Hello! Today, I have a great article from a reader, Max. Max has collected $80,000 in rental income from renting out his spare rooms, and today will be talking all about this topic. I have been renting rooms in my house for 5 years. In those 5 years, I have taken in over $80,000 in…
Hello! Today, I have a great article from a reader, Max. Max has collected $80,000 in rental income from renting out his spare rooms, and today will be talking all about this topic.
I have been renting rooms in my house for 5 years.
In those 5 years, I have taken in over $80,000 in rental income, had rent paid 100% of the time, and have saved over $100,000 at age 27.
How did I do this? Let’s take it back a few.
Let me introduce myself, my name is Max and I am a suburb-living guy from northern California.
I grew up with 3 brothers and no sisters (talk about a chaotic house!), and I am the middle child, so I was neither the favored first nor the baby.
My Father worked a lot of hours in various sales jobs to support four young kids and my Mother remained at home being terrorized by four boys under 10 (only half-kidding).
I did so terribly in grade school (failing all subjects), my Mother thought about holding me back a grade. As a supportive mother, she always told me, “do your best, that’s all I ask. But really, do your best.” As a third-grader with tears in his eyes after the third failed attempt at the same math test, those words didn’t do much. It was not until I was older and reflected on my Mother’s wise words that I really understood what “do your best” meant. More on that in a moment.
I struggled through the rest of my boyhood education and finally found some relief in high school. I found that I could replace half the day with an “occupational program.” This meant I would attend half the day in “normal” school and in the afternoon half I could go work and make money.
Let’s just say this program is the main reason I graduated high school. My first job was working at a pawn shop in a rougher part of the city.
This was my first experience seeing people who were really struggling financially.
I remember talking to many really good people in my five years there. I always thought to myself, “why do you always come back for a loan?” I realized with some candid conversations with a few “regulars” that the reason why they kept coming back was because they managed their money quite terribly.
This is the real-world education that I was not receiving at the other half of my “school” day.
Recommended reading: 23 Best Real Estate Side Hustles
Here’s how to make money renting out spare bedrooms.
Sometimes Life Throws You for a Loop
I remember talking to my manager and he would tell me to learn as much about money as possible because when you’re broke life is really stressful. I could see the evidence of that as I was sweeping up the losing scratchers and picking up empty bottles of liquor in the parking lot.
Fast forward a few years later and I bought my first house. I was ecstatic, finally, I had a space of my own! I could play music loud, have friends come over and I could park in a garage. “This is the life I want,” I thought. But life had different plans for me.
The company I was working for was bought and merged with a competitor and everyone I worked with was laid off, including me. This happened only a few months after I bought the house.
Life hit me really, really fast.
I was unemployed, had almost nothing in the bank and a mortgage due next month.
My outlook on life went from pretty good to really sucky, very fast.
Before being laid off my life was on auto-pilot. I was working kind of hard, but not really. My finances were kind of good, but not really.
But now my finances were on life support.
As I started to feel sorry for myself and blame others, I had a flashback to my Mother’s advice to 3rd grade me. With a tender yet stern voice, she said “Do your best, that’s all I ask. But really, do your best.”
In all honesty, I wasn’t doing my best. I was living life with mediocre effort at best. Life on auto-pilot at age 22? Is this really my best?
At that moment, I knew I needed to do everything in my power to get to a more solid financial place. Real-life adulting started that day.
I spent the next 24 hours researching on the internet (with very little sleep) how to make money on the side without a traditional day job. I was exhausted and did find one article that piqued my interest.
I ended up landing on this article talking about side-hustles and I was intrigued. The article gave a brief two-sentence blurb on how this one guy was renting out his spare bedrooms and living “mortgage-free.”
I thought “I have three bedrooms in this house. I’m only one person. What if I rented out the other two rooms to pay my mortgage? If I were to rent each room out, that would pay for my mortgage while I look for a job. “
I started to crunch the numbers. If I were to rent each room out for $500 each that would be $1,000 per month.
My mortgage was just under $1,000 so my problem was solved! Not quite. I still had a lot of work to do to rent out those two rooms.
