Passive Income 101: Session #4 – Renting out a room

Hello Forevercashers!

I am happy that you have taken a moment to read my thoughts this week. Today I want to continue the interesting program that I started a little while ago about passive income. I love passive income. I love working once and then getting paid multiple times for it. But for a long time I had no idea how to get started and how to go about it. Now that I have figured out what does and doesn’t work, I want to share what I know with you.

We have talked about what passive income is, how to monetize a website, how to generate income offline, and what realistic expectation you should set for yourself (you can see some previous posts on facebook.com/forevercashlife). But today, I wanted to talk about a specific method that a lot of people can use to generate passive income.

A friend of mine just bought a house that costs him $1,200 a month.  He found two roommates who each pay close to $450, meaning my friend just has to cover $300 per month to break even. Yet, he gets to get the tax benefits and the rising equity in the house.  Heck, if he had a four bedroom house, he could rent out one more room, and with that he could make his own house cash flow at $150/month. And with that he would have turned a lower quality Asset like into the best kind of asset, a Forever Cash Asset (something that goes up in value AND Provides CASH FLOW).

So if you have a spare room, how could you go about renting it out? Nerdwallet posted some info that I have found to be true:

Set a competitive rent

While it would be nice to rent a room for $1 million a month and retire in a year, that’s not going to happen. You’ll need to set a competitive monthly rent to attract prospective tenants.

Check local ads to determine the amount similar rooms are going for and craft your asking price accordingly. You may want to consider factors such as location and size. PadMapper is a great resource for this, showing the median rent price for a given neighborhood and number of rooms.

List your room

Real estate websites are typically geared toward apartments and homes, so try listing your empty room on a site such as Airbnb or Craigslist.

On Airbnb, you’ll post your room and the relevant details (availability, fees, etc.). And since hosts and tenants can review one another, you can get a sense of whether someone will be worth their rent or not. Once you agree to host a tenant, the site will deduct three percent from your rental income. The only downside is that this site is geared toward travelers, so it’s only ideal if you don’t want a full-time tenant.

If you’re looking for a more permanent arrangement, try Craigslist. It is incredibly easy to post a fee ad on the site and there are few restrictions. Be very careful, though, since scammers seem to favor the site. One scam involves someone copying your ad, offering your room for a drastically reduced price and leaving the renter accountable, which could be very awkward when someone shows up unexpectedly, ready to move in.

Screen tenants

Screening tenants is a proactive way to minimize problems. To do so, require prospective tenants to fill out an application with the following information:

  • Credit history
  • Employment information
  • Income
  • Past bankruptcies or evictions
  • References

You may also choose to require documents such as bank statements and pay stubs.

Finally, verify key information by checking the mentioned documents, contacting employers and references as well as running credit reports.

Choose someone you’re comfortable with

If you’re thinking of accepting the first tenant who passes screening, imagine listening to the worst music in the world as it shakes your home at 3 am until the police arrive with a final warning to turn it down. The importance of compatibility and mutual respect cannot be overstated. And if you need another reason to be more selective, remember that a year is generally the standard length of an initial lease. All the money in the world won’t suffice if you can’t get along with your tenant, so choose someone you trust and are comfortable with.

Collect a security deposit

Unfortunately, renters have a reputation for being more careless than homeowners – after all, it’s not their property. Collect a security deposit to ensure you’re reasonably covered if the renter damages your home. The standard amount is one-month’s rent in most areas.

Stay within the law

Various local and state laws exist to protect renters. To comply, you typically need to:

  • Ensure the room doesn’t exceed the legal occupancy limit (you probably shouldn’t rent a single room to more than one person anyway)
  • Follow eviction laws precisely (you typically can’t just kick someone out on a whim)
  • Maintain the quality of the room
  • Obtain permission or provide sufficient notice before entering the rented room
  • Provide all promised amenities (ex: access to pool)
  • Provide sufficient cooling and heating
  • Return the security deposit in a timely manner

Check with your local and state governments for a full list of laws you’ll be required to follow. Also, remember you’ll have to pay taxes on your rental income. Contact a tax professional for specific advice. Once you’re done, sit back and count all the extra money you’re making by filling that empty space in your home!

After that, all you have to do is sit back and collect the monthly rent.

Passive income can be a beautiful thing.

Comments: 1

  1. Avatar
    Posted by Mandy Thomson 23 Aug 2014 at 8:19 am

    Great blog – some very useful and relevant tips, especially about screening anyone you offer your room to! If you’re renting out a spare room, you also need to look a very honest look at yourself first, and think about how you might handle having another adult who isn’t a member of your family using your living space day to day – use this as your basis to decide what you really need, and use this as a basis to set house rules (that you both agree on first)! Please try my fun quiz: http://www.lodgersite.com/QUIZEGTYPE.html – to see how you might handle the challenges of having a boarder, roommate or lodger.

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