Author Topic: How to calculate the value of renting part of a potential home?  (Read 4060 times)

Justin234

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Hey there, my family is currently in the process of considering whether or not a home purchase is an intelligent thing to do. There are a lot of complexities that I won't go into (and "rent vs buy" has been addressed in many other threads). Suffice it to say that we are trying to factor in the high rent in our city, the current low interest rates, and the fact that houses are generally scare so they are getting bid up.

We were originally weighing this all against the idea of buying an investment property, and continuing to rent for ourselves. But we decided recently that we'd rather either spend our down payment savings (currently sitting in cash) on something that would improve our quality of life and hopefully be a good investment, or just put it in stocks and consider an investment property in a few years.

Anyway, part of our plan is to rent out a room/basement/whatever (depending on the house) to help pay for the mortgage. Renting a room could bring in $800/mo, which would be about 1/2 the mortgage (as well as being inconvenient). My question is: Is there a clear way to weigh the increased cost of a house (how much one extra bedroom would cost, or a finished (or finishable) basement), against the income that a rental would provide?

If we were talking a separate property, the standard is that rent should equal 1% of the value per month. Can this be extended to mean that, if the extra space in our house can be rented for 1% of the value that that extra space cost us, then it is a reasonable investment? Or am I missing something?

This would still leave the tricky question of estimating the value of that added space. Should I take the average difference in home values between, say, 2 and 3 BR homes in the area? Ideally we would have a MiL basement situation, but it's difficult to factor that into the home values, especially if it requires renovation. Any thoughts on this would be appreciated!

Justin234

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Re: How to calculate the value of renting part of a potential home?
« Reply #1 on: March 15, 2013, 11:30:50 AM »
Hm, no answers. I'm not sure if that means my question was poorly worded and unclear; obvious; difficult to answer; or just uninteresting? I'm not complaining, just surprised because I what I'm asking is a fairly Mustachian inquiry (renting out extra space, but making sure it pays off)...

arebelspy

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Re: How to calculate the value of renting part of a potential home?
« Reply #2 on: March 15, 2013, 12:17:23 PM »
I would not purchase a larger place than needed with the idea of renting that extra space out.

YMMV.
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Justin234

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Re: How to calculate the value of renting part of a potential home?
« Reply #3 on: March 15, 2013, 12:35:25 PM »
Okay... That's an answer. Thanks.

Hotstreak

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Re: How to calculate the value of renting part of a potential home?
« Reply #4 on: March 17, 2013, 08:01:00 PM »
I'm also interested in learning some more about this.  I'm single, and in a position within the next few years to purchase a first home.  Of course, homes have more than one bedroom, and most SFR in this area have at least 3, so I would likely use at least one as a rental space.  Hopefully I would have a friend stay there but it may be a stranger.  Are there any special modifiers beyond what are normally considered for a rental?  Assuming I can calculate the real cost of the dedicated square footage, and a fraction of the shared space, and both profit on that and come out either cheaper than my current rent, or with more amenities (for me a yard with a garden).  Is there anything in particular about renting a room or similar arrangements that are commonly overlooked? 

I do have a friend who bought a home and rented rooms out.  He had friends in town who had just recently graduated college with him, so they trusted each other and got along well.  He had a steady supply of reliable renters for many years...  still having to deal with them moving out, but knowing ahead of time, and no behavioral or property damage issues.


To the OP, yes the financial part is fairly simple.  What are your expected returns from the rental, versus what is the cost per month of purchasing the extra space including all interest, expenses, vacancies, utilities etc.  Don't forget to a least make some attempt to place a value on privacy and solitude for your family.  You don't mention much at all about your family.  If you have kids, it could be weird having a stranger in the kitchen all the time when the little one goes for juice.  Same if you and your spouse want a nice quite evening and your renter has a friend over drinking beer and playing X-Box, or is knocking the headboard against the wall when your mother in law is visiting.  If there's anything else I have overlooked I would love to hear it.

totoro

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Re: How to calculate the value of renting part of a potential home?
« Reply #5 on: March 18, 2013, 02:01:48 AM »
Yes.  I do it by calculating the mortgage and expenses first.  You then look at projected rental income and factor in tax deductions/income tax.  You then have a bottom line to compare from place to place and rent or no rent.

As far as renting a room, many people do this, although I do not because I don't want to.  If you are flexible and open and good at choosing roommates it could work out great.  Air B&B is another option.

