering a 25% discount on the course for all Financial Fives readers. Make sure to use code FIVES at checkout for the discount now.
Happy Landlording!
Max
Author bio: I remember having to sleep on a couch and always asking family for money. I felt like a failure for a long time. Once I was finally honest with myself and got out of my comfort zone, I began working on myself and learning everything I could about personal finance. Things started to change a little every month. Since that day over 5 years ago, I have collected $80,000 in rental income and saved $100,000 by age 27. At MaxMyMoney I have helped over 250 people take their spare bedroom that is collecting dust and turn it into monthly passive income. My aim is to help you get clarity and rent out your spare bedroom stress-free. Are you ready to have clarity and be stress-free about money?