36

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?

Andrew Diamond
  • 469
  • 1
  • 4
  • 7
  • 17
    Is that a typo $110,000 house? $500/month x 4 for a ~$600/month mortgage sounds crazy. – Hart CO Jul 24 '17 at 21:30
  • 2
    The tax implications of renting out your home are that all rents received are considered income, expenses like repairs, mortgage interest, insurance, and depreciation offset income, the rest is taxable, since you're living in the house it's the percentage of expenses related to the rented portion of the house. You'll file a Schedule E with your 1040. – Hart CO Jul 24 '17 at 21:37
  • 2
    @Hart CO, the cost of rent always sounds crazy from pretty much any perspective. – Octopus Jul 24 '17 at 23:01
  • 25
    @Octopus the rent seems reasonable. 110k for a house that supports 5 tenants seems crazy. – D Stanley Jul 25 '17 at 02:32
  • 22
    Anyone making $70,000/year can easily afford a $110,000 house without needing to rent part of it out, which implies to me that you all want to continue living together. It's not clear to me why you would charge that much rent, or why they would be willing to pay it. You are effectively getting a free house at the expense of your roommates. – chepner Jul 25 '17 at 12:12
  • 1
    The situation seems to call for something more ... equitable. Say, all five of you arrange for equal responsibility for the mortgage and expenses, with a requirement for the remaining tenants to buy out any one that moves out. – chepner Jul 25 '17 at 12:37
  • 1
    I would suggest you consider buying the house together. In England and Wales, this would be slightly complicated because only four people can be named on the deeds of a property (there are ways round this though). Your solicitor would be able to sort that out. Agreeing how to handle separation up front would be good too. Mortgage companies would be happy with more names on the mortgage (more targets to chase for the money) - but they might well ignore the highest paid for calculating affordability. – Martin Bonner supports Monica Jul 25 '17 at 15:00
  • 14
    Beware of doing business with your friends... – algiogia Jul 25 '17 at 15:04
  • 7
    @MartinBonner I would suggest not buying the house together, as it will significantly complicate matters as roommates inevitably move out. – Nuclear Hoagie Jul 25 '17 at 18:14
  • @NuclearWang. It worked well for me (only two others though, a couple). – Martin Bonner supports Monica Jul 25 '17 at 18:19
  • 2
    I'd argue against buying together. Especially with 5 people the risk of an acrimonious or otherwise messy splitting is just too high IMO. Especially if the relation lasts long enough to build up significant amounts of equity that needs bought out. – Dan Is Fiddling By Firelight Jul 25 '17 at 20:44
  • 4
    A friend is only a friend until you sell him something. Then, he's a customer. -- something Quark said on Deep Space Nine. it's not an actual rule of acquisition as far as I can tell. – Harper - Reinstate Monica Jul 25 '17 at 22:42
  • 1
    The mortgage should be about $850/month depending on 15/30 year mortgage. At your income you should be able to pay that on your own. Having 5 *500 =2500/month should be more than enough. Just make sure to put the extra into a saving account for utilities and long term expenses. Clearly define in writing what their money entitles them to. Do they still need to contribute to the price of a new frig or etc. – cybernard Jul 26 '17 at 00:20
  • 1
    @chepner I know some people who would rather pay a fee they can easily afford if it means not having to worry about certain things. I would be happy to pay rent to my friend if it meant they got to live for free, as long as I received other benefits, like not having to take the trash out etc. – ESR Jul 26 '17 at 06:30
  • 1
    @Andrew If you are looking for long term personal success, buy the house by yourself, charge them a little less than $500 rent each to make the deal sweet for them too, and bank the extra until you have enough to cover the mortgage by yourself for a few months. Then start paying down the mortgage with the overages. Make sure you cover ALL expenses in your calculation of the rent! Property Taxes, income tax, and water bills will all come in your name, and can be several hundred a month depending on the area. Shout out from Cleveland, Ohio! – bakoyaro Jul 26 '17 at 16:06
  • This just strikes me as sheer greed and a way to make a quick buck from your "friends", you simply want to be in the position of your current landlord having your mortgage paid for by your "friends". I don't imagine it will take long before they come to resent you (if they don't already). 5 people in a $110,000 house is surely overcrowding. – Daniel Waters Jul 27 '17 at 12:02
  • 2
    Just FYI, it's totally possible to get a house in Cleveland that houses 6 for that money. https://www.zillow.com/homedetails/3693-E-69th-St-Cleveland-OH-44105/33423226_zpid/?fullpage=true If you all want to pay $500, I'll buy it and rent to you. – Aaron McMillin Jul 27 '17 at 13:42

