Despite the fact that I have the best roommates in the world, I’ll occasionally remark, “I’m tired of having roommates.”
And Will replies: “Are you $1,700 per month tired of it?”
I don’t need to respond. The answer is obvious. The minor inconveniences — sharing a refrigerator, waiting to use the washing machine — pale in comparison to the additional $20,400 per year that our roommates contribute to our mortgage. It’s a total no-brainer.
In the past two years of living with roommates, we’ve collected $40,800 — enough money to buy a rental house that provides a stream of income for the rest of our lives. (More on that below).
But before I get there, I want to clarify that this isn’t a post about living with roommates. It’s a post about an ever-important concept called opportunity cost, critical to anyone who wants to supercharge their wealth.
Yes, we could move into a one-bedroom apartment, and perhaps someday we might. But as long as we live in our three-bedroom unit, we face a trade-off: Will and I could either live solo, like a “normal” couple, OR we could accumulate an extra $20,400 per year without needing to lift a finger.
(And as someone who types on a laptop for a living, I mean “lift a finger” literally. I get paid to lift my fingers.)
Normalcy carries a massive opportunity cost.
Normal Sucks
When we were in our early 20’s and fresh out of college, living with roommates was “normal.” But we’ve gotten older. Times have changed.
Will is almost 35, and I’m within spitting distance of my 31st birthday. We’re long past that collegiate stage of life, and over the years we’ve watched our friends escalate their lifestyles. Our friends now maintain vacant rooms — “guest rooms” — in their homes. They’ve purchased furniture, financed cars, bought diamonds.
Meanwhile, Will and I are the freaks who still live like college kids.
I can’t decide whether it’s ironic or fitting that we’re also the most financially stable. Zero debt, except the mortgages. Owners of five houses, two of which are paid-in-cash, and three of which are rapidly getting paid-off. Maxed out 401k, IRA, HSA. Huge emergency fund.
That’s not a coincidence.
To illustrate the awesome power of understanding opportunity cost, let’s check out a super-simple real-life example.
Here we go:
Income: Our two roommates each pay $850 per month, for a total of $1,700 monthly. (They also cover half the utilities, but they use half, so we’ll call that even.) That means two years of living with roommates creates $40,800 in income.
Meanwhile …
Investment: A few weeks ago, we purchased a rental property for $46,000 in cash.
Coincidence? Maybe not. (Thanks for buying us a house, roommies!)
Let’s forget EVERYTHING else that Will and I do to amp-up our savings. Let’s forget that I launched my own business a few years back, growing it from $0 to six figures. Let’s forget that I drive a used Honda Civic, eschew cable TV, wear the same clothes again and again. Forget ALL of that.
Look ONLY at the fact that we have roommates. Notice that this single decision alone brought forth enough income to buy a house in cash.
Wowza.
But wait — let’s take one more step (for the sake of over-doing it).
This rental house will command around $900 per month. Let’s say that half the rent will get gobbled up by operating expenses (taxes, insurance, vacancy, management, repairs, maintenance, bookkeeping, accounting). At this conservative estimate, this property will net $5,400 per year in passive cash flow.
Over the span of 40 years, this means we’ll earn $216,000 (in today’s dollars) — and that’s assuming we blow that money on champagne and caviar. If we re-invest that money, instead, it morphs into even more. The simple decision to have roommates for just two years could translate into $500,000+ over our lifetime. Wowza!
So let’s rephrase this question:
Imagine that a Magical Genie appeared before you, encircled by a haze of swirling mist and spicy perfume. (If it helps, picture the blue Genie from Aladdin.) After you recover from your initial shock, the Genie bequeaths you with a gift of $216,000. The only catch? You’ll need to spend two years living with two cool people. You can choose these people and continue living in your own home.
Would you accept that deal?
Duh.
When You Make Decisions, Imagine the Aladdin Genie
It’s easy to focus on out-of-pocket costs. When you swipe your Visa, the price tag is unmistakable. But most people overlook opportunity cost — the hefty price tag that comes with each decision.
Every choice is a trade-off. And sometimes those trade-offs come at the cost of lowering our income, which shrinks our capacity to flex our investment muscle.
So whenever I make a decision, I like to imagine that a Genie is offering me “a gift with a catch.”
For example:
There’s a cloud-storage system called Dropbox that can backup and sync your photos and files. The first 2 GB are free, but you can snag 1,000 GB for $99 per year. Since I’m prone to frugality, I debated whether $99/year was worth the price.
Then I pictured the opportunity cost:
Imagine that I lost all my files and photos. The Genie appears before me, and says “For $99, you can have it back.” Would I take that offer? Of course.
In other words, I make decisions by imagining the cost of NOT getting that item — the opportunity cost, the missed chance. Sometimes, this results in refraining from a purchase. (Imagine that I wore an old pair of earrings to a conference. A Genie says, “you can wear different earrings.” Eh, boring. Still not interested.)
