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I'm interested in buying, living in, and renting out the extra room/rooms in the home.

I currently make $42,000 a year with a pay bump to $46,000 next week. I have $20,000 in student debt at 4% less $2,200 for a grant I just received.

I'm 25. Next week my job becomes permanent (state work). I currently live in Lacey, WA and work in Olympia, WA. Median home price is $239,000 and $269,000 respectively.

My current total net income, after tax and bills, is $1,580 including my current rent of $450. So just north of $2,000 to spend on rent.

$5,000 in savings (lots of travel). Don't plan on making a purchase for at least 6 months. I'd like to improve my credit score and make sure I can keep up saving habits.

My goal is to be able to afford the home by myself, but making rooms available to renters throughout the year to help pay off the mortgage.

What drawbacks, pitfalls, or other bits should I be considering.

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I'd run the numbers. A $200K mortgage at 3.5% would have a payment of $900/mo. On an income of $46K, this isn't too far out of line. (Implicit in this line is my encouragement that you actually put 20% down. Less, and the lender will likely charge you PMI, and this can make your effective interest rate quite higher.)

Your idea can be great, or a disaster. Or anything in between. You get two roommates you get along with, and it's like charging friends their share of the rent, even though it's your property. Charge them each $450 (utilities included), and they are happy to live in the house, getting their money's worth, and all you have to worry about are the utilities, taxes and maintenance.

The flip side is the guy who stops paying after a month, has a 2 pack a day smoking habit you didn't know about, and has his other friends over to party every night. Lots of bad stuff is possible.

In general, if you buy a house that you can otherwise afford and want, the income could all be extra. Bank every cent of it as your house repair fund. Once that fund passes the cost of the 2 highest cost repairs, say, the roof and full HVAC system, apply it toward the mortgage.

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    Basically, screen, screen, screen, screen. And absolutely turn people down. My parents decided to diversify into property as they got older, they own and rent out several properties now and have never had an issue with tenants because they screen the crap out of applicants before they decide who's going to move in. On the flip side of that, they make sure they are responsive and available landlords and have a very good reputation, even with how strict their app process is.
    – Ryan
    Jul 6, 2016 at 0:15
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    All this and I would worry about your margin for error. If you do get a bad roommate, or the HVAC system goes out you should have savings to cover such emergencies. This is in addition to your healthy down payment.
    – Pete B.
    Jul 6, 2016 at 11:49
  • $900 ignores property taxes and insurance, right? So his actual monthly payment including those in an escrow could well be higher?
    – Joe
    Jul 11, 2016 at 19:15
  • Last few words of my second paragraph. I said taxes.
    – JTP - Apologise to Monica ♦
    Jul 11, 2016 at 19:21
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Be sure of your budget

My current total net income, after tax and bills, is 1580 including my current rent of $450. So just north of 2k to spend on rent.

And then you say

5k in savings (lots of travel)

That's barely over three months worth of savings given the net income that you cite. Did you take twelve months and look at how much money you had left over? Or did you try to add up your bills? Adding up bills is fraught with danger, as it's easy to leave some out. For example, how much do you spend on eating out for lunch? Don't assume that you'll cut expenses later. If you can't hold a particular budget now, it is risky to assume that you will do so in the future. The best way to prove that a budget will work is to live within it for a year. And even then, watch out for emergencies.

Savings for emergencies

As a general rule, you should have six months of gross income as savings at all times. That would be $21k now and $23k after your raise. So you are currently low on savings. Worse, as a landlord, you should have more savings than that. You should be able to survive a long period where you can't rent.

As a landlord, it is your responsibility to keep your property in rentable condition. If something happens, your tenant(s) can leave. Sure, you can sue for breach of contract, but there are many situations where you wouldn't win. Even if you do win, what if the tenant is no longer able to pay? Or a tenant dies. You have to put their stuff in storage (at your cost) and make claims against the estate. There's a good chance that you end up eating some of the rent, utility, and storage costs.

My point is that you probably need to be able to pay your mortgage out of your salary. Plus you need to have substantial savings to ride through issues. If you had a major repair (e.g. a broken pipe with the associated water damage) in the first year, you do not seem to be in a position to get past that.

