How to be an ethical landlord?
June 20, 2012 9:48 AM Subscribe
I am buying my first house and my friends will live there with me. What is the ethical way to decide what to charge in rent?
Okay, so my plan is to estimate the average annual cost of major and minor maintenance and divide by twelve. I'm okay with that; that's my friends paying for wear-and-tear while they live with me.
I also plan to do an estimate of the average monthly utility bills and charge that. We will close the books once a year and figure out if we went over or under on the utility bills, and charge or credit them.
But the big question is: I'll be paying approximately $1,000 a month on the mortgage (incl. taxes and insurance and all that). I could pay it all myself, and it'd only hurt a little in the wallet. I could charge my friends some amount of rent in order to help defray this cost. But how much?
We could split the mortgage bill equally, but that seems a little unethical to me. I get to keep the house after they move out. Why should they buy me a house?
I've heard about one idea where you pay your rent in "hours" instead of dollars. We all make different hourly wages and there is no defensible reason for that, so we could pay into the mortgage in proportion with the ratio of our incomes, to offset the inherent unfairness of capitalism. But still... why should they pay the mortgage when I am keeping the house?
Probably the most ethical thing to do would be to form a nonprofit corporation to buy the house off of me, and then we all pay into the coffers of the corporation and we all become board members, and then no one of us owns the house. A co-op. I might do that at some point.
But let's say I don't do that. How should I figure out an ethical amount for them to contribute to the mortgage?
Okay, so my plan is to estimate the average annual cost of major and minor maintenance and divide by twelve. I'm okay with that; that's my friends paying for wear-and-tear while they live with me.
I also plan to do an estimate of the average monthly utility bills and charge that. We will close the books once a year and figure out if we went over or under on the utility bills, and charge or credit them.
But the big question is: I'll be paying approximately $1,000 a month on the mortgage (incl. taxes and insurance and all that). I could pay it all myself, and it'd only hurt a little in the wallet. I could charge my friends some amount of rent in order to help defray this cost. But how much?
We could split the mortgage bill equally, but that seems a little unethical to me. I get to keep the house after they move out. Why should they buy me a house?
I've heard about one idea where you pay your rent in "hours" instead of dollars. We all make different hourly wages and there is no defensible reason for that, so we could pay into the mortgage in proportion with the ratio of our incomes, to offset the inherent unfairness of capitalism. But still... why should they pay the mortgage when I am keeping the house?
Probably the most ethical thing to do would be to form a nonprofit corporation to buy the house off of me, and then we all pay into the coffers of the corporation and we all become board members, and then no one of us owns the house. A co-op. I might do that at some point.
But let's say I don't do that. How should I figure out an ethical amount for them to contribute to the mortgage?
You're overthinking it. Charge them what the market would charge them, minus some percentage (10-20%?) as a discount.
posted by thewumpusisdead at 9:53 AM on June 20, 2012 [23 favorites]
posted by thewumpusisdead at 9:53 AM on June 20, 2012 [23 favorites]
How should I figure out an ethical amount for them to contribute to the mortgage?
What would a "good deal" on a room for rent in a house be where you live? That's how much you charge.
Your friends are happy because they're getting a good deal, and you're happy because you have tenants you can rely on to pay the rent.
Other than that, the secret to being an ethical landlord is to keep things fixed and in working order, as nicely as you would want it for yourself. But that should be easy for you since you live there.
posted by deanc at 9:53 AM on June 20, 2012 [13 favorites]
What would a "good deal" on a room for rent in a house be where you live? That's how much you charge.
Your friends are happy because they're getting a good deal, and you're happy because you have tenants you can rely on to pay the rent.
Other than that, the secret to being an ethical landlord is to keep things fixed and in working order, as nicely as you would want it for yourself. But that should be easy for you since you live there.
posted by deanc at 9:53 AM on June 20, 2012 [13 favorites]
It's perfectly ethical to charge market rate, i.e. whatever they'd have to pay to rent a similar place in the same area from someone else.
We could split the mortgage bill equally, but that seems a little unethical to me. I get to keep the house after they move out. Why should they buy me a house?