But other times, this makes the decision a no-brainer — like in the case of upgrading Dropbox, living with roommates for two extra years, or deciding to spend my surplus $46,000 on investments rather than crap.
(Yes, my investment analysis involves daydreaming about 1990’s cartoons.)
Objection, Your Honor!
I imagine that a few objections I’m going to hear include:
“But I can’t earn that much renting a room in my house! I only have one spare bedroom — and it would rent for $500, max.”
Work with what you’ve got. That’s $6,000 per year, enough to max out your IRA as of this year’s limits. In other words, that renter can buy your retirement.
Another way to view it: That’s $12,000 in two years, which is enough to pay cash for a car.
“But I value my privacy. I don’t want to live with a roommate.”
Do you $500+ per month value it?
“Yes.”
That’s cool — as long as you’re deliberately deciding.
What’s the Afford Anything mantra? You can afford anything, but not everything. Every decision comes with a trade-off. You can either rent out your spare room, OR you can log extra hours on-the-job to earn the equivalent amount of money. Your life, your choice.
The key, though, is to avoid the deprivation trap: “In this economy, there’s absolutely no way to get ahead!”
Wrong-o. There are plenty of ways. Hundreds of ways. The paths you choose are up to you. Be deliberate. Be intentional. Accept the trade-offs. Don’t complain that you’ve run out of options.
“I already live in a one-bedroom.”
Awesome! If you want to live solo and frugal, downsizing is the way to go.
“I have kids.”
Will’s Dad had roommates who helped pay the mortgage, back when Will and his sister were in elementary and middle school. Why do you think Will is so enthusiastic about the idea?
By watching his Dad pay the mortgage via roommates, Will saw awesome role-modeling — frugal parenting through harnessing opportunity and working with what you’ve got. Plus, he got a chance to live with grown-ups from around the world, which broadened his horizons and turned him into the mature globetrotter he is today.
“This blog post is too long.”
Oh, fine. I’ll finish now. And as a parting thought, let me reiterate that this isn’t a post about living with roommates, per se. It’s a post about recognizing opportunity costs — and being deliberate about the trade-offs you’re willing to make. You can afford anything, but not everything, and every choice will impact your path, for better or worse.
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Great post. I had this convo with my wife when we were living with her parents. She wanted out and didn’t even want to talk about the extra $1k a month we’d be spending on rent. So we ended up moving and renting a house, only to be forced to drop the contract 4 months in because I got a job in a different state. Definitely $4k plus the penalty I’d like to have back…
Yes ma’am! Another brilliant (and hilarious) article – you’re on fire these days 🙂
Timely post, we just got our first live in tenant yesterday. $400/month, but like you said – at near 5k a year I’m happy with the tradeoffs. It felt good to cash that check along with my other tenants checks today 🙂 Some family was less than supportive of this decision, but seriously with a 2500 sq ft house, we’ll hardly notice. No brainer decision. Did I mention this nearly covers all but $100 of my mortgage payment?!? (not including taxes/insurance)
That’s a cheap mortgage man! impossible in Canada…
Love it! I admire you so much. I don’t think I could live with roommates at all. I didn’t do well with it in college and now that I have babies I can’t imagine it BUT you have proven you point and to that I say kudos. 😀
I am trying to forward this post to a friend and i tried to make it shorter. But there is not much i can cut out. So post length does not matter as long as the ideas are smart and captivating.
If you ever come to Boulder, Colorado please do ping me
Maybe I’m “not normal” either because I LOVE living with roommates! I’ve always had roommates and it’s been great and surprisingly easy. Heck, in university, I lived with 4 girls on the 2nd floor of a house while our 5 other girlfriends lived on the main floor…we would run up and down between the two units – it was a blast! Having roommates definitely keeps costs down, as you’ve proved.
Great post, Paula!
@Charlotte — I really enjoy it too!! I’ve lived with countless people over the last decade, and 95% of them have become great friends — we have dinner together, watch movies together, throw parties, grab $2 tacos on Tuesdays. 🙂 It’s a total blast!
YES. This is what I do (I think it’s been lovingly termed “house hacking” from Brandon Turner over at BP?) and I adore this system so, so much. For the past 3 years, I’ve been getting paid to live in my own house!!! How crazy (awesome) is that?! I love it so much that I’m moving out and letting the tenants help me pay for that first house, plus moving into another much nicer place and letting a tenant help me pay for the second too! Upgrading at someone else’s cost… can’t beat it.
This is the system I plan to implement until I marry, at the very earliest. And there’s no guy on the horizon so I imagine that’s a bit far off still. I’m hoping that one day I won’t need a roommate and my tenants will still be paying off all my homes for me – including the one I live in (from the excess cash flow).
In a way, I’ve never made a mortgage payment, at least from MY money. That’s sick. I own two homes and have never made a mortgage payment.
