Author Topic: From a financial standpoint, is it better to buy a house with more rooms to rent  (Read 2135 times)

dylanjohn

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Instead of buying a 2 bedroom house, is it better to buy a 3 bedroom or 4 bedroom and rent out the bedrooms? Does it depend on a ton of factors, or is there a general answer for most situations?

middo

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Personally, I wouldn't want others in my home.  That is a line I won't cross.  If you are comfortable with it, consider the next 10 years.  Would having kids change it?  Would a partner change it?  It does depend on your situation.

I would put the extra into the stock market.

Syonyk

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Some roommates are awesome.  Most roommates are a pain in the patukus.

There's also no guarantee you can find roommates.  Learned that one the hard way.  $900/mo rent plus full utilities on $30k/yr, when you were planning on finding two roommates, royally sucks.

PoutineLover

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Personally I'd only do it if it was separate units. I would not want to share my living space if I didn't have to. I miiight consider it if I was planning on kids but didn't need the space just yet, but it would have to be temporary. I like my privacy and I don't miss the hassles of roommates one bit. If you're talking strictly financial, I think it would really depend on the market because generally shared rooms rent for way less than full apartments.

Papa bear

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I took a real estate economics masters level course back in college for fun. One major point of the course was determining sale values for residential homes and what attributes made a statistical difference in sale price.  Interestingly, number of bedrooms was not a factor in sales price, statistically.  The attribute with the greatest statistic significance was square footage.

So, literally, number of bedrooms is not a financial decision when it comes to sale price of the home.  I would have argued against that until I was blue in the face before taking the course. Then I saw the data. Now I think it's pretty interesting!

But you didn't ask that. When I was single, I always rented out my extra bedrooms.  I had no problem covering mortgage and utilities.  I would do that again in a heartbeat. I would take it a step further and tell you to buy a multi unit. Rent out one side AND rent your other rooms. Make money on the house, get a mortgage as your primary residence, eventually move out and have a cash cow of a rental.



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sanderh

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Instead of buying a 2 bedroom house, is it better to buy a 3 bedroom or 4 bedroom and rent out the bedrooms? Does it depend on a ton of factors, or is there a general answer for most situations?
No general answer - you have to calculate. What is the rental occupancy rate and rental rate like in your area, specifically for rooms in a share house/apartment? This is strictly financial, as the question says, ignoring your preference for roommates, privacy, etc.

clarkai

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Renting out rooms is a significant source of income for us. We bought a 2 bedroom, 2 bathroom house, built an exterior bedroom (like a tiny house, but just the bedroom part), and rent out the two bedrooms. It's working really well for us.

I think there are a few fairly obvious things to consider.

1. Make sure the full mortgage fits comfortably into your desired budget. Ours does.

2. Make sure you're living in a place that has a good rental market. We live in a college town, and on top of that, there are a lot of non-students looking for housing.

3. Are you good at living with people? I grew up as one of four siblings, and my partner's mom always had renters, so we're both actually more comfortable with more people in the house. We like the sense of community. Being in a house by ourselves gets spooky.

4. Are you good at picking roommates? We have definitely gotten better over the years! When we first were out of college, we had to kick someone out because they decided that they didn't have to pay rent- very stressful for a couple of 20-year-olds! Now most of our roommates are friends while they live with us, and we have a handful that are friends even after they've moved out, to different cities, or even different countries.

Prairie Stash

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I have a 3 bedroom, the other 2 rooms now have kids. When I was single, they had people in them paying rent. The extra utilities were very minimal, about $5-10/room for electricity and the same for water.

The difference in house price was $20,000 over a 2 bedroom. Rent was $350 including utilities, netting $4000/year. The incremental cost the house was paid for in 6 years (interest on the extra loan brings up the cost). After having kids I stopped renting them out and instead of moving to a larger home, stayed put. This saved transaction costs, moving always cost a little.

I'm a sociable person, I enjoyed having people in my house. If you enjoy roomates, look at the incremental cost difference and it will likely pay for the extra bedroom pretty fast. The biggest factor is did you enjoy having roomates in the past (when you were the renter)?

JLee

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I generally enjoy having roommates. I am also good/lucky (pick one/both) in finding awesome people.

When I bought my house a few years ago, I rented one room out and that paid for over half of my mortgage. Later I rented both extra bedrooms and that covered my mortgage plus most of the utilities. It was great.

frugaliknowit

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You need to estimate the rent you will receive, then estimate your actual profit per year.  For example, $4,000 per year (wait, that's before property taxes...).  I do believe in many markets a rational individual will pay about the same for a share as a studio apartment...

Then, you need to estimate the difference in capital cost between the 2 and 3 bedroom, and the difference in property taxes (the difference in property taxes needs to come out of the profit (above)).  For example, the extra bedroom costs $20,000 and the property taxes on a 3 bedroom is $400 more than a 2 bedroom, so ratchet the profit down to $3600 in this example.

Divide the actual profit each year into the difference in capital cost.  This will give you an estimate of your rate of return on being a landlord.  In this case, your rate of return (excluding appreciation/depreciation labor and aggravation, damages, if any) is $3600/$20,000 = 18%.

Whenever I rented rooms, I ALWAYS drafted a written agreement.
« Last Edit: August 14, 2018, 09:57:50 AM by frugaliknowit »

mozar

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It seems about the same. I could've bought a studio for 50k but instead I bought a 3 bedroom for 118k. The studio would have been 250 for mortgage and 250 for hoa. If I had done a 30 year for my current house it would have been 550 for mortgage and 550 for hoa. (I did a 15 year). For 4 out of 5 years I have had someone paying $600 a month. So 1100 minus 600 equals 500 not accounting for vacancy (I don't feel like doing the math right now). So pretty similar to the studio. Sometimes I wish I had gotten the studio but then I remember I couldn't have a garden.

JLee

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It seems about the same. I could've bought a studio for 50k but instead I bought a 3 bedroom for 118k. The studio would have been 250 for mortgage and 250 for hoa. If I had done a 30 year for my current house it would have been 550 for mortgage and 550 for hoa. (I did a 15 year). For 4 out of 5 years I have had someone paying $600 a month. So 1100 minus 600 equals 500 not accounting for vacancy (I don't feel like doing the math right now). So pretty similar to the studio. Sometimes I wish I had gotten the studio but then I remember I couldn't have a garden.

$550/mo for an HOA?! Holy crap.

mozar

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$550/mo for an HOA?! Holy crap.

I didn't feel like writing it out but half is for taxes. Although where I live 550 for HOA is quite common.

Noodle

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Since you are looking at a property purchase, I think you actually need to start with the question of whether you actually want to share your space with unrelated people long-term. (If it were just a rental, it could be more of a financial question.) To me, that sounds like hell on earth, but my niece, who thinks heaven is being surrounded by people, would probably adore always having entertainment around and would be pretty lonely on her own.