How much rent should I charge?

In My Humble Opinion
1

I’m refinancing my house after breaking up with my partner and I’ll need to take on a roommate for a while to help offset the cost. A friend of mine is looking for a place so…it’s like chocolate and peanut butter. The problem is, neither one of us knows what a fair rent should be.

I’m looking for suggestions as I’ve never experienced rent issues as a homeowner.

Here’s the approximate situation.

It’s a three bedroom home. She’ll have her own bedroom. There are two full baths, one is mine and the other is the common bath. There’s a living room, dining room, finished rec room in basement, laundry in basement. She will have access to a small workshop outside, and half the garage. Backyard.

My monthly living expenses not counting my own personal bills are as follows (rounding)

Mortgage: $1100

Electric/Water: $50-$100

Gas: $150

Cable/Phone/Cable Modem:$159.00
(she’ll have access to all three)

One friend suggested a fixed rent plus 50% of the utilities. The thing is, I don’t know what a fair fixed rent would be.

Help! I need to let her know soon.

2

Any way to find out what other rental prices are in your area? For apartments or houses. Also check the local classifieds to see what other “roommate wanted” ads are saying for prices, if they are.

3

Got any idea what a one bedroom apartment in your area rents for? If not, call around and find out.

I’m not saying that that number should be how much rent you should charge. I do think that gives you a useful number to think about.

Regardless of what that number is, I’d have a hard time seeing paying more than half your mortgage payment as fair–given that you get the equity and all that. But I don’t know that asking for half your mortgage payment is unreasonable–especially if renting a one bedroom apartment near you usually costs more than that.

4

Apartments tend to run slightly high in my area because I live in a college town. A typical apartment can run between $500-$1000. Decent houses for rent are about $800 and up. I don’t think it’s fair to make her pay 50% of the mortgage and I like the idea of rent + half the utilities, that way keeping those bills to a low roar will benefit both of us. Part of me is thinking between $300-$400 plus half the utilities. I really need to mull this over because I don’t want to screw her over and I don’t want to screw myself over.

5

[QUOTE=The Chao Goes Mu]
Apartments tend to run slightly high in my area because I live in a college town. A typical apartment can run between $500-$1000. Decent houses for rent are about $800 and up. I don’t think it’s fair to make her pay 50% of the mortgage and I like the idea of rent + half the utilities, that way keeping those bills to a low roar will benefit both of us. Part of me is thinking between $300-$400 plus half the utilities. I really need to mull this over because I don’t want to screw her over and I don’t want to screw myself over.
[/QUOTE]
I live in an area with a lot of student housing. My neighborhood is so-so. The one bedroom, three room cinderblock duplex next door rents for $500/month plus utilities. $300-$400 seems more than fair to me, with everything you’ve described.

6

Since you’re not an experienced land lord, you should probably just engage in honest negotiations with her. She’s a friend, so this situation is extremely dicey.

I like that none of the people my company rents to are people I have a personal relationship with (in fact in the regular course of business, I never meet with them. My business partner sometimes will, but usually our property manager does.)

Doing business with friends or family can be ugly. People who would have no problem with paying a land lord a rent that they know he is “profiting” from, would possibly be offended if a friend tried to turn a profit off of them. In your friend’s mind, she won’t see you as a business person but as someone she is also doing a favor for (she’s helping you pay expenses while not forcing you to rent the room out to a stranger.)

The best advice I can give is to call around, pretend you are someone looking for a one bedroom listed in the newspaper. Ask how much rent is, maybe even look at a few places, then you will probably know what is the “maximum” you can charge her. You can’t charge her market rate, because she’d be stupid to pay the market rate to you.

Since she will be paying rent in a room that is part of your primary residence in most states that means she will have significantly less legal rights than a traditional tenant. The law (in many states, I’m not a lawyer, do research) typically gives a land lord more ability to kick someone out of their primary residence than they do a rental property. In some states one of the few ways a land lord can break a lease early is to “move in” to the property, claiming it as a residence, it gives them certain rights they don’t have when they are simply owning the property for investment purposes. Again, that may not apply to your state/situation.

Also realize, any one bedroom you look up in the classifieds is a one bedroom apartment that means an individual unit to which one person has access. You aren’t renting out a one bedroom apartment, you are renting out what is typically called a “room in a house” or a “sleeping room”, the rates for one of these will be much lower than a one bedroom because the tenant doesn’t have all of the benefits of a true one bedroom unit and a smart tenant then wouldn’t pay for it at the same rate.