@Tiffany — I LOVE the term “house hacking” – and the concept of living “for free” while someone else pays your mortgage. It’s awesome. Not having an out-of-pocket house payment brings you SO much freedom.
I LOVE that you own two homes, and have never made a house payment from your own money. That is EXTRA awesome. 🙂
WOW! So impressive!
Great Post, Paula!
Your first newsletter well received. You are VERY funny.
Smart calculations, good ideas and a no nonsense approach.
We are also thinking about subletting our in-law unit.
At least give it a try and see how it works out for our privacy.
I will start reading your previous/earlier blogs.
Good Luck with your 5th house and keep us posted about your actions.
Thanks again,
Grtz,
VarAway
Haha, thank you, VarAway! 🙂
Not only a wise financial decision but when you travel, someone else is present in the home to deal with catastrophe should one occur. We made a related choice, downsized to a much smaller home that is easier to care for & can be buttoned down when we travel (which we did 13x in 12 months last year). Very freeing physically and financially.
@Deborah — Thirteen trips in 12 months?! That’s awesome!!
Yes, having someone around the house makes it much easier to travel, both financially (they pay the bills) and logistically (you can ask them to water the plants, etc. while you’re gone).
I am new to your blog. I liked the post and love
The mantra about affording anything
(But not everything). So true.
Everything is a trade off. I have lived my adult
life with this in mind. I think it is because of this
that I am a millionaire at 49. And many of my peers
simply pay the minimum payments on their mortgages, equity
lines, car loans and credit cards. And those are the
lucky ones. The unlucky ones are falling behind.
We have everything we need but we don’t try to
Keep up with the joneses. We implement
Our priorities — not anyone else’s.
If our friends buy a boat. Great. Does not mean
we need one.
That rocks, Jonathan! Millionaire at 49 — I love it! Keep it up … and forget about the Joneses!
I think it really means you would not have to buy a boat to go out on the bay or river since they are your friends and will likely invite you along on an adventure from time to time.
Oh this is such a great point and you’ve made it so well! Mr. FW and I have deliberately decided not to have roommates. We absolutely know how much we’re sacrificing in rent, but it’s just not worth it to us at this point in time. But, you are completely right that it’s an amazing revenue stream!
@Mrs. FW — I love your attitude!! You understand the trade-offs, and you’re making a deliberate, conscious choice. That’s the BEST way to handle your money!
Most people “don’t know” where their money goes. The Conformist Majority gets to the end of the month, and discovers that they “have no idea” how they’ve spent so much.
Rebels know. Rebels take control, making deliberate choices. 🙂
I make a lot of spending decisions that other people would criticize (e.g. my ridiculous travel itinerary), but that’s a HUGE priority for me … and I’m willing to make other trade-offs (more time at work; more frugal lifestyle in other places) to make that a reality.
I can’t think of much else I’d be eager and willing to spend $20,000/year on! (Though to be fair we’d get a lot less than that here for hiring out a room.)
My sister does though– she seems to enjoy having roommates, and bought a house that is set up well for roommates (and she’s in a city, so rents are more).
What do your roommates get for $850 a month? Wondering if I am undercharging at $500.
Thanks for any feedback.
@Kathie — Location, location, location.
My roommates get an updated, luxury unit (stainless steel, granite, loads of crown molding and ornate trim, high ceilings). More importantly, they get to live in a prime location.
Your location will be the single biggest determiner of real estate prices (both the amount you pay, and the amount you can charge). If you’re wondering whether or not you’re undercharging, look online at other rental listings in your area — websites like Hotpads, Postlets and even Craigslist will have a ton of listings.
Definitely not worth it to me. I tried living with a roommate once in my post-college life and it didn’t go well. Kinda like a sitcom where they draw the line down the middle of the apartment.
I love the mindset, though! Since I started reading, I’m constantly looking for new ways to supplement my income and trim my budget.
@Colin — That’s cool! What matters most is that you’re taking control of your finances by making a thoughtful, deliberate choice. 🙂
Great job of outlining the opportunity costs especially of having roommates….I’ve had roommates off and on for years. It works partly because rents are so expensive here in Washington and I’m in a sought-after location. This has helped supplement my income when my client load takes a dip. The trade-off for me is occasionally resenting the lack of privacy or needing to share space, but 99% of the time, it’s great fun.
@Judy — Ah, I understand that feeling. It occasionally surfaces for me, too … like when I want to wander into the kitchen for a midnight snack, and I think: “I need to wear pants before I can walk into the kitchen.” And for a brief moment, I’ll frown about the lack of privacy.