If you get an out and out bad tenant, are you prepared for the time and money needed to evict? While tenants can help you cover expenses, in the worst case, they are a substantial expense themselves. The linked movie should be required viewing for anyone considering being a landlord. Are you ready for that?

Include all house expenses

A $200k loan for $950 a month is quite possible. But you don't have enough savings to get that kind of mortgage. You need a 20% downpayment for the best rates and to avoid mortgage insurance (PMI). That's $50k in savings for a $200k loan on a $250k house. Also, that $950 a month won't include your property taxes. Figure another $250 a month for taxes and $100 a month for house insurance.

You can get a mortgage with 5% down, but expect a higher monthly. Your interest rate will be higher and you'll pay something like $100 a month extra for PMI.

How much do you have budgeted for replacing and repairing appliances? And maintenance in general? Have you budgeted for annual inspections of your furnace and water heater? Resealing the roof? Cleaning the gutters? Have you adjusted utility costs for a house rather than an apartment? Plumbing problems?

If you rent a room, remember that utilities are going to be commingled. Are you ready to live with someone who takes hour long showers?

Retirement

Don't forget to save for retirement. You don't want to be unable to pay your property taxes and lose your house. Don't rely on government pension promises. They are often overly rosy.

Summary

I've mostly concentrated on the bad things. It's quite possible to make this work. But I'd start with the assumption that you need at least $73k in savings. $50k of that for a downpayment (increase if the house is more than $250k). The remainder for emergencies. Note that $46k emergency savings would be better. I'd kind of prefer that the student loan be paid off, but that's not absolutely necessary.

Oh, and make your tenants buy renter's insurance. If you need to sue someone for damages, an insurance company makes a much better target than someone who can't even afford to rent a whole apartment. Plus, it makes it less likely that one tenant will sue you for damages done by another tenant.

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  • Most of these issues would be addressed under, waiting at least six months before any purchase and the fact that I'm no longer traveling as frequently. As far as retirement goes I was, up until this past month, putting $400 away in lieu of pure savings. I've sense revised that down in order to increase savings for a down payment if this plan goes through.
    – Reed Rawlings
    Jul 5, 2016 at 21:53
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    @ReedRawlings Maybe. Although I'd point out that six months is light for establishing a budget. Summer and winter expenses are often different. And it is very difficult to save six months gross income in six months, much less a downpayment (even a 5% downpayment). If you're willing to save all your net income and then drain your savings to zero, you'll have about enough for a 5% downpayment and closing costs. You wouldn't have anything left for emergencies.
    – Brythan
    Jul 5, 2016 at 22:01
  • About 1k a month went to travel which hasn't happened since my partner left about three months ago. I was going to add more to the above, but what you're saying about budget is right. It just applies far less to me now. Six months is the base. I think there will be a downturn in that time and am hesitant to buy into that market. I appreciate your thorough answer.
    – Reed Rawlings
    Jul 5, 2016 at 22:05
  • I would leave out the 'figure $250 a month for property taxes' - that number could be $100 or could be $800. (Mine is the latter, on a similarly priced property.) Too dependent on location.
    – Joe
    Jul 11, 2016 at 19:16
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I'd be most worried about risk of a roommate.

  • How do you evict someone? What are the laws in your jurisdiction? This is usually not easy.
  • There are numerous ways they can lower property value: "linear depreciation" i.e. wear and tear of furniture, walls that need to be painted, and some more drastic ones like interaction with further prospective roommates, tobacco damage, etc.
  • If you take in a friend or family member, don't assume that's a good deal, because you still have to collect rent on them, and there's always the chance they were desperate when they were looking.
  • What insurance costs do you now face? What additional landlord risk? Maybe you didn't salt your driveway before, but you do now.

You need to research both local laws and guidelines regarding landlording as well as "ask around"-style advice for how tenants have worked and how it's worked when it's gone wrong.

And this adds up into something big: your time. You will have to put real effort into answering these questions and becoming an expert in your new parttime job of landlording.

I'm not saying don't do it. These are just the "hidden factors" I'd consider early on.

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