Are Housemates Worth the Financial Benefits?

THIS POST MAY CONTAIN AFFILIATE LINKS. PLEASE READ MY DISCLOSURE FOR MORE INFO.

 

housematesWhenever I tell people how I paid off my house, I typically receive the same reaction of astonishment.  Between my age and the home prices in my area, everyone always asks what my secret to paying off my mortgage in such a short period was.  I tell them that one of the key factors was having housemates over the years who paid rent.  Some of my housemates were close friends from college, others I didn’t know as well.

 

Over the eight years that I lived with housemates, they helped pay off over a third of my mortgage.  Their rent even contributed towards utilities and HOA fees.  It doesn’t hurt nearly as much to shell out $100 for internet and cable when it’s split four ways.  However looking back, I wish I had been slightly better equipped to own and rent out a place.  

 

housematesSo I decided to share the advice that I wish I had at 23 when I first purchased my home.  Hopefully for those thinking about taking on housemates or renting out a property, you’ll find the advice useful.  I did a few things right and a few things wrong.  This post will focus in on the “wrongs”.

 

Finding Tenants

When I first bought my home, I thought the rest would be easy.  Buying a house is the hardest, most complicated part, right?  I just needed to find a couple of guys, fill up the place, collect the rent checks, file my taxes, and hopefully receive some nice tax breaks.  WRONG.  It’s not nearly as easy to find quality tenants as you might think.  

 

housematesNowadays, I know most people use sites like Craigslist to find renters.  Back when I was seeking out housemates, I tried to stick with people I knew (coworkers, friends, etc.) or friends of friends.  It didn’t always work out well that way, but I figured my methodology was at least safe.  If I was in a situation in which I was looking for housemates again, I may also post an ad on my church’s Classifieds board.  The nice thing about that is at least I would hopefully attract a similarly-minded individual.  I figure if we are worshipping at the same church, then hopefully we would have a similar belief system.

 

Make sure that you and your tenants are on the same page.  

Though you’d think it would be a no-brainer, I never made my housemates sign a contract of any sort.  Since most of my housemates were friends, I didn’t really see the need at the time.  Big mistake.  As a quiet introvert, at times I found it difficult to feel comfortable with a loud party animal of a housemate.

 

housematesI am particularly referring to the 2am phone calls asking if I could pick up a trashed housemate from a bar.  Somehow being a landlord/housemate automatically made me an Uber driver as well.  At times, I felt more like a hotel concierge service than a landlord.  Let’s just say some people took advantage of my kindness at times.

 

Be careful with renters who are close friends.  

When it comes to housemates, selectivity is key.  Friends may feel the liberty to push some of the boundaries and might become lax in treating the house well.  There were times when I had to remind one housemate in particular that they needed to scrub their pots and pans before sticking them into the dishwasher.  It’s a dishwasher, not a miracle worker.

 

As much fun as it is living with close friends, make sure that there is a clear delineation between friend and landlord.

 

Make sure all of your tenants sign contracts.  

housematesThis is probably the most important piece of advice.  If you weren’t selective and chose a poor housemate, a contract provides some security and would be helpful in ameliorating the situation.  

 

Additionally, you’d think that if a tenant broke something, that they’d have the decency to take responsibility to have it fixed.  Not always the case.  For the sake of property maintenance, a contract is important.  

 

I was also put into a bind a few times when a housemate decided it was time to move out and gave me short notice.  It made for finding a replacement more difficult without the proper time to search and vet potential candidates.  And when you are desperate, you can make some bad decisions with tenants.

 

Avoid bad tenants at all costs.  

housematesNo housemate is better than a bad housemate.  Try your best to keep the good ones and let go of the bad ones.  Not having a contract prohibited me from kicking certain people out, which in turn made for a very awkward situation at times.

 

Avoid a messy house.  

housematesEveryone has different standards of cleanliness.  That can make for a difficult situation if everyone has a different expectation.  A simple solution is hiring a maid and building that expense into the rent.  This will force everyone to tidy up somewhat regularly.  Our maid came every two weeks, although I wish she had come every week.  Even if the place only looked good for that afternoon, it was well worth the bathroom scrubbing, especially in a house full of guys.  Plus when split among my housemates, the expense boiled down to $2 a day.

 

Taxes

housematesIf you own a property, are living in it, and have housemates, hire a CPA.  Back in the mid-2000s, TurboTax was not equipped to handle that situation.  But if you choose to use TurboTax, here is what you will need to know.  

 

You cannot claim the mortgage interest deduction on both the Itemized Deductions Form (Schedule A) and on the Supplemental Income and Loss Form (Schedule E).  The IRS may or may not catch this.  You will receive a massive refund if you do so.  As wonderful as that is, it is wrong.  So at some point, you would probably receive a letter from the IRS informing you of your mistake, and you then you’d need to hire a CPA to fix it.  