But the grass is always greener on the other side. When my roommates go away (on vacation, on a business trip), the house feels so quiet, and I start to miss them. (And then I start sending them goofy Facebook postings … ) 🙂
Opportunity Cost was the best and most useful thing I learnt in ECON101 (well that and the Time Value of Money). It applies to almost every situation in life and is a great barometer of wants vs needs. We stayed in our ugly one bedroom apartment til long after our son was born because the $800 per month extra it would have cost to upgrade to a 2-bedder is much better used on travel. The side benefit being now we are so used to living in the same room as our son we can rent cheaper (smaller)apartments when we travel saving us even more money.
I got out on my own this year, after about 12 years living with roommates (I’m 31 now). In that time I saved quite a bit of money, but it’s soooo nice to be alone for a while.
Opportunity cost is really important: for everything you do, there are a lot of other things you’re giving up. The greatest resource is always time.
Thanks for the article!
Great post! It really is awesome how much extra you can make by renting out an extra room. I live in a 2-bedroom condo and I have definitely thought about renting out my 2nd bedroom because the extra $500 a month is very tempting… But, ultimately, I’ve decided that having a roommate is really not for me, as I’m very introverted and I enjoy my privacy. So, my dog (black lab) is my only roommate and she is a freeloader and doesn’t pay me any rent haha.
Fantastic post.. and great discussion in the comments! I’m coming up on 32 and generally rent my extra bedroom out once or twice a year for a few months at a time. My family thinks it’s odd, and maybe even a little cheap of me (since I make a very good living and can ‘afford’ to not have a roommate), but it’s not worth $700/month to be without one.. not to mention I actually enjoy the company, like helping people who need a hand (i.e. flexible / short term lease), and have made some great friends! I’m glad to know there’s other people in the world that think on the same wavelength!!
Our place is too small to have a full-time roommate. However, Mrs. 1500 and I recently came up with a compromise. We’re going to have temporary roommates in the form of AirBnB and VRBO short term rentals. It won’t throw off the huge income that you’ve seen, but will be a nice little side hustle that should pay for groceries and property taxes. Now, we just have to finish our remodeling…
My wife and I have rented out rooms in the past to temporary workers in town and we have had great luck with it. Our house is huge and empty. We were nervous at first, but it works out. One issue that has come up once or twice was guests of our roommates. I have not yet allowed sleepovers or family visiting overnight. I’m not a prude, I just don’t want the wife or children or friends of these guys in our house all day while we are gone. How do you handle this? Do you have something set up in a lease?
traveling nurses might be an idea too.
Up until reading this post I never thought of having roommate again. You detailed it perfectly on how having a roommate could help you make money. I may need to re-think my decision on living solo.
Thanks Paula for this great post.
I rented out my entire house in San Jose this year, and live in a tiny apartment in San Francisco. The rent nearly covers all my house expenses, but more importantly, I’m spending about a $1,000 less a month on just a place to live.
When I lived in my house I did a commuter roommate (Mon-Friday) for about $500 a month.
After that I did a roommate for a year at double that. Definitely helped motivate me to rent out the entire house for a few years, while I save aggressively for my next house.
Good for you. Yours is a very good case. Do you have your own blog?
You say this post was too long, but you stopped short of explaining how you handle the taxes on this nice chunk of income. Is there a Part 2 in the works?
@Diane — It’s simple: All rental income is reported on the Form 1040, Schedule E. Then depreciation and expenses are deducted, and the rest is taxed as passive income. Easy as pie!
Hire a good CPA who specializes in working with landlords and small business owners — he or she will handle everything. (And the CPA’s services are tax-deductible, as well!)
Thanks for the snappy reply. I do have a CPA and I own rental property, so I am familiar with Schedule E as it pertains to straight rentals, but not with roommates in a house you own and live in too. Many people think they don’t need to report roommate income. Since you didn’t mention this in the article, I was hoping there would be a part two. Perhaps it could also include info on how to determine an escape plan for rental property and how to minimize the tax hit when it’s time to sell a depreciated property. Also, assuming a roommate pays their share of the utilities, what other kinds of expenses should someone anticipate and/or be able to write off?
@Diane — Of course you should report roommate income; it’s part of your rental income. Our roommates both write checks to our LLC, which get deposited in our business account. It’s completely on-the-books and reported.
I’m not sure how on earth I could stretch that little tidbit into an entire Part Two article. “Report your income” — that’s as straightforward as it gets.
As for the second part of your question — how to minimize a tax hit while you’re selling — I advocate a buy-and-hold strategy, which involves as little settling as possible. If you do choose to sell, though (perhaps to “trade up” into an apartment complex), the best way is to use a 1031 exchange.
This is an awesome post! I love how you mentioned the opportunity cost of the decisions we make financially. That’s a great point. It’s great that your roommates basically bought your latest rental house.
“Your life, your choice.” Love it. We really end up where we desire. Our decisions ultimately shape who we are. If you are really willing to sacrifice then you will do it and not just talk about what could have been 10 years down the road. Why do we ever pay full price on anything that we can get for a cheaper price or that someone will help pay. I like me, I like money, I like both together.
