Every other Monday, we look at real estate as a way to make money. I have explained why I believe real estate is one of the best ways to grow wealth, and gone over a check list for first time investors. Today, we look at doing with what you already have, that is renting part of your house or your basement to a new tenant.
Being a live in landlord
Being a live in landlord has a lot of perks. First, you are on the property first hand, so you can see if in spite of you tenant’s background check, something is still off. A tenant who is good on paper can be noisy, put a lot of wear and tear on your property by slamming the doors, or try to sneak in a pet in spite of your no pet policy. By living on the property, you can straighten things up from the start. Chances are “bad” tenants will avoid you from the start, and only good tenants will move in.
I have lived with two roommates in a place I owned and it was much better, at least for me, than the previous houseshares I had lived in with no landlord around. The landlord would come once a quarter, take days to fix something, and no one would care about the property. With a live in landlord, people behave better, and the landlord is there to solve any problem. The property should be in better shape, as no landlord likes to live in a dump.
The thing I liked the most as a live in landlady was that you could evict the tenant with no notice. In the UK the rules are pretty strict about tenant protection if you rent the whole property. But if you live there, you just have to change the locks and put the tenant’s stuff outside your property, and you are good. I never did it, but on every interview, I made sure the tenant understood it was a possibility if they were late on rent or started damaging the property. I don’t know if the threat deterred the worst tenants but I never had a problem.
Setting the rent of your property
If you bought your main residence, you probably have a mortgage, and have had to put a good chunk of money down. You may even have opted for a 15 years mortgage or be making extra payments to pay it off faster. If your normal mortgage was $1,000 a month but you are paying $3,000, it doesn’t mean that your tenant has to pay half of that.
You need to align with the market prices for similar properties. On Craigslist and other ad boards, you can find the rates to rent a bedroom in a houseshare, and a basement or attic with independent access. To make a faire comparison with the market you need to compare all the amenities you are offering.
– Will the tenant just have access to a room or also living room and kitchen?
– Will the tenant be able to use your washer and dryer?
– Are you renting furnished or unfurnished?
– Is the entrance separate or through your living room?
– Will the tenant have a parking space?
– What bills are you including?
– Are taxes and insurance included too?
– Are you offering a peer to peer relationship, say you are in your mid 20s taking on other college kids or young professionals, or is it your family house and you take in a boarder who won’t be able to choose what movie to watch on TV tonight?
In my property, I have opted for an all inclusive rate. Everyone is happy, the tenants because the do not need to budget for the bills every month, they know exactly what their housing costs will be, and me because I don’t have to make complicated calculations to split the bills, send each of them a recap counting pennies, and get bitter if they spend too much time in the shower or do laundry too often. I also make sure my bills stay low by checking once a year on comparison sites that I pay the lowest rate possible for utilities, I have well insulated windows, and installed low-flow toilets like the Toto ultramax ii and shower heads. The tenants barely watched TV so I asked them if they were OK to get rid of the cable in exchange for a better internet plan and they agreed, resulting in added savings.
Day to day living with a tenant
If the tenant lives in a room inside your property, you want to set clear rules from the start. When is it ok to make noise, can he have company over, can company stay the night, how many nights maximum before it becomes double occupancy and both have to pay rent, etc.
Imagine an abusive little brother crashing at your place for months, what would you like to tell him from day 1? Tell that to your tenant FROM DAY 1. After you become friends or discover you can’t stand each other, communication will be harder. How do you tell a friend to do dishes? To clean after himself? Give them a copy of house rules when they move in, and talk as soon as there is a problem.
Set boundaries about rooms the tenant cannot go into, it is better if each person has a key to his or her room to avoid problems, and a shelf in the kitchen, fridge and bathroom. Make space for them so they feel welcome but define your space too.
Attic, basement and separate unit
This is the best of both worlds. Instead of having to supervise a rental property far from home, you have it right above or under you, yet your tenants do not invade your space. Maybe your driveway and garden, but you will have set rules for that in your contract as well. Renting a separate unit counts as a full tenancy, and the live in landlord eviction rights do not apply. One more reason to be very thorough with your tenant’s background check.
Be discreet and leave them space, but also keep an eye for any suspect behavior, extra people staying overnight too often, are they living there, are they keeping the property in good shape, etc.
NEVER, ever even start thinking about grabbing an extra key and checking the inside of their property while they are away. It is illegal in many places and the tenant could sue you. If you have a doubt, ask nicely if they would let you in for an inspection, and if not, what is their reason.
Having them close is also very convenient to chase late payments.