Because you're taking on a lot more risk than they are.
posted by jon1270 at 9:54 AM on June 20, 2012 [14 favorites]
We could split the mortgage bill equally, but that seems a little unethical to me. I get to keep the house after they move out. Why should they buy me a house?
Because you're taking on a lot more risk than they are.
posted by jon1270 at 9:54 AM on June 20, 2012 [14 favorites]
I would find the average rent per roommate in comparable shared houses/apartments in the neighborhood, and then take 25%-35% off that for the disadvantage of not having equal say in major decisions about the physical plant (because I assume you're reserving that to yourself as the owner).
Or, I would find the average rent per roommate in comparable shared houses/apartments in the neighborhood, subtract that from my monthly mortgage payment, and then split the balance evenly among all roommates.
Both of those seem easier to understand than your plan.
posted by Sidhedevil at 9:54 AM on June 20, 2012
Or, I would find the average rent per roommate in comparable shared houses/apartments in the neighborhood, subtract that from my monthly mortgage payment, and then split the balance evenly among all roommates.
Both of those seem easier to understand than your plan.
posted by Sidhedevil at 9:54 AM on June 20, 2012
Figure out what fraction of that $1,000 goes towards interest, property taxes, and homeowner's insurance (probably most). Deduct appropriately from there to account for the value of your income tax deductions. Maybe about half of that? Less if you want to offer a friendly discount?
Agree you are probably overthinking a little. Markets exist for a reason; make use of them.
posted by deadweightloss at 9:54 AM on June 20, 2012
Agree you are probably overthinking a little. Markets exist for a reason; make use of them.
posted by deadweightloss at 9:54 AM on June 20, 2012
We could split the mortgage bill equally, but that seems a little unethical to me.
That would be substantially undercharging them, in fact, because you've overlooked a few things. like property taxes and insurance, all the other homeowner's risks, etc.
I think that you should figure out what the market in your area looks like for the facilities you're providing and cut them a generous deal based on those prices. If you anchor your thinking to the mortgage price tag, you're going to get screwed.
posted by mhoye at 9:55 AM on June 20, 2012 [5 favorites]
That would be substantially undercharging them, in fact, because you've overlooked a few things. like property taxes and insurance, all the other homeowner's risks, etc.
I think that you should figure out what the market in your area looks like for the facilities you're providing and cut them a generous deal based on those prices. If you anchor your thinking to the mortgage price tag, you're going to get screwed.
posted by mhoye at 9:55 AM on June 20, 2012 [5 favorites]
Split the utilities equally, of course.
I agree with the others here - using the market rent is the right way to figure this out.
The amount of the mortgage payment is sort of a red herring. It's not like you'd expect them to pay more if you refinanced to a 15-year loan. Or pay less if you refinanced to a lower interest rate. And you (presumably) wouldn't stop charging them if, by some odd windfall, you suddenly owned the house outright.
posted by 0xFCAF at 9:55 AM on June 20, 2012 [2 favorites]
I agree with the others here - using the market rent is the right way to figure this out.
The amount of the mortgage payment is sort of a red herring. It's not like you'd expect them to pay more if you refinanced to a 15-year loan. Or pay less if you refinanced to a lower interest rate. And you (presumably) wouldn't stop charging them if, by some odd windfall, you suddenly owned the house outright.
posted by 0xFCAF at 9:55 AM on June 20, 2012 [2 favorites]
The reason that you get to keep the house even though they're paying to live there is that you're taking all the risk. If the house needs a new roof or the boiler breaks or the housing market takes another nose-dive and the property becomes worthless, you're the one who will pay for all of that. If one of you gets an awesome new job across the country, your friends can move out, but you'll be stuck with a house to sell and possibly lose money on the deal. If you lose your source of income and can't pay your mortgage, you're the one who will take the huge credit hit of a foreclosure. The reason that people rent instead of buying is because it's a lot of risk and a lot of work to be a homeowner. They're paying you, in part, for the service of taking on all those risks for them so that they can have a place to live. That's why you get to keep the house and collect rent from them while they live with you.