The problem really is, you aren’t doing this from a business perspective. You are doing it out of necessity and the person you will be renting to is a friend. So you have to conduct yourself in a way designed to maintain the friendship while also satisfy your genuine need for help in paying your expenses for awhile. With all of that in mind I would:

  1. Check around, like I said. Make sure that whatever you suggest as rent is not anywhere near as high as rent on a one bedroom apartment in your area.

  2. Don’t dictate rent, that will build resentment. You need to have a basic, sit-down, face to face discussion with her. You need to tell her your expenses, and then you need to say, “for this to work, I need you to pay me x in rent, because anything lower than that and I can’t afford to make my mortgage payment.” By the way, you should genuinely find out what portion of the monthly mortgage payment you need to get from her in order to still be able to “live in a reasonable manner”, and since she is a friend that should probably be what you charge. If she thinks you are trying to profit off of her, things will go bad. You should present whatever rate you offer to her as “what you need her to pay, so that you can make it financially.” That way, she will make her decision based on whether she can pay it, and not have to be wary that you are profiting off of her.

Furthermore, if she is a friend, it could make for a better tenant relationship. If she knows the amount of her rent is directly tied to you being able to survive financially, she will probably not build up resentment towards you, thinking “look at him living fat and happy while I help him build equity in this place.”

  1. Make sure she signs a rental agreement, and a roommate contract. Explain to her that this is for the protection of both of you and to insure that you both have certain guidelines for behavior as roommates laid out before move in.

  2. Strongly consider whether or not this will work out as a roommate relationship. You need to consider this from the perspective of a future roommate just as much as you do a land lord. If you weren’t in this situation, but were instead just looking for a roommate in a traditional rental property, would this woman be on your short list of potentials?

7

As for utilities, if I was a “friend renting from a friend” I’d agree to pay:

50% of cable/phone/internet. My justification would be, these are services we are both going to be using, it will be difficult to say who is using one more than the other, and it is simply “fair” to split the costs. I would want these services even if the person I was renting from wasn’t providing them.

Water, electric, and gas–more difficult.

I would agree to pay 50% of the water, because generally two people shower twice as much, wash dishes twice as often et cetera, so it only makes sense to split that bill evenly.

Electric and gas is where it gets tricky.

I’m guessing the house is heated by gas? If that is the case, I don’t know. Because generally you aren’t going to heat a house more because another person moves in, unless that other person wants the house hotter than the original person living there. My logic would be, “you are going to have to pay to heat the house whether I live there or not, so why should I pay an equal share of this expense, that I’m not directly increasing by being here?”

Electric, 50% might fly, but with caveats. If the person I was moving in with was someone who had unreasonably high electric usage, I probably wouldn’t agree to 50% (say they are someone who leaves all their lights on 24/7, or have their own greenhouse running in the back yard or et cetera.)

8

I would say half of what a better 2BR goes for in your area, plus $50/month for use of the yard and garage. When talking with her I wouldn’t refer to how much your mortgage is, It’s useful for you to keep in mind when you budget but it’s not anything she needs to know or worry about.

Your cable/modem/internet package is on the high end, if she has no plans to use the house phone then I would charge less than 50%, ditto if you have premium channels. I’m sure its a great deal but it might not be what she would agree to if you were both getting a new place together.

9

[QUOTE=sugar and spice]
I would say half of what a better 2BR goes for in your area, plus $50/month for use of the yard and garage. When talking with her I wouldn’t refer to how much your mortgage is, It’s useful for you to keep in mind when you budget but it’s not anything she needs to know or worry about.

Your cable/modem/internet package is on the high end, if she has no plans to use the house phone then I would charge less than 50%, ditto if you have premium channels. I’m sure its a great deal but it might not be what she would agree to if you were both getting a new place together.
[/QUOTE]

The tenant would be retarded to pay half of what a nice 2BR would cost for a “sleeping room.” She would rightfully even feel that her friend was taking advantage of her. Which is fine if he’s trying to profit off the situation, if his desire is to have a healthy friendship, a healthy roommate relationship, and a healthy tenant relationship all at the same time, he is going to have to behave in a much different manner than one would behave if they were in this to make money.

