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With my lease expiring soon (house with 2 roommates), I am looking to purchase a home with total cost of debt, tax, expected maintenance, and insurance less than my current rent payments (or within $100, so essentially less than $1100). Given the mortgage interest rate I have been approved for, this puts my target price around $250,000 (there are several candidates in the Minneapolis, MN area). However, I'm not doing this to break even; I'm seeking homes with 4 beds 2 baths, not all beds on the same level, and I would plan to rent 2 beds and 1 bath to a roommate.

  1. Is it a realistic expectation that I will be able to find roommates for this type of arrangement (I would plan to used some of the site linked here, and others, for marketing, while paying if needed: https://smartasset.com/mortgage/top-9-best-roommate-finders)?

  2. Could I expect around 50% of the whole home rental value from such a tenant (if not, what approximate %)?

  3. Are there specific neighborhoods (or type of neighborhoods) I should target to attract a tenant that would be amenable to this arrangement?

  4. To what extent should I give preference to higher income, high % or renters, younger average age, and higher % with college degrees neighborhoods, or their counterparts (I use http://www.mncompass.org/profiles/neighborhoods/minneapolis-saint-paul for my demographic data)?

If it matters, I'm 28 single vanilla white guy, I have more than enough saved for 20% down, and I have no debt. I don't plan on needing to move for work in at least the next 3.5 years, and even then can ride out the market in Minneapolis if necessary. Someone please let me know if what I am contemplating sounds really stupid? Forgive my ignorance, I've never purchased real estate before.

Thank you in advance to anyone who is willing to offer some feedback.

  • Until this COVID situation is over, it might be harder to rent out a single room. People may not want strangers as roommates right now. – JohnFx Jul 12 at 17:17
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    Be aware that renting out a room in a home in a residential area can be subject to all kinds of local laws and zoning ordinances. – Dilip Sarwate Jul 12 at 17:18
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You should only do this if you can comfortably pay 100% of the mortgage and expenses in case a roommate doesn't pan out. It's much better to treat a renter in your own home as a bonus rather than a necessity in case your situation changes. This also gives you more flexibility when picking a roommate. You should also ensure no complications due to local laws regarding renting out a room in your own home.

How easy it is to find a good roommate and how much you can expect to get vary wildly by location. Close proximity to public transportation, universities, business centers, or large hospitals can make it much easier to find a good renter willing to pay higher prices, on-site amenities can be a factor too. Likely those benefits are also baked into the home prices/HOA dues, so I'd focus primarily on where you want to live. A pretty easy way to research is to browse available listings for roommates, rentals, and homes for sale and observe the relationship between market rent and property price per square foot/bedroom (factor in HOA dues when estimating monthly total payment on a house).

I'd also suggest borrowing as little as possible, buy the cheapest place that you can comfortably live in (and you believe has appeal for a renter). I don't know how much luck you'll have finding one person that wants to rent 2 bedrooms. I would either not worry about 4-bedrooms, be willing to accept less rent if nobody wants 2-bedrooms, or consider more than 1 roommate.

Review your state/city laws regarding discrimination, there are typically exceptions to some of the FHA rules when seeking a roommate vs advertising for renters in general. If I were hunting a roommate I'd still focus on ability to pay first, but I'd also want to spend a fair bit of time assessing compatibility, unless you get a proper duplex you'll have shared areas of the house and will want to make sure you can get along.

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I like Hart CO's answer and have a little to add. First it is not a dumb idea, it could be a very good idea. The key is that this venture should be considered a business and you should open such with deliberate intention. You seem to be well on your way, and in addition to many fine points in Hart CO's answer I would recommend the following:

  • Do you want to be in the landlord business?
  • Would being a landlord detract from your primary source of income?
  • Who is your ideal tenant and what unique features will your home have to attract that clientele?

The landlord business is not for everyone, and if it detracts sufficiently from your primary source of income it may be best to leave it to someone else. Identifying an ideal tenant will help you in your home search, understanding what kind of rents you can achieve and the demand for such.

One such demand, that a friend meets, is that he rents out rooms in his home. His target is young people that livelihood depends on not being 420 friendly. These would include people in law enforcement or who hold security clearances. The home is near the downtown, so going out is a short Uber ride away. He charges a decently low price (he inherited his home so the mortgage is minimal). He himself is in law enforcement so he has contact with new employees, that just join the force who need a cheap place to say. In my opinion it is a fantastic business that provides a steady but humble income.

What will be your niche? Having a good niche and access to steady stream of customers can really help this business be a success.

You should also have a plan for income from this property that would include tax planning.

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