3 Things to Consider When Renting by the Room

Many people supplement their investment portfolio with residential real estate. These investments can be single-family homes, condominiums, or apartments. However, some real estate investors feel as though they just aren't making enough money.

If you have just a single property, can you make more money with it? Yes—which includes increasing the returns on your investment property or properties. Consider renting by the room rather than renting out the property as a whole if you want to boost your bottom line.

Renting individual rooms gives you access to multiple tenants, which means multiple rent checks. Although it can be a great financial strategy, renting this way does come with a few caveats.

Why Rent by the Room?

The majority of people who own real estate tend to rent their properties out as a whole to one person or a single family. As a property owner, you may want to consider this option whether the home is your principal residence—meaning you live in the home—or if it's simply an investment property. There are a lot of benefits to renting a single-family home or another unit to multiple tenants for both you, the landlord, as well as tenants.

The Basics

Because there are multiple people living in the property, tenants can reduce their rent expenses by sharing their cost with others. Let's say a three-bedroom home normally rents for $2,000 every month. A single tenant may not need that many rooms, and may not be able to afford that rent. But if the room went for $800 per month, it may be more affordable.

This gives the tenant their own private space as well as access to the rest of the living space—living room, kitchen, bathroom(s), and any other common space. Moreover, if the landlord charges utilities separately, they can be split between tenants, further reducing their monthly burden.

Landlords, on the other hand, can receive more rental income by renting out rooms to different tenants. So that three-bedroom home that rents out to one family for $2,000 will bring in $2,400 each month if rented to three different tenants instead. Renting by the room also helps make rental income more reliable for landlords because it minimizes the effects associated with having vacancies.

High Tenant Turnover

Sharing a house with multiple people as opposed to renting an entire apartment all alone is a cost-effective way to live. This is especially true for single and young people—especially in big cities like New York City where space is a premium and rents can skyrocket.

Many millennials have opted for this kind of arrangement because it allows them to have extra cash to use for other things like paying down college debt, buying a new car, or even saving for a down payment on a home of their own. In many parts of the country, most individual rooms can be rented out for several hundred dollars a month, while a decent apartment unit can cost at least $800 a month.

As a result, sharing a house with a few people is almost a no-brainer for people who don't have children and very little responsibility because the cost savings are huge.

Landlords, however, will very likely have to put up with a high tenant turnover rate. Yes, there is certainly a lot of demand for this kind of housing, but for the most part, renting by the room tends to be a temporary arrangement. After a few months, tenants will eventually want a place of their own with more privacy and space. Some people may find sharing a kitchen or bathroom with others for a long duration annoying. It may also be hard to date when renting an individual room.

As a result, landlords may have to replace multiple tenants every three to six months. Though it may not be hard to find replacements, the hassle of frequently listing a place to rent as well as screening possible tenants can become irritating.

Additional Phone Calls

Another thing to consider when deciding if you should rent your rental property by the room is the additional work needed to manage several tenants—not to mention the potential for conflict and drama.

Many landlords already find it annoying when they receive late-night phone calls from a single tenant. With more tenants under the same roof, it is almost inevitable that a landlord will receive more calls about broken items, complaints, and disputes among roommates. The extra money earned by renting by the room instead of the entire apartment may not be worth the additional headaches and stress.

It's also important to keep in mind that renting to more people will ultimately mean dealing with more damages and possibly more evictions. That may be a turn off for real estate investors who want to earn income from their properties passively.

Hidden Expenses

It is very easy to omit important expenses when calculating potential returns for a rental property that is rented by the room. That is because many expenses that are usually passed on to a tenant end up being assumed by the landlord, including lawn care, heating expenses, and anything else that may be hard to measure the usage by each tenant. Without carefully considering these hidden expenses, landlords run the risk of overestimating their return on investment.

In many states, it's illegal to charge a tenant for utilities—water, gas, and electricity—unless the usage was accurately and individually metered. This is hard to do with a rental unit that has multiple tenants living in it. In the end, the landlord will have to cover these costs.

The Bottom Line

Renting by the room is one way for real estate investors to increase their rental revenue. There are a number of things, however, to consider before implementing this strategy. For example, having anywhere from two to five complete strangers living in one house will create potential conflicts.

Additionally, there are some expenses, such as electricity and water, that can't be passed to tenants when individual rooms are rented. Some landlords might also not find the hassle of a high tenant turnover to be worth it.