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.
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.
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.
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?