 

You would end up owing back taxes and late penalties for filing incorrectly.  It’s an expensive lesson and something that a CPA could have done correctly from the start.

 

taxes housematesHere’s what the CPA would do to fix the mistakes.  If you live with three other housemates, you would be able to take 25% of the mortgage interest, since you are one of the four people living in the house, and apply this to your itemized deduction.  

 

You could also base the deduction on the square footage that each person has access to.  This is a bit more complicated.  For me personally, it wasn’t too much of a difference.  This is usually more useful for people that rent out small basement apartments or other similar situations.  In my situation, my housemates and I shared all of the common areas of the home.

 

Claiming a Loss

taxes housematesNext, you would apply the remaining 75% to your Schedule E.  The expenses from the home, including depreciation against the fair market rent, would most likely cause a loss for the year.

 

Note: Do not charge your friends or family less than fair market rent, otherwise you may end up paying the difference if you are ever audited by the IRS.   Plus on top of that, there is a chance that you may lose the deductions that you were claiming on the rent.

 

So when I first saw that I had more expenses than income that first year renting out my house, I was ecstatic.  I thought I could use some of these deductions to offset against the salary that I earned on my 1040 form.

 

Once again, this is WRONG.  If you live in the house, you cannot take a rental expense deduction on the property.  So that nice deduction that I thought would offset against my meager government salary quickly disappeared.  

 

With all that said, if you do take on housemates, enjoy your time with them.  It is a fun and unique opportunity that you might not have forever.  But don’t get too content with their company– it is much better to wake up to your gorgeous wife 🙂

 

So readers, have you ever been in this type of rental situation with housemates?  Would you consider taking on housemates in order to help cover the mortgage and get you that much closer to FIRE?  Share your thoughts below.  

Mustard Seed Money

Welcome to the website. A mustard seed is a very small seed but astonishingly grows very large over time. My hope is that through your financial journey that your small investment in time, money and faith will grow beyond anything that you could ever imagine.

57 Comments

  1. If I had it to do over I probably would have taken on some roommates when I was starting out. In graduate school, I lived with 4 other guys in a crappy house. Rent was insanely cheap ($250ish for everything per month) but once I got a job I felt like I needed to move out and get my own place. I just didn’t know that I would care about retiring when I was 40 back then.
    Grant recently posted…12% Rate of Return??My Profile

    • My husband pays $250/mo including everything since he lives in another city which is much cheaper than DC. He said it doesn’t matter to him where he lives. He just wants a place where he can put his stuff. I’ve seen the room and the house before, and it’s just not pretty. But it’s good for the price. We’re able to save more because Mr. FAF makes that decision.

      It’s not too late to do or not to do something. Don’t be too hard on yourself 🙂
      Ms. Frugal Asian Finance recently posted…7 Frugal Wins & 3 Frugal Fails – May 24, 2017My Profile

    • Thanks for sharing Grant!!! I definitely got lucky/fortunate. At first when I bought the place I couldn’t afford the house by myself. Then I started to make more money and just continued to pour more money into the house until it was paid off. By far the best thing I ever did.

  2. Turbo tax is not the best way to go if you have tenants and rental properties. At least not for the first year you’re holding tenants. A CPA is highly recommended and a lawyer to draw up those contracts! Big time. This stuff can get so so so ugly, my mom almost sued her landlord. My devotion to AirBnB despite the up keep is simply to void the legal mess. Now with all that said…YES tenants! That’s free money baby!
    Lily @ The Frugal Gene recently posted…First Month Blogiversary Stats {Shout Outs, Mistakes…& Why I Blog}My Profile

    • Thanks for sharing Lily!!! I’ve never tried AirBnB but I have to admit that I’m really intrigued. Before my wife got preggo we were planning on using an AirBnB on a trip to Toronto which we’ve postponed at this point. Maybe next year we’ll try 🙂

  3. I’ve had roommates before and hated it. I don’t know how else to put it, unfortunately in my case, there are no nice words to describe my roommate experience! 😀

    I’ve shared rent with others in the past for various reasons.

    As soon as I started living on my own, I’ve had close friends as roommates who were supposed to help out with the expenses. After a while, I ended up paying for everything myself. Even food. So, that didn’t work out 😀

    Next, I moved abroad and having roommates seemed like a great idea to keep costs down! While money wasn’t a problem this time, we were constantly arguing about little things: why didn’t someone wash their plate, why wasn’t the trash taken out, etc…

    All in all, I’m very reluctant to the idea of having housemates in the future 😀
    Adriana @MoneyJourney recently posted…Develop a frugal habit of saving moneyMy Profile

    • I can definitely understand your apprehension Adriana!!! Roommates come with their own headaches. It’s definitely not for everyone and there is definitely a cost/sanity analysis that needs to be run 🙂

    • Thanks for stopping by Daniel!!! I definitely didn’t do it intentionally. Just one of those things you don’t know what you don’t know at times 🙂

  4. I have 2 roommates and I completely agree with you on the better no roommate than a bad roommate. I used Craigslist this last go around and while the one guy isn’t too bad, I swear he doesn’t care about me or the house. I’m looking forward to when his lease runs out.