If you want to buy the house as a co-op, do that, and share the risks equally among the group. But as long as yours is the only name on the mortgage, you're doing them a huge service by giving them a stable place to live, and it's entirely appropriate for them to pay you for that privilege.
posted by decathecting at 9:56 AM on June 20, 2012 [17 favorites]
If you want to buy the house as a co-op, do that, and share the risks equally among the group. But as long as yours is the only name on the mortgage, you're doing them a huge service by giving them a stable place to live, and it's entirely appropriate for them to pay you for that privilege.
posted by decathecting at 9:56 AM on June 20, 2012 [17 favorites]
why should they pay the mortgage when I am keeping the house? Because that's what landlords do. Anywhere they rent they are paying based on the total cost of ownership. this includes maintenance, mortgage, taxes, etc. If you want to give them a break I would suggest looking at the market rate rents and offering a discount equal to the percentage of tax advantage you will get as a homeowner who can deduct interest and taxes. (about 20% during the first several years of the mortgage.)
posted by Gungho at 9:58 AM on June 20, 2012 [1 favorite]
posted by Gungho at 9:58 AM on June 20, 2012 [1 favorite]
Here's how I would do it if I could make the mortgage on my own (I have some experience in this area):
1. Budget for repair and maintenance
2. Share of utilities
3. Rainy-day/upgrade fund. You'll need a new roof and so on eventually, and it's to your tenants' advantage that this not be put off long.
If I did not have to charge market rate, I would not do so. You're giving your friends a huge gift of financial stability, which is an incredible thing and something to be proud of.
posted by Frowner at 9:59 AM on June 20, 2012
1. Budget for repair and maintenance
2. Share of utilities
3. Rainy-day/upgrade fund. You'll need a new roof and so on eventually, and it's to your tenants' advantage that this not be put off long.
If I did not have to charge market rate, I would not do so. You're giving your friends a huge gift of financial stability, which is an incredible thing and something to be proud of.
posted by Frowner at 9:59 AM on June 20, 2012
You also need to figure the taxes issue into all of this . If you are in the US you likely get a tax break for the mortgage interest and the property taxes. However, if everyone is paying you some kind of rent that's rental income and is taxed. If you have an accountant you may want to run this by her/him.
posted by mareli at 9:59 AM on June 20, 2012
posted by mareli at 9:59 AM on June 20, 2012
We will close the books once a year and figure out if we went over or under on the utility bills, and charge or credit them.
It seems like a bad idea to do the true-up this infrequently, especially if you're starting from an estimate. If your estimate is off for a whole year, one party or the other could end up owing a lot at settlement time. If whoever that is doesn't have the cash flow to settle, it puts you all in an awkward situation that could have been avoided if you just settled more frequently.
posted by strangely stunted trees at 10:02 AM on June 20, 2012
It seems like a bad idea to do the true-up this infrequently, especially if you're starting from an estimate. If your estimate is off for a whole year, one party or the other could end up owing a lot at settlement time. If whoever that is doesn't have the cash flow to settle, it puts you all in an awkward situation that could have been avoided if you just settled more frequently.
posted by strangely stunted trees at 10:02 AM on June 20, 2012
When I rented to friends, it turned out that market rate for a 'good deal' was approximately the cost of the mortgage and property taxes divided by the renters (i.e. they actually contributed enough to cover the mortgage and property taxes on their own, I did not pay a share of the mortgage or taxes).
I didn't feel bad about this in the least. Yes, fortunately for me, I was able to break even when I sold the house. But I could have been $20,000 in the hole when I sold it. If some disaster had happened or a maintenance issue, I would have had to take care of all that.
When one of the renters left a roomful of crap in the house when they moved out, I had to be in charge of junking and selling everything they had left behind.
And when one of the renters who was a so-called 'friend' ended up leaving me a final rent check that bounced, I was the one who ended up paying the fee for the check bouncing, having to harass them for a year about paying me back and finally hiring a sort of a collections agency to get them to pay.
No, I didn't feel bad about them paying for my mortgage for me at all.
Make sure you make your friends sign a legally valid lease and give you first and last month's rent and a deposit! I cannot emphasize this enough.
If they end up screwing you (even though you don't think they will, I'm sure), you won't have a leg to stand on later.
posted by treehorn+bunny at 10:06 AM on June 20, 2012 [6 favorites]
I didn't feel bad about this in the least. Yes, fortunately for me, I was able to break even when I sold the house. But I could have been $20,000 in the hole when I sold it. If some disaster had happened or a maintenance issue, I would have had to take care of all that.
