Buy home and leverage roommates, or split rent?

Question

Currently, I live in a 3 bedroom apartment with 4 other people (5 total), and we are looking to switch apartments because we don't like the place anymore.

I started looking around for new places, and found a handful that could work out. However, I had the idea that instead of all of us draining our money into a landlord, I myself could instead buy a home with a mortgage and charge my roommates rent, which I could funnel into the mortgage, paying off my debt.

I currently make 70,000 a year. And my roommates are in the same ballpark.

I was aiming to buy a 110,000 home, and charge my roommates 500 a month, giving me 24k a year to put towards the home and other costs.

I have already lived with these people for a year, so I know they are clean and respectful, and have never missed a rent payment, so I don't predict problems there.

I am in the Cleveland Ohio area.

I was planning on seeing a professional about the situation, but wanted to ask here to get an idea of what I should think about.

Edit: If I go through with this, do I need to report it in a special way on my taxes?

Answer 1

what I should think about.

• How much cash can you put toward a down payment? Anything less that 20% will significantly raise your mortgage amount.
• What if your roommates decide that they want to move again - will you sell the house or find new roommates?
• How strict on rent payment are you going to be with them? Will you give them more grace because they are friends? How much grace until they are taking advantage of you?
• Is a 110k house big enough for 5 people?
• Are they willing to pay rent while you reap the benefits of building equity in the house?

If you decide to do this - get everything in writing. Get lease agreements to enforce the business side of the relationship. If they are not comfortable with that much formality, it's probably best not to do it,

I'm not saying that you should not do this - but that you need to think about these type of scenarios before committing to a house purchase.

Answer 2

"...instead of all of us draining our money into a landlord..." Instead, you are suggesting that still everyone (except you) will drain their money into a landlord, just that now the landlord is you.

I guess what that really means is that you will need to have landlord tenant agreements between you and your roommates. When things break or need replacing you'll have to foot the bill and as your tenants, your "roomies" might not be too forgiving when things need fixing.

When the fridge breaks down, you'll have to buy a new one immediately. Yard work is your sole responsibility, unless you offer discounted rent or other perks. What about service bills: energy, water, sewage, internet, television, etc?

Answer 3

There is a term for this. If you google "House Hacking" you will get lots of articles and advice. Some of it will pertain to multifamily properties but a good amount should be owner occupied and renting bedrooms.

I would play with a mortgage calculator like Whats My Payment. Include Principle, interest, taxes and insurance see how much it will cost. At 110k your monthly fixed payments will depend on a number of factors (down payment, interest, real estate tax rate and insurance cost) but $700-$1000 would be a decent guess in my area. Going off that with two roommates willing to pay $500 a month you would have no living expenses except any maintenance or utilities. With your income I would expect you could make the payment alone if needed (and it may be needed) so it seems fairly low risk from my perspective. You need somewhere to live you are used to roommates and you can pay the entire cost yourself in a worst case. Some more things to consider..

Insurance will be more expensive, you want to ensure you as the landlord you are covered if anything happens. If a tenant burns down your house or trips and falls and decides to sue you insurance will protect you.

Capital Expenses (CapEx) replacing things as they wear out. On a home the roof, siding, flooring and all mechanicals(furnace, water heater, etc.) have a lifespan and will need to be replaced. On rental properties a portion of rent should be set aside to replace these things in the future. If a roof lasts 20yrs,costs $8,000 and your roof is 10years old you should be setting aside $70 a month so in the future when this know expense comes up it is not a hardship.

Taxes Yes there is a special way to report income from an arrangement like this. You will fill out a Schedule E form in addition to your regular tax documents. You will also be able to write off a percent of housing expenses and depreciation on the home. I have been told it is not a simple tax situation and to consult a CPA that specializes in real estate.

Answer 4

It's doable, but there's a fair amount of risk involved. The biggest issue is that your roommates could move out. It's possible that they could have a falling out, get a job in a different city, or just move on. How difficult would it be to find another roommate? How many roommates can you lose and still afford to pay the mortgage, insurance, taxes, and all the rest of your living expenses?

Even if you you retain all of your roommates until the mortgage is paid off, there's still some risk involved. If you were to lose your job, could you continue to make mortgage payments? Worst case scenario is that you could become unemployed for a time while home values in your State/City/neighborhood are crashing.

Last, the position on landlord has the potential to be lucrative, but also comes with a fair amount of responsibility. It will be a drain on your time to maintain the house and to make sure you always have tenants. I know you said that your roommates are good about paying on time, but are you willing to evict a friend because they won't/can't pay rent? It's easier to ask the landlord for an extension on rent when you're friends.

All that being said, I think that this idea is worth considering. My recommendation is that you consider every aspect of it, and proceed cautiously if you choose to do so.

Answer 5

I've done this, both as one of the renters and (in a different house) as the landlord. I had roommates I had not lived with before though. It's definitely doable, but can get awkward.

Some advice in no particular order

1. Make sure you can afford the house on your own. This avoids the awkward situation of making you financially dependent on your friends. Also, it shouldn't be a problem for a 110k house on a 70k salary.

2. Set the rent below market rates. The arrangement should be financially beneficial to everyone, not just yourself.

3. Expect your roommates to leave eventually. These days people will go where job opportunities take them.

Answer 6

Mixing friendship and money, whether that's loans or landlording, is risky. Often things work out, but sometimes the unexpected happens, and it doesn't. If things go wrong, are you prepared to walk away from either the friendship or the money?

After you've considered that, the next question is how your roommates feel about the deal. You're looking to charge your friends $2000 to rent part of a property that, from the sound of it, they could rent much cheaper from a stranger. Maybe the market is different in Cleveland, but in my area, I'd expect to pay $2000 in rent for a place worth closer to $300,000 than $100,000. Have your roommates expressed interest in the idea, and have you discussed dollar values with them? Are you still interested if they ended up paying $1600 in rent? $1000?