    I don’t know, I go back and forth on it. He doesn’t clean, always pays rent when he gets his paycheck (which has been 3-5 days after the 1st, Late) and I’ve been very lenient. When I’m willing to stretch the rules for him, wouldn’t you think he would be nice in return? I guess not.
    Erik @ The Mastermind Within recently posted…Starting a Subscription Box Business – HOWLinfuse KombuchaMy Profile

    • Thanks for sharing Erik!!! Some people just aren’t interested in being part of the household structure. They treat things more like a hotel which is unfortunate. Sorry to hear that things aren’t working out as well as you’d like.

    • Thanks for sharing Roadrunner!!! I definitely agree that I probably wouldn’t do this again now that I’m married. It was the right season for me when I did it 🙂

  5. It’s been many years since we rented out a room in our house and although we’ve talked about doing this again in the future (depending on potential changes to our job and/or living situation). However, I agree that you need to be very selective and careful about who you rent a room out to. We found that the first six months were great, but then living a year or more with the same person (especially if they are a friend) can create strains in the relationship.

    Great post!

    • Thanks for sharing!!! I’ve had some friends that rented out their home while they were married. I think it takes a special relationship to do so plus finding the right tenant for the situation. Definitely not for everyone.

    • Thanks for sharing Budget on a Stick!!! I think I might avoid renting a house with a baby that cries in the middle of the night. I feel like I just got back on regular sleep recently, so to go back would hurt 🙂

  6. I like the having a maid come. When I was renting out my house to a few people that was my biggest issue, along with finding quality tenants that didn’t end up costing me more money than it was worth!

    To this day I still have that maid come as with a busy schedule it is nice to have a clean house that I can work into my budget!

  7. Thank you so much for the great advice, especially the piece on taxes! I’ve lived with close to 20 housemates since I was 18 to help lower the rent and utilities. Living with close friends can turn out to be a disaster. I’ve had roommates who had mental illness, which turned out to be a struggle in and of itself.

    Congrats on paying off the mortgage early! That’s our goal in a couple of years. 🙂
    Ms. Frugal Asian Finance recently posted…7 Frugal Wins & 3 Frugal Fails – May 24, 2017My Profile

    • Oh man I can’t even imagine living with someone with mental illness. That must have been a huge struggle. Coming home should be a respite to everything going on in your life. Not to more problems.

  8. This is definitely an option to consider if you want to pay a house off quickly! I don’t think housemates are for me, since I would want some privacy in my house (and will pay dearly for it). But if I could construct some kind of addition where there’s a separate entrance/bathroom/kitchen for a renter, I would be a landlady in a heartbeat.
    Mrs. Picky Pincher recently posted…How To Save Money On MeatMy Profile

    • Thanks for sharing Mrs. Picky Pincher!!! Now that I’m older and married. I definitely need/want that privacy. Definitely not for me anymore 🙂

  9. I am encouraging my kids to take on housemates or maybe buy a duplex when they first start out.
    Thanks for the tax information. It was a bit of a learning curve to set up the taxes when I first started renting properties and hired a CPA. It was a big help. I’ll have to remember the extra little steps when it comes to roommates for the future.
    High Income Parents recently posted…My Favorite Online Brokers for High Income ParentsMy Profile

  10. We have a large basement with a bedroom, full bathroom, and large living space. We also have the plumbing setup for a small kitchen. However, I do not have my wife on board with the idea. The main use for our basement is our daughter’s play area. Does anyone have any experience/suggestions for getting a spouse on board with renting out part of your house?
    The Grounded Engineer recently posted…What does the new American Health Care Act mean for Health Savings Accounts?My Profile

  11. I lived with friends before when I was in school, but I never rent my rooms to friends. I am currently renting out a property and it’s a lot of work. Some months are great, where I do very little and just collect the rent cheques. Other months are a bit challenging as I have to deal with bad tenants. My motto is: do things by the books and always protect yourself with a contract.
    Leo T. Ly @ isaved5k.com recently posted…26 Money Mistakes To AvoidMy Profile

    • Thanks for sharing Leo!!! I definitely wish we had set up a contract when I started to rent to my roommates. I think it would have helped with some conflicts that arose.