When one of the renters left a roomful of crap in the house when they moved out, I had to be in charge of junking and selling everything they had left behind.
And when one of the renters who was a so-called 'friend' ended up leaving me a final rent check that bounced, I was the one who ended up paying the fee for the check bouncing, having to harass them for a year about paying me back and finally hiring a sort of a collections agency to get them to pay.
No, I didn't feel bad about them paying for my mortgage for me at all.
Make sure you make your friends sign a legally valid lease and give you first and last month's rent and a deposit! I cannot emphasize this enough.
If they end up screwing you (even though you don't think they will, I'm sure), you won't have a leg to stand on later.
posted by treehorn+bunny at 10:06 AM on June 20, 2012 [6 favorites]
The reason that you get to keep the house even though they're paying to live there is that you're taking all the risk. If the house needs a new roof or the boiler breaks or the housing market takes another nose-dive and the property becomes worthless, you're the one who will pay for all of that.
Yes. Not only that, if I were your tenant, and you said, "the boiler broke. I am going to have to charge you an extra $300 in rent this month to replace it" because if I wanted to worry about the boiler and the appliances, I would own, not rent.
Add me to the list of people saying that you are way, way, way overthinking this. Split electricity and gas and and bill your tenants for them monthly, just like anything else. You want to make it as simple and as consistent as possible for them, and they are expecting something very similar to living in a rented house. So emulate that environment as closely as possible.
posted by deanc at 10:06 AM on June 20, 2012 [2 favorites]
Yes. Not only that, if I were your tenant, and you said, "the boiler broke. I am going to have to charge you an extra $300 in rent this month to replace it" because if I wanted to worry about the boiler and the appliances, I would own, not rent.
Add me to the list of people saying that you are way, way, way overthinking this. Split electricity and gas and and bill your tenants for them monthly, just like anything else. You want to make it as simple and as consistent as possible for them, and they are expecting something very similar to living in a rented house. So emulate that environment as closely as possible.
posted by deanc at 10:06 AM on June 20, 2012 [2 favorites]
I would find the average rent per roommate in comparable shared houses/apartments in the neighborhood, and then take 25%-35% off that for the disadvantage of not having equal say in major decisions about the physical plant (because I assume you're reserving that to yourself as the owner).
This is way too much to take off. It's not as if you get to make big decisions about physical plant if you have a room in a rented shared house/apartment -- the landlord makes those decisions.
We will close the books once a year and figure out if we went over or under on the utility bills, and charge or credit them.
It's actually not hard to do this monthly, at least if you have a simple spreadsheet to keep track of things. Then you can just say a few days before rent is due "this month you owe me X" where X is a number that's close to, but not exactly the same as, the nominal "rent". This is what my current shared house does, and it works pretty smoothly.
posted by madcaptenor at 10:06 AM on June 20, 2012
This is way too much to take off. It's not as if you get to make big decisions about physical plant if you have a room in a rented shared house/apartment -- the landlord makes those decisions.
We will close the books once a year and figure out if we went over or under on the utility bills, and charge or credit them.
It's actually not hard to do this monthly, at least if you have a simple spreadsheet to keep track of things. Then you can just say a few days before rent is due "this month you owe me X" where X is a number that's close to, but not exactly the same as, the nominal "rent". This is what my current shared house does, and it works pretty smoothly.
posted by madcaptenor at 10:06 AM on June 20, 2012
You're treating this like splitting a dinner tab, and it's not the same at all. Current market prices and practices (e.g., are utilities included) for similar offerings is the only relevant factor; discount as you will to compensate for your avoided cost/risk in getting random roommates that aren't reliable as well as friendship. If you can't make it work charging market rents, well then you shouldn't have bought that property. On the other hand, if you're making a profit off of it, then good on you: that's what investors do.
Your approach seems logical on its surface, but if you take it to its logical extremes it obviously fails. Say your mortgage was zero, you wouldn't charge them zero rent as a result. Say you need a new roof this year, you wouldn't charge them a share of that cost either. For a final example, say your house caught on fire and burned to the ground, you wouldn't expect them to pony up a share of the non-insurance-covered cost to replace it.