6 Answers6

61

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.

D Stanley
  • 133,791
  • 19
  • 313
  • 372
  • If this were an Australian question, I would advise getting bond, and lodging it officially with the bond office in addition to getting a lease agreement. I don't know if such a sentence has meaning in the USA? – Scott Jul 25 '17 at 03:56
  • 33
    "If they are not comfortable with that much formality, it's probably best not to do it." This. It's only a good idea if they can do it as a financial deal. If it's all verbal because it's just among friends, you risk your finance and your friendship both. – Wildcard Jul 25 '17 at 04:07
  • 1
    Note that anyone who doesn't want to or isn't able to provide good answers to the first three questions is a potential yes answer to the fifth question. Merely not having a down payment saved up yet is a decent reason to rent instead of building equity. – Todd Wilcox Jul 25 '17 at 19:16
  • 1
    @Scott It's called a deposit in the United States, and the landlord usually keeps the amount on his own books (instead of having a government escrow). Renters should get proof of paying it, and that's usually written into the lease. – chrylis -cautiouslyoptimistic- Jul 26 '17 at 06:13
  • It can work but caution is advised. I lived with a friend for a number of years and we did this. We started out in an apt, moved to a town house and then a house both of which he bought. We split the typical utilities like room mates do. I did sign some relatively simple paperwork when he first bought the town house. From my side of things the benefit was that he kept my rent pretty low compared to market rates and he was more easily able to afford the mortgage. I eventually moved out because he was getting married and we are still good friends. – Evan Steinbrenner Jul 26 '17 at 18:28
  • I'd add: * what if you decide you need the place for yourself because you want to start a family or need to host family members or any other situation? Would your friends be ok with the normal notice or would they hold against you? – rosysnake Jul 27 '17 at 11:27
31

"...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?

Octopus
  • 523
  • 3
  • 10
  • 5
    Not a helpful answer, more like three unrelated comments. – jwg Jul 25 '17 at 09:49
  • 10
    It really gets to the heart of the original question, though, IMO. There seem to be lots of risks in the situation, just none of the primarily financial. – chepner Jul 25 '17 at 12:33
  • 8
    @Jwg unrelated comment? He's 1 of 5 people "Dumping" money into a landlord... if he gets a house then he's a landlord with 4 people "Dumping" money into him. This is a valid set of questions and concerns for a new "home owner" and "landlord". – WernerCD Jul 25 '17 at 12:41
  • 4
    @jwg, the question as stated was "...to get an idea of what I should think about." I think I offered some suggestions of things to think about. Basically, he's not going to be sharing expenses with his roommates anymore, his relationship with them will certainly change. – Octopus Jul 25 '17 at 16:11
15

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.

JaredStroeb
  • 439
  • 2
  • 6
  • 3
    Is it possible to have a trust buy and own the property, and for everyone to be a tenant with the trust as the owner ? – Criggie Jul 25 '17 at 06:57
  • 1
    Trusts can and do own rental property. I am not an expert but financing is more difficult to find and expensive when buying as an entity. Commercial financing usually requires 25% down and will result in a higher interest rate. You can buy in your own name (for better financing terms) and transfer into a trust, but that can trigger a due on sales clause where the bank can demand the entire mortgage balance. – JaredStroeb Jul 25 '17 at 13:59
8

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.

Nosrac
  • 6,839
  • 26
  • 50
8

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.

aij
  • 181
  • 2
1

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?

Karen
  • 455
  • 2
  • 8