Recently found this blog when looking for information on buying a house to rent out. I like the perspective of this article as well though. I had a roommate for a year in college and it made me swear off them. I’ve been living by myself for 10 years, but this article does make a great point about it being worth it. For about 8 months I was touring with a show around the country and we stayed in hotels every night. We shared a room with a roommate. I thought it was going to be absolute torture after my college experience, but my roommate and I became the best of friends and learned how to make such a tiny space work for 2 people with our sleep schedules and different morning rituals. The only thing I think we ever disagreed upon was the temperature of the room occasionally but she had grown up in the north and myself in the hot and humid south so I guess that was to be expected. I figure if we could make it work out in a small hotel room, having a roommate or two in an actual house wouldn’t be so bad!
Have you thought at all about renting out your other properties by room? For example a 2 bedroom house getting $1200 a month as an example…2 people splitting that would pay $600 each…but if you were the one to rent out the house to 2 different people…and charged a little more…This seemed to be popular near the college I went to, lots of houses had rooms for rent but were owned by someone else. So let’s say $800 each? . That’s an extra $400 a month. Worth it? Too hard to find 2 people each time?
Amazing post! I love the mention of opportunity cost. I recently bought a new MacBook Air after having an early 2008 MacBook since 2008. My old Mac was on its last leg, and I was wishing, hoping, and praying that I could last a few month years on it. After realizing that my MacBook no longer has sound output, the screen would frequently go black, and the battery wouldn’t hold a charge, I decided that I needed a new MacBook. The trade-offs for me were not having my vision go bad because I would have a brighter screen, longer battery life, and I could finally watch Netflix on my laptop without having to solely rely on my iPhone and forgetting to switch from LTE to wifi and go over my data with Verizon! So my opportunity costs involved me having a more reliable computer for my business.
As far as roommates to, I have been in my own apartment for almost 4 years. While I love living alone, the trade-off is not having someone home to talk to and having to pay the full amount of (New York City) rent. At this point, I’ve decided not to downsize and to get a roommate(s), for a variety of reasons. But it makes me think of what you’re saying: we can have something that we want, but we need to remember what we are giving up in order to get it. If it’s worth it, then go for it!
Love this post! Anything to remind us of opportunity costs. We paid off our house and got a real lesson on the better opportunities for that money. On the plus side, we still rent a room in our house. It’s the easiest money we make.
thank for this post. since stumbling upon your blog a year and a half ago. it has changed my views on finances. though, i am still working to be debt free. i now have a house and rent out the other rooms and took the smaller room to be able to charget a higher prices. always look forward to your new posts. hopefully one day i can share my story.
I’m the one paying rent to help pay my roommate’s mortgage! lol I actually don’t mind at all. 100% better than helping some distant landlord, IMO. Plus, she watches my cat while I’m away!
Once I graduate and get A Career/settle down/yadda yadda, I am going to be doing the exactly same thing. Especially if it works out like how I have now and my roommate works nights (she’s a nurse) while I work days. We hardly even see each other! Having someone pay me rent will be just the best way to go and it will really help me to make up for lost time, financially.
@Ms. LOL — Absolutely — this is a win/win situation. The “renter roommate” gets a great place to live, at a fair market price, in a solid location, with an on-site landlord who’s there to fix problems 24/7!! Haha. And the “owner roommate,” of course, gets all the advantages outlined in the article.
I love win/win agreements and totally believe business should be based around these. 🙂
It sounds like you have the perfect setup — the “feeling” of living solo combined with the advantages of sharing with a roommate!
Great post! Recognizing trade offs is such an important thing. There’s so much more than just saving money by stopping your usual routine to a local coffee shop. I’ve served in the active duty for years. Roommates definitely wouldn’t bother me at all to stream in some more income.
Paula,
Great post. You guys have been served well by simply taking in a few roommates. And it’s great that you consciously recognize the trade-offs and deliberately make that choice. That’s really what’s it’s all about. It’s about being deliberate with your money and valuing your time and money appropriately.
However, there is an additional opportunity cost of having a bigger place and taking on the roommates besides just your privacy (or lack thereof). There’s also the opportunity cost of you guys just living in a much smaller pad. Though there are certainly efficiencies to having a bigger space and divvying up some of the costs, I don’t think it’s quite as rosy a picture as you’re painting. You’d really have to compare the savings of a smaller space and what those savings could have otherwise generated once invested. I’m sure there’s still a considerable spread, but by nature it wouldn’t have been $40k, which makes some of the future calculations a bit misleading.
Either way, it’s a great message. There’s a lot to be learned here about opportunity cost, trade-offs, valuing your money and time, and simple sacrifices adding up to huge amounts over time!
Best regards.
I am so glad that I stumbled across this blog! Frist, Your writing is fantastic.
Second, this is a great article. I have one rental house that my brother and I went in on together. And it was a brilliant move. Real estate is definitely a great way to store your extra cash and make a handsome return in the process.