10

[QUOTE=The Chao Goes Mu]
Apartments tend to run slightly high in my area because I live in a college town. A typical apartment can run between $500-$1000. Decent houses for rent are about $800 and up. I don’t think it’s fair to make her pay 50% of the mortgage and I like the idea of rent + half the utilities, that way keeping those bills to a low roar will benefit both of us. Part of me is thinking between $300-$400 plus half the utilities. I really need to mull this over because I don’t want to screw her over and I don’t want to screw myself over.
[/QUOTE]

I’d go for $300 plus half of the utilities. Mostly because it is a bit less than a third of the mortgage, and she would be getting access to a bit less than a third of the house. This assumes that you can afford $700/month by yourself.

Any less and you’re doing her a favor you can’t afford, and too much more and she’ll eventually feel taken advantage of. Be willing to negotiate the amount she pays for the cable/phone, especially if she doesn’t need access to the phone, since she didn’t have a say in the package you picked.

I don’t think you should be too swayed by other rents- she can do that research herself and decide if what you are asking is fair.

11

[QUOTE=Martin Hyde]
The tenant would be retarded to pay half of what a nice 2BR would cost for a “sleeping room.”
[/QUOTE]

Um, you just suggested calling around and asking for a 1BR rental to establish a high end price. (Which, I understand, you wouldn’t charge). Half a 2BR is going to be significantly less than a 1BR in most markets. Here an average one bedroom/one bath is $1250. Half of an average 2BR/2 bath is $950. Needless to say, half a 2BR price follows your first rule: “1. Check around, like I said. Make sure that whatever you suggest as rent is not anywhere near as high as rent on a one bedroom apartment in your area.”

Personally, I would probably settle on a price midway between half a 2BR/2 Bath and a third of a 3BR/2 Bath. From the sounds of the OP, I’d guess a rent of around $400 + 1/2 utilities.

12

[QUOTE=pulykamell]
Um, you just suggested calling around and asking for a 1BR rental to establish a high end price. (Which, I understand, you wouldn’t charge). Half a 2BR is going to be significantly less than a 1BR in most markets. Here an average one bedroom is $1250. Half of an average 2BR is $950. Needless to say, half a 2BR price follows your first rule: “1. Check around, like I said. Make sure that whatever you suggest as rent is not anywhere near as high as rent on a one bedroom apartment in your area.”

Personally, I would probably settle on a price midway between half a 2BR and a third of a 3BR. From the sounds of the OP, I’d guess a rent of around $400 + 1/2 utilities.
[/QUOTE]

Half a 2BR isn’t “significantly cheaper” in any markets in which I am personally vested, it’s possible this is different elsewhere.

We have some properties in a college town, and the rule there is that what you charge for a 2BR is almost the same as a 1BR rate * two.

Some land lords even get away with taking this to 3BR or even 4BR units (you have to get tricky though with anything over 3BR due to occupancy laws.)

This is because a lot of college kids want to “live with each other” so they don’t really complain about paying as much in a 2BR as they would in a 1BR.

13

[QUOTE=Martin Hyde]
Half a 2BR isn’t “significantly cheaper” in any markets in which I am personally vested, it’s possible this is different elsewhere.

[/QUOTE]

Must be. Because when I went to college, your share price went down dramatically with more roommates. A 1BR was around $700, A 2BR $500, a 3BR $400, and a 4BR $300.

14

A big part of this depends on how you plan to treat her. Will she be allowed full access to the “common areas” of the house? Can she put her personal belongings out and around, or do you want her to keep them confined to her room? If you have guests, do you expect her to disappear? Do you view her as a roommate, or as someone living in your home?

I ask this because I have twice been in unequal roommate situations. The first time, I sublet one bedroom in a two bedroom apartment for the summer. The permanent resident charged me half the rent, but did not consider me an equal tenant. She would not allow me to leave personal belongings in the common areas, and got angry when I expressed an opinion about where to set the thermostat (I paid half the utilities too). She felt she had more rights as the permanent resident. I felt that if she was going to treat me that way, she should have charged me less rent.

A few years later, I let a younger sister move in with me rent-free into my two bedroom apartment. She was not on the lease and paid no rent. But she still expected to have full rights as a “roommate.” She wanted to have people over whenever she wanted, and thought she had a right to get upset with me if I wasn’t neat enough for her. I felt she had no rights to anything except her bedroom, unless I was generous enough to grant it. And I thought I was plenty generous, but she didn’t.

So you should be very honest with yourself about how you will feel when this person spreads their personal belongings all over, cranks the A/C, and leaves dirty dishes in the sink. If you expect her to adhere to certain standards and have less than an equal right to common spaces, you need to figure that into the rent you charge. Then you should talk to her about your expectations and how they are factored into the rent. Agree to some kind of roommate contract. Believe me, you will be happier if you are up-front about this stuff.