As far as considerations, give as much separation as possible and as much soundproofing as possible and avoid basements.  Go for above ground housing if possible.  Buy in a good area that is in demand and have a generally desirable home that is updated.

If you don't have a separate suite try for separate floors and bathrooms and maybe even a mini-kitchen area like this: http://infiniteelectronix.com/avantick30b-1compactkitchen.aspx  They cost a few hundred dollars and are fairly easy to install.  This could suit a student and could turn a large bedroom into a self-catering space.

Justin234

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Re: How to calculate the value of renting part of a potential home?
« Reply #6 on: March 24, 2013, 01:06:42 PM »
Yes.  I do it by calculating the mortgage and expenses first.  You then look at projected rental income and factor in tax deductions/income tax.  You then have a bottom line to compare from place to place and rent or no rent.

As far as renting a room, many people do this, although I do not because I don't want to.  If you are flexible and open and good at choosing roommates it could work out great.  Air B&B is another option.

As far as considerations, give as much separation as possible and as much soundproofing as possible and avoid basements.  Go for above ground housing if possible.  Buy in a good area that is in demand and have a generally desirable home that is updated.

If you don't have a separate suite try for separate floors and bathrooms and maybe even a mini-kitchen area like this: http://infiniteelectronix.com/avantick30b-1compactkitchen.aspx  They cost a few hundred dollars and are fairly easy to install.  This could suit a student and could turn a large bedroom into a self-catering space.

Thanks for the tips - that's an interesting option for a mini-kitchen set up.

Justin234

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Re: How to calculate the value of renting part of a potential home?
« Reply #7 on: March 24, 2013, 01:09:25 PM »
To the OP, yes the financial part is fairly simple.  What are your expected returns from the rental, versus what is the cost per month of purchasing the extra space including all interest, expenses, vacancies, utilities etc.  Don't forget to a least make some attempt to place a value on privacy and solitude for your family.  You don't mention much at all about your family.  If you have kids, it could be weird having a stranger in the kitchen all the time when the little one goes for juice.  Same if you and your spouse want a nice quite evening and your renter has a friend over drinking beer and playing X-Box, or is knocking the headboard against the wall when your mother in law is visiting.  If there's anything else I have overlooked I would love to hear it.

Thanks. Yes, I agree about the weirdness. And we do have kids. We are on the border of whether we "want" this or not. It would take some getting used to - it would be good when the renter is great to live with, and bad when you have a problem or if they are just odd or not a good fit...

I think it is really a good option for single people though. I know someone who rents out bedrooms in her house on a short-term basis and this pays the entire mortgage. Pretty smart, if you can put up with the company. She has pretty careful vetting process and apparently has gotten really good people.

mizzoujohn

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Re: How to calculate the value of renting part of a potential home?
« Reply #8 on: March 28, 2013, 12:43:09 PM »
Hey! I've considered the same thing. I was thinking graduate students. They are past their partying days and serious about school, and I would think reliable/intelligent. Plus you have a good idea how long they will be renting. What does everyone else think?
Regards
John

richschmidt

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Re: How to calculate the value of renting part of a potential home?
« Reply #9 on: March 29, 2013, 08:46:43 AM »
This reminds me of the HGTV show Income Property...

My advice: if you can find a place that let's you have a completely separate apartment to rent out, go for it. Our house has two apartments in it that we rent out to law students. They're up on the 3rd floor (it's a big old Victorian) and have their own separate entrance. They are complete apartments, with their own kitchens and bathrooms. Utilities are all combined, which means we can't be as Mustachian as we might otherwise be in the summer and winter. :) But it makes things simple for renting to students, since they don't have to set up utilities.

One additional downside is noise, but it's been minor. They know we live below them, and they're respectful of that.

We've also had people live with us, essentially renting a bedroom from us, but with $0 rent. Having a separate apartment is much, much better.

mpbaker22

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Re: How to calculate the value of renting part of a potential home?
« Reply #10 on: March 29, 2013, 08:54:36 AM »
I calculate expected monthly rental income (including months where it goes unrented) and subtract monthly expenses (extra taxes, extra maintenance, etc.) then multiply by 360 (25*12).  That is the maximum I'm willing to pay extra in value of the home.
My formula is also more for a multi-family with the 2nd unit rented out.  It's not exact, but I'm not exactly in the market yet :)

I'm also single and looking at buying a place I can have paid off when the wife and kids hypothetically come.
« Last Edit: March 29, 2013, 08:56:25 AM by mpbaker22 »