When I graduated college I landed my first “big-girl” job 700 miles away from friends or family. I needed a place to live so I checked out various studio and one bedroom apartments, but was quickly left with a bitter taste in my mouth. Half of my take-home pay to live in a tiny little box? How would I ever save a dime? I needed a better option and that was when I stumbled upon the idea of buying a house and renting out the spare bedrooms to help with the mortgage. Two years later, I have met interesting people, had some really great learning experiences, and managed to put away roughly $20,000. Here are the steps you can take to liberate yourself from the one bedroom apartment blues:
- Talk to a Mortgage Lender. You want to know what you can afford, but also take the maximum they tell you that you can afford with a grain of salt. I almost laughed when they told me how much I could afford, because I knew that figure left nothing in my budget for, well, anything. Since I did not feel like living off of Ramen for the next 30 years, I only looked at houses 75% or less of what they told me I could afford. Also, even though the plan is to have roommates paying you, you want to make sure you can afford the house on your own just in case something unexpected happens.
- Talk to a Realtor. Discuss what you are looking for in a house. Personally I knew that I wanted to have my own bathroom and a separate living area in case I wanted to be alone. My two tenants shared a bathroom, but keep in mind that you will get more for rent if each bedroom has their own bathroom.
- When you find a house that you think fits the bill, look up what comparable rooms rent for. I have found craigslist to be the best source of information for this. You can even go so far as pretend to be a person interested in a room for rent in the area and go check out the competition.
- Run the numbers and see if it works for you. Using my situation as an example, I had two bedrooms that rented for $500 and $525 each, plus each tenant was responsible for 1/3 of utilities. I did not assume that my income would be $1,025 * 12, or $12,300, because this would not account for any vacancy or repair expenses. I estimated a 20% vacancy rate (I tend to be picky about who I let live with me, but I easily could have had a 5% vacancy rate if my sanity meant nothing to me) and I also estimated a 10% repair rate. This left me with $8,610. The entire mortgage payment (principal, interest, taxes, and insurance) was $1,000 a month, leaving me with an estimated yearly cost of living of $3,390. I didn’t factor in utilities because I would have had to pay those in an apartment anyways. This is MUCH cheaper than an apartment, plus the principal portion of the mortgage payment is similar to moving money from one pocket to another pocket, it’s not a true expense.
- After you buy the house, it is advisable to create a very solid rental agreement. With my first tenant, I did not have this and I learned the hard way very fast. It’s a story for a different day, but she stiffed me rent and ransacked the house when I was away. Always do a background check and credit check and always have a signed lease.
- Have fun, be friends, but keep your authority. Some people you live with will end up being good friends while some will be acquaintances. Even with the roommates that turn into friends, I have always relied on the lease and rental agreement and do not stray from it. Remember, you aren’t being the bad guy, you’re just enforcing what they agreed to before they moved in.
Now just sit back and watch that money stack in your bank account! At any stage in life, if you’re the type of person who (A) doesn’t like to live alone and/or (B) prefers to live alone but really wants to gain financial freedom this is a great way to accomplish that. Good luck and keep up the saving!