Newbie questions: renting out rooms

Say if I was going to rent a 3 bed 2 bath apartment in the big city. Its around $2000 per month. I want to live in one room and rent the other two rooms out for $1000 each per month. (These are just fictional numbers) but the plan is tolive relatively rent free this way.

Oh and Ive never been a landlord before. I have no idea where to even start.

Lets say I have $8000 saved up. Now Im ready to find a place to rent.

Then I sub-lease the other two rooms to room mates using somesort of sublease contract.

Do i need to store security deposits in a separate bank account?

Do i need to start an LLC?

Heres a wacky question: Can I use the landlording of these rooms in any way for developing equity or purchasing power for buying my own property somehow?

What are aome good cities in the usa for millenials to do this landlording style?

With only $8000 saved up to do this, it does not seem like a lot of padding in case something goes wrong…

Seems like being a newbie live in landlord has a big learning curve

Maybe start by reading a book with the basics of landlording…

I’ve been the owner-landlord for this type of housing, and rented the premises to two or three roommates, though I now prefer married couples with or without children.

If you were to approach me to rent the place, by yourself, and then sub-lease, the first problem is you have to be credit worthy enough to carry the rent. So for a $2,000/month rental, I’m looking for someone making at least $6,000/month. In addition, I’m looking for someone with a steady source of income, steady job history of over 2 years, with W-2’s that I can verify. I also run a credit check. I would need to credit check any tenants you rent to.

If it was a roommate situation, you’ll have to find your 2 roommates first, come to me, and I’ll see if all three of you have a combined income of $6,000, at least 2 of you of a steady source of income, steady jobs, with W-2’s to verify. I run credit checks on all of you.

The problems I have with these 2 or 3 roommate situations is they’re not stable. They get into fights, one guy, or two guy’s leaves, another one or two takes its place. Once I wound up with one guy that delivers newspapers, whom I never credit checked because he replaced an original roommate, makes very little money, trying to pay the rent for 3 guys because his 2 roommates left. The mistake I made was not credit checking the subsequent roommates, and approving them first. He left before I evicted him.

Now it’s true I could’ve gone after the two original tenants under the jointly and singularly liable clause of the lease. Unfortunately, when this happened, one of the two left the country, the other quit his job to go back to school. I count myself lucky losing a months rent taking into consideration the security deposit.

Now, even if you got some landlord going along with you, in most jurisdictions, your plan can technically be interpreted as you’re running a rooming house, which is usually defined as having 3 or more unrelated people living together. Unless you get a zoning variance, you’ll be in violation of the law.

There’s another problem with your approach. Unless you tell your tenants that you’re the landlord of the unit, and you rent each room out for a certain price, they find out later that you’re living rent free with them paying most of the rent, you’ll get into trouble with them. This has happened at one of my rentals, one roommate left claiming she was ripped off, she was not told what the monthly rent to me was. She found out later, there’s 3 of them, and she’s paying half. The remaining 2 cannot afford the house. But if you rent it out as landlord, then find yourself tenants, you run the danger of the town declaring the place a rooming house.

Hm, thanks for the info. It sounds like a sticky situation.

A number of times Ive rented in these situations with multiple young professionals. These usually ended up with drama. Each scenario probably had one person living basically with free rent while secretly hosing the other roomies.

Well anyways I am moving soon, not sure where exctly yet. I will be renting a room hopefully finding decent room mates. I have money squirreled away. About $8000. Unsure how to use the money to make more with some real estate fancy footwork.

Any suggestions?

I’m not sure how old you are, but my brother-in-law was able to earn a significant amount of money during college by purchasing a three bedroom home with an unfinished basement. He put an extra two bedrooms and a bathroom in the basement and rented four bedrooms out to different people while living in the fifth. I remember him telling me that his mortgage payment was about equal to what three tenants paid on the rent, and the fourth was just left over. He basically lived rent-free while collecting this one persons rent per month and then sold the house after college for more than he paid for it.

I have always thought that if I were starting out again I would do something similar. Perhaps not with roommates, but even buy a nice single-family home and live in the basement while renting out the upstairs. If it is a good investment property then the upstairs without the basement should more than cover the mortgage and you would be living rent free.

Are we talking the 20th century or are we living in the 21st century?

How did your brother afford to buy a house in college?

Where did he get all the money for paying for a big house?

Where did he get all the money for renovations?

How old are you people?

Another example is the guy who struggled to start his own business, so he just bought an already successful business instead. If you dont have a successful business how do you afford to buy an already established and successful one?

Where are you guys getting all the money?

How are you buying properties in NYC without any money?

Whats the magic trick? Or are you all spoonfed and hiding it?

I’m 34. This was about 10 years ago. The down payment required would’ve been three or $4000 with FHA at that time. I didn’t ask him where he got the money. Assuming he is anything like my wife, he probably left school with a lifetime of Christmas and birthday money and summer jobs all rolled into a bank account. I went down and helped him do the basement remodel. My guess is that probably cost him 10,000 out-of-pocket.

These might sound like big numbers if you live paycheck to paycheck. My advice is to start listening to Dave Ramsey.

I took Dave Ramsey’s course and it sucked. He is giving advice for people who already have high paying jobs and already have everything. He always had a high paying job, he was just a lazy spender. He also had a family. These people with families shadowing them and protecting them are seriously advantaged.

Neato story about your brother. It should be called the Two Step Estrogen Hostage Tech. Have your parents give you everything for free —> use the money to invest —> and profit. Its a pretty nice set up you guys have got for yourselves.

Yeah, imagine that. Growing up in a two parent home, staying off drugs, not getting pregnant out of wedlock, and graduating from college are the single biggest determining factors of a person success. Now what are you going to do with that information? Are you going to spend your whole life walking around with a chip on your shoulder and raise kids who have the same chip on their shoulder, or are you going to suck it up and do something to change your family tree?

You asked for advice and I gave it to you.