Rent a Room in Your House: Follow These 5 Steps for Maximum Protection was written by Max and originally appeared on Wealth of Geeks. It has been republished with permission.
The population of the United States continues to grow every year as more individuals flock to the U.S. The demand for rental housing increases with this growth.
Between 2006 and 2016, the United States grew by 7.6 million households. New homeowners did not increase in the same ten-year period.
Invesco Real Estate, one of the world’s largest property investors, gave Mynd $5 billion to buy 20,000 homes in the United States (in 2021) within three years on behalf of pension funds. Invesco is not the only large corporation to dip its toes in the single-family home (SFH) rental market.
In March 2021, Allianz Real Estate and private equity group Centerbridge invested $1.25 billion in Upward America Venture, a partnership with homebuilder Lennar Corporation to acquire over $4 billion of new single-family homes for rent in the United States.
Historically cheap mortgage rates push corporations to invest large amounts of capital into SFH rental properties. As these corporations buy more real estate, the logical result is that more individuals will need housing as renters.
If you own a home and want to make some extra money every month, here is a guide on how to rent a room in your house.
Renting a Room vs. Renting Out a House
Having a rental property is very different from renting a room out in your house. When you rent out a room, you will be sharing space with this person. Conversely, you do not live with your tenant when you have a rental property.
Renting out a room in your house requires even more scrutiny of potential roommates because you share a home with them. Many of the same guidelines apply to rental properties and room rentals, yet significant differences exist.
How To Rent a Room
Step 1: Price Your Room Competitively
Before you decide to take in a roommate, you should research how much money you can charge for rent.
Make sure to look at different room listing sites to understand your rental market. Sites like Spareroom.com, Facebook Marketplace, and Craiglist all offer the ability to search within a specific zip code.
Make sure to set the search within a few miles of your zip code and look at the different advertisements.
Are the advertisements short and vague?
Do their photos look like they came from a flip phone?
If you see these deficiencies, that will allow you to improve your listing and attract higher-quality potential roommates.
Once you have an attractive ad and photos in place, you can charge 10-15% higher than the local market due to the extra work you have put in.
Before you receive your first month’s rent, you will need to craft a stellar room advertisement.
Step 2: Be Specific in Your Room Advertisement
The easiest way to have your notifications light up after posting your ad is by being vague. A roommate ad should support your desire to find the perfect roommate and spell out the specific characteristics and attractive traits you want in a roommate.
Don’t be shy here. Go through your previous roommate experiences and think about the good, the bad, and the ugly.
What was that one thing that irritated you about your previous roommates? What were the things you liked about your last roommate?
Make sure to add all of these dislikes and wants to your roommate ad.
My room advertisement is over two pages long and has over 500 words. I’d much rather receive three phone calls in one day instead of twenty. Yes, that did happen once, and no, I would not recommend it.
The more specific you are in what you want, the better result you will have. You do not want phone calls from unqualified potential roommates. That makes this process cumbersome and time-consuming.
Do not include your email address. Potential scammers will only communicate via email.
Instead, only communicate by phone call using a Google Voice number, so you do not have to give anyone your actual cell number.
Lastly, ask yourself: if I were looking for a room, would I call this person?
If your answer is yes, you are on the right track. If not, make necessary changes until you are happy with the result.
Step 3: Ask the Right Screening Questions
Once the ad is active, people will begin calling you. Prepare several questions to ask them to get a sense of who they are and if they would be a good fit for you.
Here are three deal-breaker questions you’ll want to ask each person who calls you.
Do you have the first month’s rent and security deposit ready today?
Ask this question first so you can weed out all the unqualified callers.
If you rented out a room for $500 per month, you would need the $500 (first month’s rent) plus $500 (security deposit) for a total of $1,000.
If they answer anything other than a resounding yes, politely end the phone call. Tell the potential roommate you are only considering applicants who have the money saved today.
Someone who doesn’t have $1,000 saved up is either in a tough spot financially or does not manage their money well. To minimize any problems down the road, do not consider anyone who is not economically stable.
Again, the higher your standards, the better the roommate you will find.
Where do you work?
You need to know how they will afford to pay the rent each month. The best question to ask is whether they have worked at the same place for over six months.
If they are new at a job, ask what happened at their previous employer and see how they frame the details of their departure. Ideally, they moved to the new company because of higher pay, benefits, or culture.
If they bad-mouth their previous employer, you should consider that a negative sign.
You want to find someone who has consistent full-time employment. When the pandemic hit, many people lost their jobs. Some of these individuals could not find new work and did not pay their rent for months. This situation is a nightmare for any landlord.
Choosing a reliable roommate or tenant is 100% your responsibility. Only consider applicants who have a consistent job history.
Why should I choose you as a roommate?
If they pass the financial and job requirements, you can move on to more personality-based questions.
You will find out quickly if this person read your advertisement or not. If they seem clueless about the room ad, it means they probably scrolled straight to the bottom and called you.
Reading through the ad takes only a few minutes. If they are unwilling to go through it before calling, pass on them.
If they cannot articulate why they will be a net benefit to your life, pass on them.
Let them either build up a grand narrative on how they are the best roommate ever or not. After a few minutes of chatting, which story is true will become apparent.
Step 4: Have a Solid Rental Agreement
Make sure you have everything in writing.
You want to make sure all your dealings with your roommate are in written format.
The other party will not attempt foul play with everything in writing. Written agreements are real and tangible.
New room rental landlords get into trouble when they rent to a mutual friend without a written agreement. This new roommate takes advantage of the friend-lord, and it ends up damaging relationships in the end.
Whether you are renting to your cousin or someone you met from Craigslist, you want to make sure you include two elements in your rental agreement.
Length of Lease
Most room rentals are month-to-month (MTM) leases. MTM leases are easiest for both landlords and tenants due to their flexibility. As a landlord, you can also charge a nominal amount more for rent due to the non-permanence of the lease.
MTM leases allow you to evict someone if they are not the fit you hoped for in the beginning. Likewise, the roommate can move out if they are not happy with the living situation. This flexibility is a win-win for both parties.
Non-Payment of Rent
Dealing with someone who does not pay rent for any reason can be stressful.
When you have everything clear in the rental agreement, you, the landlord, have a path forward.
You want to include a default section that specifies if the roommate decides not to pay the rent, you will evict them.
The last thing you want is to be in small claims court, and the judge rules against you because you were ill-prepared. You want to be ready if you ever have to evict an unreasonable person.
Step 5: Treat This As a Business Venture
Treat the agreements you have in place with respect.
When the roommate pays late, charge the late fee. This communicates that you do not play games, and your roommate(s) will respect you more for it.
Once you start compromising a little here and there, you might begin to compromise in larger areas.
Ready To Be a Landlord?
Having roommates who live in your house is not easy. Even when you have years of experience, you will always be learning more about human behavior and being a better roommate.
However, being a landlord can be great because it allows you to make passive income that requires little ongoing work.
You can make extra money by making sacrifices and planning actions for each situation.