  12. In Russian culture it’s almost inappropriate to charge your friend for living with you, the same applies to your relatives. I don’t know why, but it is. Of course everyone assumes that the person who stays with someone has to buy groceries and deserts, help with housekeeping and so on.
    Even if I had a rental in Russia, my friends or relatives would assume if they want to rent it they would pay less just because we are friends/relatives.
    Thanks for sharing this with us, a lot of common sense here
    Friendly Russian recently posted…Value of $100My Profile

    • Thanks for stopping by Friendly Russian!!! I definitely wish I could have let them live there for free if I could have afforded it. But I definitely didn’t have the funds to do so at the time. So I got the benefit of them paying down my mortgage 🙂

  13. Thanks for the read. One of my regrets out odf college was not buying a house and having friends live with me. In hindsight, would have loved to do that. Instead, I lived out on my own and paid rent. You do bring some excellent points about the potential pitfalls of renting to those close to you. I would never have thought to consider some of those points. Does this mean I have to have my wife sign a contract now when we buy a house haha

    Thanks for the read.

    Bert
    Dividend Diplomats recently posted…Lanny’s Recent Stock Purchase – W.W. Grainger, Inc. (GWW) X 2My Profile

  14. I think the real estate bloggers like to call this “house hacking” and it is a powerful tool to buy a house and have tenants buy your mortgage. Of course there can be ups and downs being a landlord and having housemates when you’re young and inexperienced. And when you have a family, you might not want housemates. I guess a duplex could work in some areas though. House hacking is pretty difficult in NYC though…real estate is so expensive!

    • Hahaha…I had no idea that I was house hacking at the time. I was just trying to pay my bills. Glad to know that I was on the cutting edge at the time!!!

  15. Luckily I’ve never had to share an apartment or house with anyone. My cousin shared a flat in his first 3 years in university. In his final year, the flatmate moved out and in moved in a new guy. Long story short, it was terrible. The other person didn’t clean at all, and my cousin felt like he was being taken advantage of as a nanny.
    Troy @ Market History recently posted…Are initial claims too low? What does this mean for the economy and stock market?My Profile

  16. Wow, MSM. I had no idea that taxes on an owner-occupied house with renters would be so complicated. It’s a real eye-opener. Did the thought of ever becoming an undocumented landlord cross your mind?

  17. I lived with a few guys in college, but it was in campus housing. Never lived in something with roommates where I owned it. I can only imagine what it would be like some days. Parties would be fun, but not on weeknights when I have to get up at 4:30 am the next morning!

  18. I’m really trying to convince myself that it’s a good idea and worth it to do this when we finally move into our place but it feels like it would be really hard to share our living space again for the long term that we’d need for it to matter to our finances. We’d need someone quiet and considerate, though, who wouldn’t ever throw parties. And that seems a bit restrictive 🙂
    Revanche @ A Gai Shan Life recently posted…Just a little (link) love: drunk and Thor’s hammer editionMy Profile

  19. All great tips. Those are a few of the questions I am asking myself now. Bring in another person to help pay for rent/ mortgage etc? Or live alone and pay more? Would be nice having extra payments by others so I can have more money for investing, but it always comes at a cost.

    After college, I refuse to live with a close friend and try to stick with acquaintances at best. It tends to put strain on the friendship usually over stupid things and isn’t worth it. And at the end of the day you have to protect your best interests and property/ investment, so a contract is necessary regardless of who moves in.
    Dividend Daze recently posted…Equity Crowdfunding – A New Source of Passive Income?My Profile

    • Thanks for stopping by!!! It’s a huge question and definitely something that you have to way the cost/benefit analysis against. How much is it worth living by yourself and what is the long term benefit to having the mortgage paid for. For me it was totally worth it outside the some of the conflict but I know for others it’s definitely not worth it.

  20. MSM –

    Love this post as it brings back some “fond” memories. I had a roommate within 3 months of buying my house and it was a friends older sibling. Let’s just say – even the cover a book can be incorrect, as on the outside – I thought this individual would be clean, courteous, “team” environment when it came to upkeep.. but it ended up being more of a hotel; crap everywhere and when he would have people over – almost made it impossible to even “feel like” I lived in my own house. Here is what I would do differently:

    1.) Be VERY selective and interview them, in a way – find their habits, their history with renting and their normal day to day/night to night festivities to see if they line up with yours
    2.) Be on a cleaning system – one person should not be doing everything
    3.) Talk about up front, when rent can increase – i.e. higher property tax, insurance, re-couping any immediate “big” expenses if it’s because of both individuals, etc.. – I had to explain in an awkward fashion with support why I had to increase rates..

    Thanks for sharing this; def. would do things A LOT different. Roommate lasted almost 3 years and had to kick him out, couldn’t take it anymore and the rent wasn’t worth it!

    -Lanny

    • Thanks for sharing Lanny!!! Sounds like you had a pretty tough roommate experience as well. Definitely sucks when those situations arise. Those are awesome tips that I definitely would also have taken into consideration!!!

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