It's nice that you're all friends, but this is a business transaction. Treat it as such so there's no misunderstandings later.
posted by carmicha at 10:08 AM on June 20, 2012 [5 favorites]
Your approach seems logical on its surface, but if you take it to its logical extremes it obviously fails. Say your mortgage was zero, you wouldn't charge them zero rent as a result. Say you need a new roof this year, you wouldn't charge them a share of that cost either. For a final example, say your house caught on fire and burned to the ground, you wouldn't expect them to pony up a share of the non-insurance-covered cost to replace it.
It's nice that you're all friends, but this is a business transaction. Treat it as such so there's no misunderstandings later.
posted by carmicha at 10:08 AM on June 20, 2012 [5 favorites]
And by the way, if your friends have a problem with you charging them a very fair market rate for rent, signing a lease, or giving first/last or deposit (standard practice for rentals), then I would really question taking them on as renters.
posted by treehorn+bunny at 10:10 AM on June 20, 2012 [5 favorites]
posted by treehorn+bunny at 10:10 AM on June 20, 2012 [5 favorites]
We will close the books once a year and figure out if we went over or under on the utility bills, and charge or credit them.
The settling up once a year seems like a really bad idea, for the reasons mentioned above - either settle up monthly, or charge a fixed amount for utilities (include it in the rent or whatever) and accept that you're taking on the risk that you will end up paying more than you estimated (of course, if you find that you overestimated I you can always give your friends a refund - I just think it's a bad idea to reserve the right to say "whoops, turns out you owe me an extra $500!").
I don't own my own place, but starting next month I am the only one on the lease of a two-bedroom that I will be sharing with a roommate. I'm charging her a fixed amount that includes utilities. I may regret this come winter, but it's a risk I'm willing to take for the sake of simplicity.
posted by mskyle at 10:14 AM on June 20, 2012 [1 favorite]
The settling up once a year seems like a really bad idea, for the reasons mentioned above - either settle up monthly, or charge a fixed amount for utilities (include it in the rent or whatever) and accept that you're taking on the risk that you will end up paying more than you estimated (of course, if you find that you overestimated I you can always give your friends a refund - I just think it's a bad idea to reserve the right to say "whoops, turns out you owe me an extra $500!").
I don't own my own place, but starting next month I am the only one on the lease of a two-bedroom that I will be sharing with a roommate. I'm charging her a fixed amount that includes utilities. I may regret this come winter, but it's a risk I'm willing to take for the sake of simplicity.
posted by mskyle at 10:14 AM on June 20, 2012 [1 favorite]
…why should they pay the mortgage when I am keeping the house?
um, charge market rate and split utilities as you would any shared living arrangement. give them a bit of a discount (10-20%) or include the utilities if you really want. make them sign a lease and give you first/last and deposit. this is a business transaction and you can't risk being sentimental/emotional about it. but you charge because you assume risk and you are responsible for maintenance costs—so you need to save some or all of the money you would get from their rents (after paying your mortgage) to cover regular and surprise maintenance costs. maybe use some of the extra money you end up with and hire a housecleaner for you all so you won't have to deal with that.
you are looking at this too sentimentally/emotionally. it's sort of one of the reasons why one shouldn't live with friends.
posted by violetk at 10:15 AM on June 20, 2012
um, charge market rate and split utilities as you would any shared living arrangement. give them a bit of a discount (10-20%) or include the utilities if you really want. make them sign a lease and give you first/last and deposit. this is a business transaction and you can't risk being sentimental/emotional about it. but you charge because you assume risk and you are responsible for maintenance costs—so you need to save some or all of the money you would get from their rents (after paying your mortgage) to cover regular and surprise maintenance costs. maybe use some of the extra money you end up with and hire a housecleaner for you all so you won't have to deal with that.
you are looking at this too sentimentally/emotionally. it's sort of one of the reasons why one shouldn't live with friends.
posted by violetk at 10:15 AM on June 20, 2012
Anyone who rents anything, anywhere pays their landlord's mortgage bill. You are now a landlord, so don't be afraid to be a darn good one.
As others have said, charge the going rate for a room in a house. Check out Craigslist for an idea of what your area will bear.
As for utilities, collect the bills at the end of the month, divide total by number of people living in the house, that's how much to charge for utilities.