15

[QUOTE=pulykamell]
Must be. Because when I went to college, your share price went down dramatically with more roommates. A 1BR was around $700, A 2BR $500, a 3BR $400, and a 4BR $300.
[/QUOTE]

Definitely not the case here. On average price per roommate of a 2BR is 94% of the price of a month’s rent in a 1 BR unit.

16

A couple of my friends had a huge falling out as a result of this type of arrangement. They had roomed together in an apartment for several years, and then one of them bought a place of her own. They made it less than two months before the roommate moved out.

I think neither of them could see the other’s side. The homeowner expected half her mortgage payment as rent, plus half groceries and utilities (basically the same arrangement they had in the apartment), and couldn’t understand why the roomer wasn’t thrilled at the prospect. The new place was much nicer than their old apartment, with slightly higher rent. The owner expected the roomie to be as excited as she was. The roomie didn’t really have reason to be excited–it wasn’t her place and it was a constant reminder that her friend was much better off than she at the same age. The owner expected more from the roomie in terms of cleaning and keeping the place up. She would get cranky about shoes left in the hallway and clutter in the roommate’s own room. Most importantly, perhaps, she didn’t understand the fundamental difference between renting an apartment with a roomate and renting a room in someone else’s home. Even though roomie had access to the entire place, it wasn’t hers and she never really felt as comfortable as she did in the apartment. She didn’t really pick the place. She had no choice in furniture or decorations. The owner even tried to dictate the furniture roomie could put in her own room, insisting roomie use owner’s furniture rather than her own. She had no choice in utilities, cable, etc. There was an issue about who she was allowed to invite over. The relationship had transformed from friends and roommates to landlord and tenant. Roomie ended up moving back into their old apartment alone, paying more than she had for either place before.

I know that was a long story that is partly irrelevant to your situation. Here’s my point: Your nice, big house may seem superior to a tiny apartment in all ways, but please recognize that there will be drawbacks for your roommate. You should consider this when you calculate what to charge and, even though you didn’t ask for advice, when you interact with her. The more you make her feel like it will be her home too, the more you can ask her to pay without drawing resentment. If you don’t want her to have nearly equal rights, then she should be paying significantly less than half the mortgage.

For what it’s worth, $350-$400 plus a fair share of utilities sounds reasonable to me. Fair share here may or may not mean 50% of each.

17

[QUOTE=Martin Hyde]
Half a 2BR isn’t “significantly cheaper” in any markets in which I am personally vested, it’s possible this is different elsewhere.

[/QUOTE]

Anyhow, here’s the numbers I came up with from here:
Location, 1 BR, 1/2 2BR

Chicago, $1279, $890
NYC, $2326, $1761
Madison WI, $624, $530
Ann Arbor MI, $710, $561
San Francisco, $2587, $1431

I tried to throw in a mix of big cities and some college towns. Now, I believe that in your college town your rule holds true, but it’s hardly that way across the board. The best numbers I could find for a national average are here.

So, $897 vs $549 (1/2 2BR) for the nation, on average. Your market may vary.

edit: I see you’ve already responded. My point is that it’s stupid to call the tenant “retarded” for taking such a rate, as it seems in most of the US 1/2 the 2BR rate is quite a bit lower than a 1 BR.

18

[QUOTE=pulykamell]
Um, you just suggested calling around and asking for a 1BR rental to establish a high end price. (Which, I understand, you wouldn’t charge). Half a 2BR is going to be significantly less than a 1BR in most markets. Here an average one bedroom/one bath is $1250. Half of an average 2BR/2 bath is $950. Needless to say, half a 2BR price follows your first rule: “1. Check around, like I said. Make sure that whatever you suggest as rent is not anywhere near as high as rent on a one bedroom apartment in your area.”

Personally, I would probably settle on a price midway between half a 2BR/2 Bath and a third of a 3BR/2 Bath. From the sounds of the OP, I’d guess a rent of around $400 + 1/2 utilities.
[/QUOTE]

Furthermore, I suggested calling around to find a “high end” price, because if the rent the OP asks for is anywhere near that, then the friend would have no reason to accept it. They would be better off getting their own place, where they would have more rights as a tenant.

Your counter might be, “the OP is free to set whatever rent they want, it is on the renter to decide if it is reasonable.” From a business perspective, I definitely agree with you. We set rates on our properties in the area of the market, because that is what sells We are in it to make money.