I’m not sure if my wife would be down with roommates, but this would certainly save(make) a lot of money. Opportunity cost is one of my favorite concepts from Economics, thanks for sharing another great example of how valuable it is.
I know a 31 year old who has a young son and lives like this. I always thought that was a little ridiculous, that they were living like college kids in a party house, until I read this post. I was referred to your site by a forum poster on BiggerPockets, so I came here with a real estate investing mindset. I have to say, this is a brilliant idea, and kudos to you! Keep it up!
Thank you Kristy! I’m really happy to hear that I could help facilitate that paradigm shift. 🙂 Having zero out-of-pocket personal housing costs has been instrumental in helping me grow the funds to become a real estate investor.
I’ve listed with a lot of random people I’ve met off Craigslist. Every place has turned out well. So from the other end of the spectrum, it is definitely a win-win.
Great article. The way I look at it, if you are an easy to get along with person, you might as well monetize that by getting a roommate. When I bought a place I realized that 2 bedroom condos didn’t cost all that much more than single bedrooms, so I bought a 2 bedroom place to give me the option of renting the second bedroom if need be. I’ve taken advantage of it over the past 6 years and it has turned out great. The best part is when my first roommate found a girlfriend an basically disappeared. I kept the rent low, so he was willing to keep renting instead of making the commitment to move in with his girl.
It goes a long way towards financial freedom. I actually just got laid off yesterday, but I’m way less worried about it because I know such a large percentage of my mortgage is taken care of.
Totally loved this post! I factor in opportunity cost as well. I’m going to have to think about using your genie example.
Man I love this blog.
Are you doing some kind of experiment, Paula? It’s been just over a month since your last blog post.
Just curious… and surprised…
I love that you write about your success and hopefully will inspire others to make some changes in their lives that can pay off – HUGELY! Investing in Real Estate helped us quit our day jobs and travel full time. http://www.venturists.net love owning my time
Great post!! At this point in my life, I would never choose to have roommates. I have a 2-year-old and a 1-year-old (so…actually I don’t think anyone would choose ME to be a roommate haha!). BUT I think the point is that you are willing to do what it takes to continue making money and developing passive streams of income. You’re right – there are hundreds of ways to make money! Find something that works for you (whether it’s roommates, a side job, working longer hours, refinishing furniture, etc.) and go for it! Thanks for the inspiration! 🙂
My roommates are Airbnb travelers. I went from $800 a month from a roommate to $3k-4k a month, from travelers, grandparents and fabulous people.
Imagine if you were renting those 2 rooms via Airbnb… Hmmm and you could block a bit of no roommate time as long as you made the “$1,900” (i’m including the utilities you split) a month.
Definitely motivational! Growing up, my parents had rental properties and I swore I would never get into the business after seeing the horrors of it from the inside, but… it’s so tempting! There are definitely pros and cons to being a landlord, but if done right, the benefits can certainly outweigh the downsides. You just have to channel your inner hard-ass. Great article and good for you!
Hi Paula.
I’m a new blog reader. I’m studying your material and thought I check your YOUR blog. I recently read that wealthy people buy things that create income rather than on-going expenses. It really makes sense. This was a fabulous example. Not only did I get a chance to see how a real blogging pro writes, I learned a great tactic AND reinforced a wealth-building way of thinking in the process. Thanks!
I’m so glad I found your blog. I’ve been on the fence about getting roommates in my new house, thinking we are too old for it (mid thirties), and I’m so hapy to see how well it has worked out for you. This is truly inspiring and motivating.
@Marullos — Thank you! One of the advantages to getting roommates when you’re in your 30’s is that you tend to naturally attract older, more responsible roommates.
For example: One of my roommates recently received a Ph.D. in genetics and is working as a postdoc researcher. He doesn’t have much money yet (since he’s been in graduate school for his entire adult life, and postdocs don’t earn much), so it makes financial sense for him to live with roommates. But he also doesn’t want to live with a bunch of 21-year-olds in a party house. So we’re a really solid fit, as roommates.
In short: You’ll attract the type of person who wants to live with a 30-something roommate. There’s a good chance that the two of you will naturally be at the “same station” in life.
You are a hero of self-sacrifice. It is amazing how much you can save up in such a short time if you just sacrifice a little. I did the roommate thing until I was 28 and saved a ton of money, including enough to take a year off for charity work.
I would recommend that everyone try it for at least a year. Besides saving some pretty good money, you learn a lot about yourself and others.
Congrat’s to you for all of your accomplishments! Great story and very interesting real estate investment strategies to earn you good cash flow!
Great thoughts. Wonder how many will forget this by tomorrow? What do you suggest for those in their 50’s to 60’s age group? Emergencies do come up & they did in my case so lost everything. We never know what tomorrow is going to bring is what I now relay to everyone.