Because you are all friends, and presumably would like to remain so, make sure EVERYTHING is spelled out, in writing and signed.
Lease: Even if you plan on renting month-to-month, have everyone sign his or her own lease. Spell out what you expect in notice needed before move out, how much you are charging per month, what the tenant is getting, everything.
Pets: Decide now what you expect in the way of pets. Guaranteed someone will bring home an animal and the two of them will have eyes like a Keane painting. Either that or everyone will want his or her own animal and your place will start looking and smelling like a shelter. If no pets, put that on the lease.
Deposits: This is a business of sorts. Get everyone to give you a security deposit. Deposit the money in a separate bank account specifically for this purpose.
Landlord law: Look this up for your area, find out what your rights and obligations are as a landlord in your jurisdiction. If you have to give a written assessment to your tenants about why you are withholding security, find out how, what and within what time-frame.
Accountant: You need to understand the tax ramifications of this arrangement. Typically a homeowner can deduct the interest paid from his/her income tax. How does collecting rent from your tenants affect this? Get a good Accountant.
Maintenance: Do you expect your tenants to pitch in when it's time to clean gutters, mow the lawn, put the trash out, all of that? Make sure that's all up front. If you end up having to pay a pro to do this stuff for you, that may involve a hike in rent, let everyone know that.
Renter's Insurance: Do not let anyone move in without his or her own renter's insurance. Your homeowner's will cover you, the property and any liability. But if the hot water heater breaks, and ruins someone's priceless Picasso etchings, you might be on the hook because regular homeowner's won't cover their losses. In fact, make this a condition of your lease with your tenants.
Go to You Tube and search People's Court Landlord. Watch a few of the videos, and you'll pick up some more tips.
This is not a lark, you are ensnaring your friends, your finances and the largest investment you're likely to make in your life. Don't leave it up to chance, or "Hey, they're my friends, it'll be cool."
posted by Ruthless Bunny at 10:16 AM on June 20, 2012 [6 favorites]
As others have said, charge the going rate for a room in a house. Check out Craigslist for an idea of what your area will bear.
As for utilities, collect the bills at the end of the month, divide total by number of people living in the house, that's how much to charge for utilities.
Because you are all friends, and presumably would like to remain so, make sure EVERYTHING is spelled out, in writing and signed.
Lease: Even if you plan on renting month-to-month, have everyone sign his or her own lease. Spell out what you expect in notice needed before move out, how much you are charging per month, what the tenant is getting, everything.
Pets: Decide now what you expect in the way of pets. Guaranteed someone will bring home an animal and the two of them will have eyes like a Keane painting. Either that or everyone will want his or her own animal and your place will start looking and smelling like a shelter. If no pets, put that on the lease.
Deposits: This is a business of sorts. Get everyone to give you a security deposit. Deposit the money in a separate bank account specifically for this purpose.
Landlord law: Look this up for your area, find out what your rights and obligations are as a landlord in your jurisdiction. If you have to give a written assessment to your tenants about why you are withholding security, find out how, what and within what time-frame.
Accountant: You need to understand the tax ramifications of this arrangement. Typically a homeowner can deduct the interest paid from his/her income tax. How does collecting rent from your tenants affect this? Get a good Accountant.
Maintenance: Do you expect your tenants to pitch in when it's time to clean gutters, mow the lawn, put the trash out, all of that? Make sure that's all up front. If you end up having to pay a pro to do this stuff for you, that may involve a hike in rent, let everyone know that.
Renter's Insurance: Do not let anyone move in without his or her own renter's insurance. Your homeowner's will cover you, the property and any liability. But if the hot water heater breaks, and ruins someone's priceless Picasso etchings, you might be on the hook because regular homeowner's won't cover their losses. In fact, make this a condition of your lease with your tenants.
Go to You Tube and search People's Court Landlord. Watch a few of the videos, and you'll pick up some more tips.
This is not a lark, you are ensnaring your friends, your finances and the largest investment you're likely to make in your life. Don't leave it up to chance, or "Hey, they're my friends, it'll be cool."
posted by Ruthless Bunny at 10:16 AM on June 20, 2012 [6 favorites]
Charging by the "hour" is potentially problematic because under that scheme, everyone needs to disclose their income. Which could be uncomfortable for some people, could lead to mistrust (what if one tenant lies and says he's making less than he really is?), etc.
