Five years ago, I bought a 3 bed property in a lovely college town the UK. I shouldn’t brag too much about it and break my lucky strike, but since day one, I found a friendly roommate to share part of the mortgage with, and my then-boyfriend was also pitching in a below market rent, 30% lower than what we had been paying our landlord in our previous rental. It made his parents furious that I was getting rich on his back, but he didn’t want to buy a place, didn’t have a dime for a deposit, so I considered it fair that he would contribute towards our living expenses.
Anyway, for a while, it was the two of us in a room, the roommate in another one, and a third guest bedroom where we had a desk, and most of our clothes in the closet. We did have a few guests that summer so it was nice to have a spare bed, but came September, students came back to the college town and I took a second roommate in.
We were just a little more cramped in the room, but the deal was with the extra rent my boyfriend would pay even less rent, and I would pay for treats like restaurants and travel, so he was on board pretty fast.
A year later, we broke up, I moved out and relocated to Morocco, and the two roommates stayed, with a third one moving into “my room”. I knew I wouldn’t be back anytime soon and wasn’t leaving any personal stuff behind, so I had no problems renting it. With the $875 I was getting by renting that room alone, I had enough to find a nice place on my own in Casablanca.
Fast forward five years, and the roommates have come and gone, and been generally good people looking after the place and warning me if something goes wrong. They have recruited their successor every time they moved out, and chosen those people carefully. In return, I have been a good landlady and changed heaters and washing machines as soon as they break.
The property is cash flow positive since I left, by a few hundred dollars each month. And this month marks the day the accumulated cash flow reached the price of the down payment I forked out when I first bought.
So basically, thank you, roommies, for buying me that property!
The feeling is great because now, this property cost me absolutely nothing. The rents have covered the deposit, the legal fees, the furnishing costs, the heater repairs… everything. I could sell it at any price and still make money since my cost is $0.
Imagine you get a $200,000 property and put $40,000 down. The $500 positive cash flow every month means that under 7 years, your tenants will have repaid your deposit back. At the same time, they are also repaying capital on your mortgage, slowly buying you the other $160,000 of the property.
That is why I love investing in real estate. If the bank was more understanding of my weird self-employment status, I would have more rental units, although managing a property from the distance can get complicated if you happen to get a bad tenant.
In the meanwhile, the rent surplus now more than covers my housing expenses in Guatemala, so not only am I getting a free property, they are also putting a roof over my head. Real estate is awesome.
Nicola says
That set up sounds great! I have considered real estate but I’d be worried about getting a bad tenant and then all the worry/costs that might occur. Do you screen prospective tenants?
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Pauline says
I don’t do a credit check but that is because I have a setup that allows me pretty much to just change the keys and put their stuff outside if they stop paying. They are made aware of it as they sign the contract and so far I have had great tenants. Some messier, some dirtier, but they always have paid on time.
Alicia says
I have a small surplus (positive cash flow) every month that is essentially the slush fund for my rental unit. Rather than think of it in terms of the tenants paying off my down-payment in the place, I think of it building a renovation fund for when I move back in. Either way, making money from it 🙂
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Pauline says
Good for you! my place is new so no big repairs are needed but now that the downpayment is paid off the surplus will probably be saved for repairs down the road.
Kayla @ Red Debted Stepchild says
I have a 4 bedroom house, but every time I’ve tried to have a roommate it’s been a disaster, so I haven’t pursued having a roommate (or two) to help pay the bills. I also value my privacy and personal space. I don’t have to worry about who’s stuff is who’s or who made a mess in the kitchen because it’s only be living there. But, I can see how renting to roommates and/or tenants would be a good investment. Maybe at some point having an additional property to earn money would be a good idea.
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Chris says
I agree with your post in general, and if you are cash flow positive every month, you are doing ok. I have to disagree a little with your math near the end however. If you take your 40 000 down payment, and invest it with a return of 5% for those 7 years, it would be worth 53 600 if my calculator is correct. You need to keep that opportunity cost of the down payment in mind when you do these comparisons. Take care.
Pauline says
You’re right, the money tied to the house is not making money elsewhere.
Myles Money says
This is EXACTLY why I want to get into investing in real estate. I love the idea that the rental income covers your costs and pays you a monthly dividend.
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Anne @ Money Propeller says
Nicely done! Finding scenarios like that is difficult in the market that I live in, plus we are currently very overweight in real estate, when taking a look at our whole portfolio. Due to investing style differences, I’ll probably have to stick to REITs, unless I hit the big time online and can convince my spouse to use some of it to find a real estate investment!
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bergencounty says
Roommates can be really enriching, in more than just financial ways, but a bad living situation is not worth major sacrifices. The poster doesn’t specify where he/she lives, or his/her debt situation, so it’s hard to be too specific with advice here.
I found having inexpensive rent (as low as $375 in a great location) allowed me to feel really flexible in terms of radically changing my career path and income levels. It’s not a good idea to “have” to make x dollars if you can avoid it. But having a bad living situation isn’t worth the stress.
Look at studios and don’t buy a lot of stuff, so if you decide to go back to shared housing, you won’t have a lot of crap to move in with you.