If you follow my content, you will know that I am a massive fan of renting rooms. Sharing your living space is the single greatest wealth generator for the average person.
However, the average person doesn’t want to live with someone else (even family) or want to take the risk of owning rental properties.
To achieve financial freedom before age 70, you’ll need to make money in your sleep. Rental income, dividends, and royalties are three accessible ways to build wealth via passive income.
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Today, I want to explore two passive rental options available to the average person. They may seem daunting at first, but you’ll realize they aren’t as risky as they seem.
Getting started with rental income. Renting rooms and buying rental properties begin differently. Renting a space starts with the realization that you want to achieve financial greatness in your life.
For this article, I will assume you bought a house as a primary residence. You are then buying another primary residence while keeping your original home. This method is the best way to start your rental property empire.
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Most people fear owning two homes, so you’ll have to begin this journey by overcoming this limiting belief. Having two houses is the same as owning one home; however, you’ll need a bigger pot of emergency money.
To summarize, renting rooms is about building cash flow, getting out of debt, and investing in alternative assets. Owning rental properties is about using real estate as an asset to pay for college, TAP home equity, and building generational wealth.
My story. I currently have two rental properties and two rental rooms. Therefore, I can give a good explanation of the differences.
The learning curve. Both types of rentals require a learning curve. Rental properties need you to detach yourself emotionally from your home.
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If you worry about the condition of your home, you’ll want to avoid renting properties. Your tenants will destroy your house because that’s what tenants do best. You’ll need to have this mindset, plus a nice cash reserve ($10,000 per house), to prevent stress.
The learning curve for renting rooms comes from finding great tenants. You will see this person every day. Many tenants have issues or mood disorders. Don’t expect someone to take good care of your things, and you’ll be fine.
There are two books to read, “The Book on Managing Rental Properties” and “The House Hacking Strategy.” These books will provide you with a good starting point for your journey.
However, there isn’t a good book on the ins and outs of renting rooms. There are ways to increase your rates and improve the quality profile of your tenants. I will write this book because my wife and I have been renting rooms for four years, to great success.
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Money mindset. Which type of rental income produces the most cash flow? Renting rooms is the most lucrative source of rental income compared to owning one rental property.
Of course, you can expand to own multiple renting properties, which could eventually net you huge gains. But, rental properties require a lot of maintenance and vacancy costs.
The true magic of renting rooms is in the hidden savings. You won’t have to pay for two air conditioners, two roof repairs, or two termite problems.
You simply have to maintain your house as you would normally. Also, renting rooms will help you keep a higher standard of cleanliness around the home.
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My general rule of thumb is that you can rent the master suite for 50% of the rent for the entire home. For example, if the house could rent for $2,000/month, you can rent the master for $1,000/month.
Therefore, if you have two master suites, you can completely cover your mortgage. That’s what my wife and I do for our primary residence.
Cash flow versus equity. You will “cash flow” immediately when renting rooms. When renting a home, it may take you a few years to start getting decent cash flow ($300-$500/month).
You will need to take the cash flow from renting rooms and convert it into other forms of investments. You can invest for dividends and interest, save for a home down payment, or start an automated business like vending machines.
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When you rent a home, someone else is paying down your mortgage, you are building equity and price appreciation, and you are leveraging tax incentives.
Owning rental properties is one of the best ways to build generational wealth because it helps you build leverage in the world. You won’t benefit from leverage if you do not convert your rental room cash flow into assets.
Which way is best to start? I recommend starting with renting rooms because you may not be a good landlord. If you cannot be strict, or people run over you, consider investing in Real Estate Investment Trusts vice becoming a landlord.
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You may think you’ll get a property manager for your rental property. However, property managers can mistreat you just as badly as tenants.
If you don’t understand real estate, leverage, numbers, rates, and business, you’ll have difficulty using both methods.
However, when renting rooms, you’ll have far less at stake. It requires little money upfront (say $1,000), but you can reap massive rewards. You’ll need a business mindset to be successful in renting rooms. You’ll pay with a crappy tenant if you try to half-ass it.
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Conclusion. My wife and I paid off our debt by renting rooms and added over $200,000 to a dividends portfolio. It has been annoying occasionally, but overall it is a major win.
Owning rental properties is not bad once you have the mindset and the money to be successful. Once I learned how to grow my wealth, dealing with maintenance, insurance, and tax issues at the two properties became second nature.
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However, when I was struggling financially, owning multiple properties was nerve-wracking. That’s why I suggest renting rooms first, building up an emergency fund AND maintenance reserves (they are different), then moving into properties.
Either way, you will need to read books to get the best results. I tried them both without reading, and they are tough. Dealing with tenants, maintenance folks, contractors, real estate agents, and property managers can be challenging without education.
I am glad you are interested in real estate. You don’t need to be a tycoon or mogul to make good things happen. Real estate is a mindset; ensure you build it before jumping into the arena. Good Luck!
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