Rentals Run in the Family
My parents and extended family had several rental properties throughout my childhood and to this day. So I was blessed to be able to see and understand how renting out a home worked.
When I was younger, my Father would often bring me along to visit his rental properties, which gave me valuable real-world experience.
He would show me what passive income looks like in the real world. He showed me when you treat a tenant with respect and dignity they would usually pay rent on time. A win-win situation.
At times, he would have me help him clean the properties after a tenant had moved out or was evicted, which taught me the responsibility that comes with being a landlord. It’s not all sitting back and collecting money. Sometimes you need to get your hands dirty to maintain the property.
Even though some of my experiences helping my Father clean properties were less than enjoyable (downright disgusting sometimes), I learned a lot about the what goes into owning and maintaining a home.
Renting Out a House vs a Room
Unfortunately, almost none of what I learned from my family with rental properties applied because I was renting out a room in a house I was living in.
Since this was completely different than renting out the whole house, I began doing my research.
As I spent the next several days researching, I found literally thousands of articles. One article would say take a deposit, another would say not to take a deposit. One article said don’t ever rent out rooms. The next would say it’s a great idea.
I was overwhelmed with all the conflicting information and felt hopeless. Learning from my Father I knew I needed a written rental/lease agreement to make sure everyone was on the same page. I used one of the first templates I found for the first roommate. Bad idea, I ended up having to evict him because this generic agreement was not specific enough and he used loopholes to his advantage.
I’ve since created my own room rental lease agreement. You can download it from my blog on this page. I made a ton of adjustments so everything is very specific so you don’t have to experience the pain of evicting someone. Don’t make the same mistake I did!
I messed up in many different ways over the years. I’ve used the wrong lease agreement, did not ask the right questions, and used a generic advertisement that caused 20 people to call me in one day! Throughout time, I tested and revised things until I had a proven system I could put on autopilot.
Usually, most tables have four legs. One in each corner, right? Do you know what happens when you put a fifth leg in the center? The table becomes 100% solid. Nothing is going to take it down. There are five legs that have helped me find the perfect roommate, ensure my safety and have rent paid, every month. I am going to share each of those legs now.
Leg One: Perfect Roommate Wanted
If I submitted my first room advertisement for an evaluation I would have received a failing grade.
Why? It was too vague.
After I received 20 phone calls the first day, I was so overwhelmed I didn’t even pick up the phone. The voicemails I received were from people who were not a right fit. Every single one had a ton of drama happening in their life and I did NOT want to deal with that. I wanted peace in my house. My mentality is: everything I do with someone has to be a win-win situation for me and them or I’m not doing it.
The reason my ad didn’t work was because it gave the bare minimum details about the house, neighborhood and me – the owner.
Months previous, I had written down all my financial goals with specific numbers, dates and details. What if I applied that same specificity to the roommate I wanted? Like, the perfect roommate?
I then furiously wrote every single trait I wanted in a roommate. Honest, good communication, financially stable, direct, and many others. After I looked at this wish list of qualities I laughed at myself thinking this person doesn’t exist but I might as well try. Let me tell you, this was a great decision.
The next morning, I deleted my failing ad and replaced it with my “perfect roommate wanted” advertisement.
You can probably guess what happened. My phone did not ring once that day. I even called my Mother to make sure my phone was still working!
The second day I received one phone call. It’s almost as if this guy was everything I wanted in a roommate. Stable income, respectful, similar interests, moving from a good situation. This guy ended up living with me for over 3 years, paid rent on the first of each month and was the best roommate I have ever had. The “perfect roommate wanted” ad ended up working.
If you want access to the exact ad I used to get this perfect roommate you can access it here.
I figured out the more specific I was, the better result I ended up having.
I was now hooked on being as straightforward, upfront and honest as humanly possible.
Leg Two: Which Questions to Ask?
Once the ad was in place I needed to ask them some questions when they called, right?
Again, the first time I took in a roommate I asked vague questions. These did not help me one bit in learning about him. He ended up being a terrible roommate. I wish I could have avoided it.
After that bad taste in my mouth, I began thinking just like the advertisement. “What specific answers do I want before someone moves in with me?”