@K — If you’re in your 50’s/60’s and need to earn extra money:
1) Flex your hustle muscle. Create a side business via consulting, freelancing, teaching, tutoring. You have more job experience than the rest of us, so use that to your advantage.
2) Rent out part of your home. There are plenty of grad students, recent immigrants, recent divorcees, and other people in their 30’s/40’s/50’s who would be happy to live with a more mature housemate, rather than someone who’s young and might stay up too late.
3) Rent out your home on Airbnb, VRBO or another vacation-rental website, so you can have “temporary” housemates.
nice article. Thank for sharing your story. It’s helpful
Awesome post! Our house is too small and my wife and I are raising up 3 teenagers. I’m thinking of renting another house and have it rented out. What do you think of this scheme?
@Eric – Here’s a blog post that I wrote to an “accidental landlord” that might help you gain clarity in your situation — http://affordanything.com/2013/06/03/should-i-rent-out-my-upside-down-home/
This is an awesome post. I wish you will make more than that. You deserve it. I am inspired to do more to also make that amount. Keep inspiring us.
I love the idea. I have THREE spare bedrooms. Where do you find and how do you vet potential tenants. What is your process?
@Kay — I post ads on Postlets.com, which feeds to Zillow, Trulia, Redfin and multiple other rental websites. I also post ads on Craigslist. For vetting them, I usually talk to them in-person at the house, or we’ll go out for coffee, and I’ll get a sense of the person and about whether or not we’d get along. I also run the standard background check that I’d do for any tenant (roommate or not).
Paula,
Loving your blog! You’re a gifted writer. I have several rental properties and was wondering what you use for the “standard” background check (and credit check). Any suggestions?
Thanks!
Wow. I can’t stop reading your articles. So addicting. I’m only 18, but I’m looking to have plenty of savings by the time I’m ready to retire (hopefully 45.) Im very anxious to get into real state and the idea of buying and renting out homes. I’ve always had the idea in mind and can’t wait to get started as soon as I can. Again, im only 18. And just barely began to start getting my credit score up, but Ive read post after post on this website and I feel that you guys (you and Will) are VERY, VERY knowledgable people. Love everything you guys do and I definitely look forward to read more. I usually never comment or put any of my 2 cents on anything but I had to share my thoughts on this. You guys are awesome. Hope to see you two progress even more! This has probably been one of my favorite articles so far
Thank you, Albert! I really appreciate that, and I’m thrilled that you’re getting a headstart on this when you’re 18. Time is both your most precious asset and your best ally. The more you invest when you’re young, the more powerful the results. (And you’ll almost certainly be able to retire at 45, especially since you’re starting now.)
I can’t get enough of these articles! Good stuff!
Hey Paula – Great to see you still being so successful with Real Estate. Are you still buying rentals? Doing any more flips? Congrats on the success to date!!!
J Scott
Hey J. Scott! Thank you! I’m up to 7 rental units now (4 single-family homes and 1 triplex), and I’m under contract for a condo (as an owner-occupant). With the exception of the condo, I don’t plan on buying any more property in the next couple of years. Instead, I’m focused on paying down my current holdings. I already own 2 of the 5 buildings free-and-clear, and I’m on-track to have a 3rd property, the triplex, paid-in-full by next year. So — Yeah!!
I read on your blog that you just leased your first rental property. Congratulations! Your numbers look awesome, and your decision to hire a property manager is 110% the best thing to do. Property managers make life much easier. 🙂
Hope you’re doing well!
Perfect timing on this! I’m actually buying a Florida home this month (Chicago winters are BAD!!) and trying to decide about renting it out to weekly vacationers or get a few roommates to fill up my new 5 bedroom abode.
Think doing the roommates will be the better choice, more stability and they will take care of the place better when I’m not there (most of the time except every other weekend).
Thanks!
I couldn’t handle living with other people – I just work as a high price escort in Australia. Compliments my straight wage nicely. I have 6 regular clients I see weekly at $700 an hour. $850 a month? Lol. Sounds like a pittance to have to have people around constantly. I think the health risks would be about the same too – who knows whom you’d be inviting into your house. I drive a new car (no loan or lease) and at the age of 23 have just purchased my first house with a mortgage over ten years – will be able to pay it off much sooner. Duhhhhhh. It’s cute how everyone is telling you how great you are however. Congratulations. I’ll stick with what I’m doing thanks anyway. Oh. I buy all the clothes, shoes, bags, furniture and groceries I want or need. Plenty more where that came from.
Are you serious?!
…. WHAT?!
Do you have to pay income tax on roommates’ rent?
@SC — Yes, I do. They’re tenants, just like all the others.
We have had 2 roommates plus 1 tenant which brought in $26,400/year. We had to ask one roomie to leave as we needed the space (I had severe insomnia and my husband’s snoring was making it even harder to sleep – I just needed my own space while I was a full time student) so it has dropped to $19,200. I’ve now finished my degree and my sleep is thankfully much better with the regular schedule and said roomie is considering moving back in!
