Buying a Place and Renting out a Room: Important Things to Know

| January 28, 2013 | 38 Comments

buying-a-place-and-renting-out-a-room

The following is a guest post from Pauline Paquin, a French girl who blogs over at Reach Financial Independence. Born and raised in Paris, Pauline blogs about how she has been traveling the world for the past 10 years, while trying to build wealth and achieve financial independence, and how you can follow your dreams and reach your goals too. Today she is going to talk all about things to know when buying a place and renting out a room. You can follow Pauline on Twitter @RFIndependence.

Would you pay over $1,000 a month for a guest room?

When I bought a three bed flat three years ago in the UK, my initial idea was to rent one room use the remaining two to live large with my BF. This additional bedroom would be our guest room, our closet, our office, and our storage room. After a few months, we realized that we were barely using the third room. Yes, we would go every day to grab our clothes there and my BF would spend a few hours here and there sitting at the desk. Over the summer it was filled with family and friends (who would have thought summer in London was so attractive) but as September arrived, we came to the conclusion that the room would be empty until next June.

It was time to consider how much having an empty room was actually costing us.

Extra mortgage and buying price

In my area, a 3 bed flat was selling for $425,000 and a 2 bed for $375,000. A $50,000 difference, that would mean an extra $200 per month towards our mortgage. It was quite a luxury just to tell people ”you can stay in our guest room”!

TOTAL: $200 per month since I took a mortgage

Extra taxes and fees

The difference in closing costs was negligible, but we would be down one band in council tax, meaning a $300 savings per year. The condo fees are harder to determine, probably $600 per year more, since they are based on the size of the flat.

TOTAL: $360 per year, or $30 per month.

Extra utilities

My flat is VERY well insulated. Still, the extra room is heated in winter and it costs more money to do so. Utilities come to $80 per month, I think I could save $15 in a two bed flat.

TOTAL: $15 per month.

Extra hassle

Yes, a free room is nice. It is also an extra room to clean and keep tidy. Half an hour was probably spent every week taking care of the empty room, at $15 per hour, that is $30 per month.

The extra furniture was basic, we got most of it on Craigslist and freecycle, but you can include it in your calculations.

TOTAL: $30 per month.

Loss in rent

By deciding to keep this room empty, we were passing on rental income. You probably do not want a stranger in your house, but knowing the room is currently rented at $730 per month may change your mind.

TOTAL: $730 per month.

Other costs

I am not factoring depreciation, the raise in home insurance costs, the extra commission I will pay to the realtor to sell it, or the maintenance it will need when the paint will fade and the carpet will have holes.

My grand total omitting all that comes to $1,005.

By renting my room for $730, I still pay $260 in mortgage, fees and utilities, let the tenant deal with the room cleaning, and generate an income of $470 before taxes.

That is over $5,000 a year that I can put towards the mortgage or use to reduce my own housing expenses.

Again, I know that having someone in your house is not ideal, and can even lead to tensions if you don’t get along well. Having bought young, I was used to living with roommates and didn’t mind the sacrifice in order to achieve financial freedom earlier.

Don’t want to take in a full time tenant? You can look at short term rentals on sites like Airbnb, and rent your room to tourists. The rates are higher but you will need to clean the room and change the sheets. Some people also offer board to foreign students coming to learn English for a week or a month. It is an interesting way to profit from what you already have until you need the room for kids or guests. Your extra room can also be turned into your home office and become tax deductible from your yearly return. Seek advice for the amount you can deduct.

Would you mind renting your extra room?

Category: Guest Post, Housing, Lifestyle

Comments (38)

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Sites That Link to this Post

  1. How I became a landlady | September 2, 2013
  1. Modest Money says:

    lol that’s awesome that you slipped in the 20 things about you post into the list :)
    It was pretty interesting learning more about you. Mini roadtrips are awesome and so is just enjoying the city. I personally just don’t feel obligated to go on big vacations when we live in such a great city. By the way, thanks for mentioning me post.

  2. Funancials says:

    I just discovered your site via Modest Money. Looks great. Keep it up

  3. Summer always goes by too quickly! And then Fall happens and Winter is around the corner :( The days are long but the years are short.

  4. Thanks for the link love! I’ve taken dance class on and off my whole adult life. I love it! Hope you finally make it to one!

  5. Holly@ClubThrifty says:

    Thank you so much for the mention!!
    I am definitely jealous of your mini-vacations! I hope you have a great weekend!

  6. femmefrugality says:

    Summer has not been good for our budget, either, but we’ve been having fun! Sounds like you have, too. :) Thanks so much for the mention!

  7. DebtsnTaxes says:

    Thanks for the mention! I would have saw it sooner but we just got back last night from our camping trip.

  8. canadianbudgetbinder.com says:

    Sorry mate, just found out you linked my post or I would have come by earlier to give you a great big CHEERS MATE!!! Thank you kindly for thinking of CBB! Mr.CBB :-)

  9. Michelle says:

    We rent out one of our extra rooms and the extra income is nice!

  10. John S @ Frugal Rules says:

    We would consider it in the future, but with the kids it’s not really a viable option. I imagine it is a nice way to help defray the cost of your mortgage.

  11. I lived with roommates before i was married, and occasionally my husband and i talked about renting with roommates again when we were really broke. but i can’t do it now. I love being on our own too much. i love having the living room to myself, being able to do all my girl things when my husband isn’t there…
    my parents on the other hand recently rented out a room to a college student and the extra income is helping them pay off my brother’s tuition. So i can see it as a possibility, but not right now.

  12. Interesting breakdown! Having now lived with just my spouse for nearly four years, I think it would be hard to go back to sharing with someone. Maybe we could do it if our place was larger, but currently we have enough trouble keeping ourselves contained in the space. That is a very good rental income that you’re getting. I hear the flat market for rentals is insane in London these days. Hundreds of applicants for a room and stuff like that.

  13. I don’t think I would mind it as much if it was my place and if they sucked I could kick them out. :)

  14. holly says:

    I would consider it if we didn’t have kids! We have a 4th bedroom that we only use for storage and guests.

  15. OutlierModel says:

    CF really wants to do this when we buy a place with an extra bedroom. We would just do short term stays, like students, just for the extra money!

  16. Brick By Brick Investing says:

    I would have loved to do something like this when I was younger and before I started my family. It seems as if you could even transition that 3 bedroom flat into a complete real estate investment property if and your BF decided to start a family later on.

  17. Student Debt Survivor says:

    We have a two bed and it’s not very big, but we wanted to have the extra bedroom in case we had financial problems (job loss etc) and needed the extra rental income. I hadn’t thought about short term renters, that would be more palatable to us since we value our privacy and I wouldn’t want someone in that room all the time.

    • short term is pretty nice, I used to rent my whole studio when I went on holiday and it almost paid for the holidays! Check out nearby hotel prices, lower by 30% and you’ll get people. You can have a calendar with the dates you agree to host and the ones you want to be alone.

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