If the OP is in it to make money, that is what he/she should do, otherwise this gets a lot more complex. If that was the goal, I’d strongly advise against a friend as a tenant.

Keep in mind a lot of land lords don’t own their properties free and clear (that’s typical for us), so the market rate isn’t some sort of “fair” rate for the land lord. It’s the rate that will cover all expenses and generate profit on top of that so to set such a rate for a friend means you are profiteering off of them. That applies whatever rate you decide to use as a comparison.

If you think this situation equates to one bedroom in a two bedroom unit, keep in mind, that market rate is what it is because that is what delivers a profit to land lords in the area while also maintaining reasonable demand.

Roommate relationships are difficult enough as it is. When you are in a dual roommate and land lord/tenant relationship, as well as a preexisting friendship, you will have resentment build up over one party profiting off of the other party. Now, say the OP sets the market rate. At first look, the friend may think “yeah, this is about what I’d pay on the market, and I get to live with my friend” but as months wear on, and eventually roommates will come into minor conflicts if nothing else, this friend might start to think “hey, why am I paying the same rate as I would a private land lord when I’m doing my friend a favor to help them pay their mortgage?” My advice was designed around the idea of not creating a situation where the tenant/roommate will eventually feel resentful towards the OP. That could eventually lead to a lost friendship, a miserable living condition, and a bad landlord/tenant relationship.

The reason I even bring up market rates, is because the rent should be connected to them in some way.

The OP shouldn’t just charge the market rate, because those rates are what they are because they provide a profit to one party and an acceptable value to another party. That’s fine when you’re talking business, but friendship, roommates that alters the situation.

At the same time, the OP shouldn’t charge such a significant discount of the market rate that the OP is “doing a significant favor” for the roommate. Because then the OP will be at risk of becoming the resentful party.

That is why I suggested the OP look at what they “need” this person to pay, for them to “live in a reasonably comfortable manner.” My assumption is this would probably result in a rate in the neighborhood of 30-40% of the monthly mortgage.

On the off chance the OP works through their personal math, and finds they could easily live if the roommate was only paying 25% of the monthly mortgage as rent ($275/month) that would be such a significant discount on market rates, I would advise charging a higher rate. Because such a low rate would probably create a very unequal relationship, and possibly resentment.

Depending on what kind of conversation the OP can have, just working out a “rate fair to both” wouldn’t be a bad idea, either.

19

[QUOTE=pulykamell]
Anyhow, here’s the numbers I came up with from here:
Location, 1 BR, 1/2 2BR

Chicago, $1279, $890
NYC, $2326, $1761
Madison WI, $624, $530
Ann Arbor MI, $710, $561
San Francisco, $2587, $1431

I tried to throw in a mix of big cities and some college towns. Now, I believe that in your college town your rule holds true, but it’s hardly that way across the board. The best numbers I could find for a national average are here.

So, $897 vs $549 (1/2 2BR) for the nation, on average. Your market may vary.

edit: I see you’ve already responded. My point is that it’s stupid to call the tenant “retarded” for taking such a rate, as it seems in most of the US 1/2 the 2BR rate is quite a bit lower than a 1 BR.
[/QUOTE]

Heh, all of those are “big cities” compared to where rent. We do have some properties in Richmond, which is a bit smaller than Madison, and larger than Ann Arbor, but that isn’t a college town. Outside of college towns I was never implying you don’t get a discount per/occupant for doubling up tenants (or even in a college town, it’s just a very small discount in the ones I’m familiar with.) Just that discounts of around 28% aren’t common (like the $700 for a 1 BR, $500/per for a 2BR would be in your original examples.)

The reason I pulled out the word “retarded” is we aren’t talking about 1/2 of a 2BR, we’re talking about a sleeping room, or arguably 1/3 of a 3BR.

A sleeping room typically implies an unequal roommate relationship in which one party is the property owner and land lord and the other is a tenant with less access to the house at large.

Tenants in such situations, in many jurisdictions, have fewer legal rights. Such a situation just isn’t analogous to sharing a 2BR apartment, because that is typically a more equal-roommate situation.

20

I don’t disagree with your whole analysis. It was your strong choice of wording and the insinuation that a tenant may be dumb to take such a rate. In some situations, it may be, in other situations it may be perfectly fair. Like I said, I personally would settle for a slightly cheaper rate, with a bottom of what a third of an average 3BR would cost. I wouldn’t necessarily charge anything for garage or yard use.

Which, actually, we agree on, as my suggested number was $400 (with the little market information we know), which works out to be 36% of the mortgage.