I miss having my own space and privacy, but like you mentioned, not $1,100 worth per month! We originally agreed to have roommates until we got married, but now we’ve agreed to have roommates until we have a baby. With any luck, that’ll be within a year 🙂
Love this. Passing it on to my significant other who is much less enthusiastic than I am about the idea of having roommates. I think your delivery is better than mine!
I’m currently in the market for a house (for a bunch of reasons, one key one being that our rental market here is bananas and my rent is increasing 10-30%/year) and I’m struggling with if I should buy a studio condo (3x my income, $160,000, closer-in) or a 2-bedroom house (5x my income, $250,000, less good location) . I “qualify” for both (I make $45,000/year), but the main advantage of the 2-bedroom house is that it:
1) won’t have an HOA, which run $250-300 month for most of the condos but don’t include utilities
2) I can have a roommate. Renting a 2-bedroom at this point, a rental cost $2200/month vs a $1100 on a mortgage on a $250,000 house.
However, spending that much $$ on a house seems unsettling to me.
I don’t know how important location is to you, but after doing it both ways, I think buying a house with boarders is the only way to go!
10 years ago, we bought our 5 bedroom home for $440,000. We got a 30 year mortgage and our payments were originally $2,300 a month. When rates dropped, we refinanced and our payments dropped to $2,000 a month. We were happy to save $300 a month..
When rates dropped again, we refinanced again, but since they were so much better on a 15 year loan, we switched from a 30 to a 15 and our monthly payment went from $2,000 to $2,700 but we’d have our house paid off in half the time and more importantly we started renting out a couple of rooms at $625 each. So, now we pay $2.700 – $1,250 = $1,450. The combination of our home appreciating at 5% a year and the rent we have received, has given us a free place to live for the last 10 years. Totally, 100% free. 🙂
This is an excellent post and fantastic explanation of what roommates can offer financially. Upon entering graduate school, I bought a 3 bedroom house. My two roommates have been paying for me to live rent-free for three years (~$27,000/year). This is a major benefit and allows me to live comfortably with only my measly graduate school stipend.
Yes that’s all great if you already have a house to rent out, but how did you get your first house? My boyfriend and I are working our asses off to even pay rent let alone get a mortgaged house. We are paying $1,600 for one bedroom in a house (mini kitchen and bathroom) and that is on the good side for the area, if that gives you any idea. The cost of living where we are (Santa Cruz, CA) is insane, but all of our family is in the area so we don’t want to move. How did you get your first house? Can you go into a mortgage planning to rent it out? It makes me sick paying that much in rent. It feels like throwing money away. Thank you for your time, and congratulations!
Hi Phoebe —
The short answer: We intentionally moved to a place with a low cost of living; rented a bedroom that cost $400 per month (the total rent was $1,200 per month; we were living with roommates); and worked our butts off until we saved a downpayment for a $225,000 triplex. We moved into one of the units in the triplex (with roommates) and rented out the other two units.
In a nutshell, that’s how we bought the first property.
Here’s the longer version of that story: http://affordanything.com/2011/10/17/slowly-building-a-real-estate-empire/
Hope that helps! Best of luck!
– Paula
Looking into getting a roommate after I close on my first home. I’m curious about the tax implications? Is their rent considered income and therefore taxable? Any online resources you can point to (besides this AWESOME one) for the logistical how-tos and a bit of legalease?
Hi Kelsey, $800 is pushing it, but if you work a full 40 hours a week and have no other fixed costs and know how to live frugally, you should be able to do it. Why don t you see if for a little more you can get a 2BR and share the cost with a roommate.
Super amazing piece of content, really worth reading and sharing it as it saves my money. Also now-a-days it isn’t difficult to find roommates as there tons of classified sites that could help find roommates.
Awesome post! I bought a 4/3 tri-level house that I’m (slowly) remodeling. Figured at over 2000 sqft and 3 bedrooms empty, I might as well rent them out for extra income. Well, their rent covers my mortgage AND utilities every month, so I’m living for free and using the income from my job to fix up the house instead of taking out a home equity loan. I also converted the den into a bedroom for me so my brother could take the tiny bedroom downstairs for the time being, so really it’s a 5/3 at the moment. The greatest thing is that my brother and I both live downstairs and I’m renting the 3/2 out upstairs so it’s almost like living in an apartment in which we all just share the kitchen and laundry. I actually really lucked out in this scenario.
I always had your way of thinking when I had cancer and needed a roommate, because I couldn’t work and SSDI denied me even having a lawyer. It takes 2 yrs to get seen by the judge. Never seen a dime after working so hard. Sad but true.
Question is, if a student is coming from a foreign country how do I do a background check? With so much going on, it’s hard to rent a room to anyone.