What rental strategy should you choose for your investment property? The majority of real estate investors opt to rent out a single property to an individual, or a single family. But that’s not the only option for a long term rental property. You can also consider renting by the room – ie renting a property on a room by room basis. Is it a better strategy than renting out an entire property? The answer is not a shocker: it depends. Let’s take a look at both options, renting rooms vs. a whole house, before we make our final judgment.
Disclaimer: Before you consider renting by the room, make sure your state and zoning regulations allow for it. Depending on where you invest in real estate, you may need to check rooming house zoning and obtain a rooming house license. Once you have that, you’re good to go.
Related: 13 Reasons Why (and Why Not) You Should Consider Renting Out Your Property on a Room by Room Basis
Perks of Renting by the Room
Higher return on investment
There are several advantages to renting by the room. For one, renting out a room could yield a higher return in rental income. It’s quite simple math- with multiple tenants, you can make more money. Let’s say you have a 3-bedroom investment property, and let’s assume renting out the property to a single family can generate $1,200. Renting to three different tenants for $500 each could generate $1,500 instead, and the tenants won’t be complaining about a high charge for rent.
Lower chance of 100% vacancy
When renting by the room, you’re less likely to experience total vacancy – the period of time when your rental property is completely vacant. If one tenant chooses to leave the property, you’ll still have a source of rental income from the remaining tenants. Whereas with renting the entire property, you’ll experience total vacancy during the turnover period.
A great option for college towns
If you’re worried about finding a long term tenant in a college town, you can rent by the room. Most students prefer this arrangement. In this case, you would need to consider a plan for the summer months, when university students are out of town. One option is to convert your traditional property into a vacation home during this time to continue generating income.
Things to Consider When Renting by the Room
When renting a single family home to multiple tenants, consider the following:
Higher tenant turnover
Usually, landlords who rent out a room experience higher tenant turnover. Tenant turnover can be higher because renting by the room is considered a “temporary arrangement” by many people. This is especially the case in bigger cities and among single Millennials and college students.
And while it’s not always difficult to find replacement tenants, the process of listing the rental property, screening tenants, and signing the lease can all be time-consuming. One way to avoid this issue is to have a minimum stay requirement in the lease, such as 6 months or a year.
Related: Lower Turnover Rate, Higher ROI: How Landlords Can Retain Good Tenants
Income can be unstable
Because the turnover rate is higher, your bottom line as a real estate investor can be affected. So while it’s true that at full occupancy you’ll make more money, it’s not the case during turnover periods. Remember the $1,500 we initially assumed? During turnover, you could be only making $500, or nothing at all. If this cash flow property is your sole source of income, renting by the room could bear more risk.
Because you have multiple tenants, you may need to deal with multiple issues, which means your phone may be ringing more if you choose to rent by the room. Additionally, you may incur additional maintenance costs, especially with tenants moving in and out more frequently.
Renting by the room can also bring about additional tenant management issues, especially if you own more than one rental property. Depending on property size and how many rooms you’re renting, you could end up with a dozen tenants at once. Imagine the management nightmares!
So when you rent out your rental property by the room, you should evaluate whether the extra income is worth the extra hassle.
Perks of Renting Out a Whole House
It’s a more stable source of income
You know how much you’re receiving in rental income every month. Furthermore, traditional renting usually has a longer lease, which helps you better manage your income expectations. If you have an annual lease, you know you’re receiving our previous example’s $1,200/month.
Related: Real Estate Investing 101: How to Calculate Rental Income
One tenant, one point of contact, one problem at a time, you get the point. Additionally, it’s also less work with regard to zoning laws and legislation. To get the rooming house license we mentioned above, you have to meet certain requirements and file various requests. These are all steps that you can avoid when renting out the whole investment property.
Fewer management issues
One of the hidden costs of owning a rental property is tenant management. Real estate is very much a people and people management industry. So if you don’t have time to collect rent from individual tenants, mediate matters between them, or tend to their separate needs, definitely refrain from renting by the room.
Which Option Should You Opt For?
So what’s the final judgment? We’ll stand by our initial answer: it depends.
If you are confident that you’ll be able to maintain full occupancy and have the time and resources to manage multiple tenants, do consider renting by the room. Also, consider this option if your area attracts students and young professionals.
If, on the other hand, your area attracts families, we advise you to rent the entire investment property. We also advise this option if you own more than one rental property, if you have less time to invest, or if you’re heavily relying on the income generated from the property.
Final Pro Tip
To help you decide which strategy to choose, you can also use Mashvisor to calculate and compare returns from either strategy. Our rental property calculator can help you estimate expected rental income so you could make a calculated decision (pun intended). To learn about your options for signing up for our services, click here.