Is there a rule of thumb when getting roommates in a house?

Question

I have a 3 br house, and I'm considering getting roommates. For the sake of round numbers, let's say my mortgage and all bills(water, electricity, cable, internet, etc) comes to $1,500 a month. Of course, this doesn't include car payment or student loan or other expenses that are solely mine.

Also, to be clear I'm not interested in renting out rooms for the sake of making ends meet. I can pay the monthly bills, I can make minimum payments on debt(car loan, student loan, no credit card debt), and I'm saving money away each month. If things take a turn for the worst, there are some expenses I can cut out entirely(like my cell-phone). However, I'm young, I don't have a family, and I've been thinking of getting roommates to eliminate my debt(excluding the house...which will take many years regardless), and to build up a nice 'rainy day' fund.

Is there a rule of thumb for deciding how much to charge someone if I rent a room out to someone? Eg, if I get one roommate, do I strictly go 50/50 of the monthly costs, or should I charge them a little more? I know I'll have to claim this as taxable income on my taxes, so should I make them pay 1/2 + what I'll end up paying in taxes at the end of the year, or are there other variables I'm not aware of?

Of course, I'm the seller so theoretically I can get as much from someone as they're willing to pay, but I want to know if there's a minimum I should be aware of, so that I don't find myself in a hole where I have to use my current savings to dig myself out.

My current plan is to have my car and student loans paid off in 4 years, but I could certainly expedite that if I had someone(s) giving me $750+ a month.

Answer 1

What you charge them depends on what kind of use you want them to have of the house. Your use of the term "roommate" implies you're imagining, well, a roommate-type situation where everyone has full access to all common areas. This is the usual situation when multiple people jointly rent a house that none of them owns. In this situation all the roommates are essentially equals.

But if you own the house and are renting it out, you can do whatever you want. A lot of people would not look for "roommates" but for "lodgers" or "tenants" --- you rent one room to a person, and you decide what the terms are for their use of the rest of the house. That means you get to decide if/when they use the kitchen, if/when they get to use your dishes, what they can do in the back yard, etc. In this situation the roommates are not your equals. You own the property and you set the terms for everyone else. (To clarify after reading the other answer: by "not your equals" I don't mean to imply that renters aren't equal as human beings to the landlord or should be treated as lowly peasants or anything like that. I just mean that they need not have equal decision-making powers with regard to the housing itself.)

I would say the big difference is the social dynamic: personally, I wouldn't feel comfortable renting out rooms to "roommates" unless I was quite sure I would get along with them --- basically, the kind of people I would actually rent with, not just rent to.

If you do rent roommate-style, and everyone has essentially equal access to all the facilities of the house, I'd say it's reasonable to split all house expenses roughly equally (with perhaps some adjustments for differences in amenities, like if one person has a larger bedroom than others). If you rent tenant-style, where you're not expecting them to be your buddies, the best way to determine a reasonable rent is to find other people renting similar rooms and see how much they're charging. Craigslist is a great way to do that; you can also ask around to people you know.

Answer 2

Market rates bed on comparable units is what determines the rent. I have a big spreadsheet to evaluate rental properties on a cost and tax basis; it has like 70 numeric cells, but none of that means a darn thing. What sets the rent is what other landlords are charging for similar units.

One big mistake made by novice buy-and-share people, especially in the expensive big city, is getting all principled that the tenant ought to pay half your mortgage. Sure, if you give me half the equity and tax advantages!

So my $1700 rent added $200 equity to your home, and also allowed you to deduct $1500 in ITI, reducing your taxes by 22%+8% of that, or $450, and meanwhile my half of your house's appreciation is $400. Not so principled about giving that back to me, eh?

So a "based on cost" pricing model really doesn't work. It is neither competitive nor fair.

Answer 3

In my experience, in a house share situation, it seems to come down to how comfortable the occupants feel and how much of their own space they want. For example, I've come across lots of situations where someone is renting a room from a live in landlord, but in practice the two housemates (or roommates if you prefer) have equal run of the place and may even share food and hang out together and also the opposite, where people are sharing a property as equals, but tend to stick to their own room and don't share, or even more extreme, where they are technically equals but subject to one or more very domineering housemates (roommates). This happened to someone I know who was renting with two "friends" but was forced to move out. I run a website - aimed at lodgers and live in landlords, and house sharers to a lesser degree, mostly from the UK, but relevant everywhere as I deal with much more than legalities and tax.
I came across this thread as I wanted to explore the difference in the US between a lodger and a roommate. From what I gather, the term "lodger" is understood, but the term "roommate" is more typically used to mean a lodger, which in itself suggests a more equal arrangement than in the UK, where we're more used to owning property than renting, and certainly sharing. However, I believe that if you're letting a room to someone, and they pay you a reasonable rent and respect both you and your home, you should be prepared to treat them as an equal on a day to day basis. If you're not, then you naturally won't attract either the best rent, or the best lodger/roommate, however desirable the property.