I began crafting some very pointed questions to help me get to know this person before I spend time or energy on them.
I’ll go over the most important two.
1. Do you have the first month’s rent and security deposit ready?
They absolutely must answer yes to this. If I rented out a room for $500 per month I would need the $500 (first month’s rent) plus $500 (security deposit) for a total of $1,000. If they falter or say they are waiting until next week or anything of the sort I politely end the phone call by telling them I will only consider them when they have the money saved. Some may say this is harsh, I say I have high standards.
If someone doesn’t have $1,000 saved up that shows me they are either in a tough spot financially or are not good at managing their money. Either way, if I allow them to move in they will most likely bring that “trouble” under my roof. I really only want people who are financially stable and good with their money. Again, if they do not answer with a confident yes to this question I move on to the next potential roommate.
In my experience, the higher I raise my standards the better the roommate I have living with me. Win-win.
2. Why do you think you’re the right roommate for this house?
Articulation is important. You can figure out really quickly if they read your ad. Sometimes people scroll to the very bottom and call the phone number. I ask them a few questions like “what did you like about the ad?” If they read the room ad they will be able to tell you something to the nature of “I really liked your specifics” or “I am an upfront, direct communicator.”
You want to quiz them to make sure they read your ad. If they read your ad they will either pre-qualify or disqualify themselves because of the specificity. If they cannot tell you anything about the ad I would politely say “it sounds like you didn’t read the room ad, I spend a lot of time making the ad so I can find the right person. Please read the ad and if you think you’re a fit give me a call back.”
Out of dozens of these phone calls not a single one has called back. You can probably figure out why.
Simply put, I ask specific and straightforward questions that give me important insight. My time is valuable and I do not want to spend 30 minutes talking to someone just to find out, in the end, they are not qualified.
Leg Three: The Ever-Important Rental Agreement
“Make sure you have everything in writing.”
We’ve all heard this a million times. This is especially true when renting out a room.
I have heard the absolute worst stories of people taking advantage of their friendly landlords. A common thread in a lot of these stories is: the landlord does not have a written rental agreement. Think about it like this: if you were to lend someone $10,000 and they were going to pay you back over the next three years would you want that in writing?
Of course you would.
Similarly, whether you have a stranger from Craigslist or a close friend move in you want to have a written agreement.
The reason I had trouble, in the beginning, was because I used a generic template that was not specific enough to my situation. I have found there are three must-have elements to have in a successful rental/lease agreement.
1. Long-term lease or month to month?
All leases I have done in the past have been month to month.
You may ask “but what if someone moves out after a month, is it a headache having to find someone again so soon?” I have only had this happen one time and from the beginning, the tenant was upfront with me. I let him move in because it was the holiday season and more difficult to find someone.
The question I ask myself is “if this person is great on paper and over the phone but ends up being a terrible roommate do I want to have to live with them for a full year or six months?”
The answer is heck no! The reason I state clearly in the agreement I do a month-to-month lease is because I want the roommate to know they are not locked in to staying as circumstances can change quite rapidly in a six-month or one-year period.
Would you say 2019 was different than 2020? Exactly my point. I make sure to put in the rental agreement that the lease period is monthly.
2. Default
Defaulting means the tenant fails to make the rent payment in the correct time frame and it is assumed they will not be paying their rent. Dealing with someone who refuses to pay their rent can be really stressful.
Thankfully, when everything is clear in the rental agreement, you (the landlord) have a path forward.
My previous failure using the generic agreement did not state-specific information regarding what the procedure is if a tenant defaults. You’ll want to make sure to read up on your specific state laws and if you have questions about the laws you can call a real estate attorney and usually talk to one for free for a few minutes. There is a wealth of information online that has state-specific information.
Make sure to be updated on any legislation passing. A couple of times a year I search “new landlord-tenant laws for (current year).” You can then read what laws are up for voting and which have passed. Simply put, make sure in your rental agreement you have updated information about what will happen when a tenant does not pay.
The last thing you want is to be in small claims court and the judge rules against you because you were ill-prepared. Thankfully, I have not had to deal with this personally. You want to be prepared in case you ever have to evict an unreasonable person.
3. Miscellaneous Provisions
This is the section that contains all the unique elements to your house and situation. There are several elements that you may consider adding.
Do you want the tenant to have Renter’s insurance? I always say yes. Let’s make-believe for a moment your house burned down completely. These are the situations you will be thankful for insurance. Your insurance company will pay to rebuild your house but what about your roommate’s $3,000 custom-built computer?
Your insurance company will not pay to replace that computer as you do not own it. This is where renter’s insurance comes in. The policy is usually quite inexpensive (we’re talking $15 per month) to cover their belongings. Your roommate can sleep easily as their belongings are covered. You, the landlord, can also feel confident because the tenant also has liability protection.
Seeing how renter’s insurance is cheap, it is a good practice to require your tenant to have a policy.
A few other provisions you might add are no subletting, room only occupied by roommate, no making room alterations, and late fee details. If you would like to take a peek at the exact rental agreement I use you can see it here and download it if you want to use it.
Leg Four: More Rules??
Yes, you most certainly want to have some house rules. The house rules keep your house orderly and peaceful. Everyone can agree after a long day working they want a peaceful home to relax in, right?
The roommate agreement is important because it goes over the things the rental agreement does not. I have 15 rules on mine and each of them is important. Here are a couple that have helped me keep peace in my house.
No overnight guests – My house is 1,000 square feet. It is not large by any means. This size is great for a couple or a few people. Once you start adding in extra people the bathroom situation becomes hectic. To keep the peace in the house, I explain to my roommate why everyone’s normal schedule is so much better with no overnight guests.
Noise level – I wake up at 4:54 am every day. Don’t ask me how I settled on it but I did. I make sure everyone understands there will be quiet hours that will allow everyone to sleep. Sleep is important and you want to make sure everyone is fully rested. When people are sleep-deprived life is not fun at all.
Ironically, the more rules I add to this agreement the better the roommate I tend to get. I have a full list of all 15 rules here. You are welcome to use and edit it to your needs.
Leg Five: Be Strict
The more I respect the agreements in place, the more my roommates respect me.
If there is a late fee and the roommate pays late, charge the fee.
Once you start compromising a little here and there you might start compromising in larger areas.
Follow your agreements to the T.
So What’s Next?
Being a landlord has helped me understand a 40 hour a week job is not the only way to make money every month. Once I opened my mind to something new and uncomfortable I began to grow both financially and as a person.
I have now collected over $80,000 in rent and have saved $100,000. I have followed this plan and the plan is working really well.
My life went from me sleeping on a couch with $0 in the bank to teaching others how to become a room rental landlord.
Being a room rental landlord doesn’t have to be stressful or confusing. It can actually be quite fun and you get passive income. A win-win.
With over 5 years of experience and over 30 roommates, I have seen pretty much everything when it comes to room rentals.
I have created a step-by-step course where you can learn how to rent out your spare bedroom, protect yourself & get passive income every month with minimal effort. If you have never rented out a room before, this course is for you! You can enroll here. This course will take you from being unclear and confused by all the conflicting information out there to having clarity and knowing exactly how to rent out your spare bedroom.
Most importantly, Now, I can now tell my Mother with confidence I am doing my best in all areas of my life, and that makes it all worthwhile.
P.S. For a limited time I am offering a 25% discount on the course for all 1 Dollar Financereaders. Make sure to use code MICHELLE at checkout for the discount.
Happy Landlording!
Max
Author bio: Hey all, Max here! I remember having to sleep on a couch and always asking family for money. I felt like a failure for a long time. Once I was finally honest with myself and got out of my comfort zone, I began working on myself and learning everything I could about personal finance. Things started to change a little every month. Since that day over 5 years ago, I have collected $80,000 in rental income and saved $100,000 by age 27. At MaxMyMoney I have helped over 250 people take their spare bedroom that is collecting dust and turn it into monthly passive income. My aim is to help you get clarity and rent out your spare bedroom stress-free.
Are you interested in learning how to make money renting out your spare rooms?