You may be surprised to discover that fair-market rents in your area are actually lower than a straight split of PITI + utilities + maintenance. This is because, as you point out, the owner gets to keep the house, and with commercial properties, the owner may plan to sell it after it appreciates as part of the overall profit-making plan.
I strongly encourage you to treat your leases as arm's-length business transactions, not as friendly agreements. The potential for people to take advantage of each others' friendship is too great.
posted by adamrice at 10:21 AM on June 20, 2012
You may be surprised to discover that fair-market rents in your area are actually lower than a straight split of PITI + utilities + maintenance. This is because, as you point out, the owner gets to keep the house, and with commercial properties, the owner may plan to sell it after it appreciates as part of the overall profit-making plan.
I strongly encourage you to treat your leases as arm's-length business transactions, not as friendly agreements. The potential for people to take advantage of each others' friendship is too great.
posted by adamrice at 10:21 AM on June 20, 2012
Ryan, one thing that you can do — since I know you're sufficiently cerebral — is try to estimate your risk, especially long-term risk, on the mortgage. One way to do this is to search for estimates of per year capital repair, ameliorated over the length of the mortgage, for similar houses. Factor in a surcharge of what would make you comfortable taking on that risk and allowing yourself a cushion — some percentage, which would be similar to what a bank might charge if making a similar loan.
From that, you can work backwards and charge your new roommates based on the risk while allowing the value of the house itself to cancel itself out. (And especially in Ann Arbor, the housing market's value has kept appreciating, relatively insulated from the recent dip, though you could certainly take that into account when deciding how much risk to factor.) So you can subtract the estimated appreciation from the total costs of ownership, including risk funds, and charge your renters an ameliorated share of that. That way, they're paying you to take on risk and to maintain the property, but not paying you for the underlying property. (This is based on my perception of your personal ethics, something that I think is different from the general assumption of what's ethical in general, i.e. charging what the market will bear minus a discount).
You really should talk this over with an accountant, though, because I'm pretty sure there are a bunch of factors that will complicate your equation that are non-obvious from the outside.
posted by klangklangston at 10:24 AM on June 20, 2012
From that, you can work backwards and charge your new roommates based on the risk while allowing the value of the house itself to cancel itself out. (And especially in Ann Arbor, the housing market's value has kept appreciating, relatively insulated from the recent dip, though you could certainly take that into account when deciding how much risk to factor.) So you can subtract the estimated appreciation from the total costs of ownership, including risk funds, and charge your renters an ameliorated share of that. That way, they're paying you to take on risk and to maintain the property, but not paying you for the underlying property. (This is based on my perception of your personal ethics, something that I think is different from the general assumption of what's ethical in general, i.e. charging what the market will bear minus a discount).
You really should talk this over with an accountant, though, because I'm pretty sure there are a bunch of factors that will complicate your equation that are non-obvious from the outside.
posted by klangklangston at 10:24 AM on June 20, 2012
Also, as you think about the equity you'll be accumulating and how unfair that seems, consider that it will probably be many years before you accumulate enough equity to pay for the costs that you'll incur when you do sell it. You're going to be paying buyer's closing costs as you buy this house, and when you sell it you'll be paying a fat commission and seller's closing costs. If the market is slow and you have to move out before the house sells (you got a great job offer in another state) then you'll be paying for two residences while you wait for a buyer.
Unless housing values in your area appreciate very quickly, the transaction costs of selling the house could easily eat up all that wealth you thought you were accruing. If, seven years from now, you get a great job offer two states away and decide to sell the place, the accumulated equity might not be enough to cover the transaction costs. If you deal with that by keeping it as a rental property, then you'll find yourself an absentee landlord with a different set of attendant problems.
Basically, landlords don't have it nearly so good as inexperienced young renters suspect they do.
posted by jon1270 at 10:28 AM on June 20, 2012
Unless housing values in your area appreciate very quickly, the transaction costs of selling the house could easily eat up all that wealth you thought you were accruing. If, seven years from now, you get a great job offer two states away and decide to sell the place, the accumulated equity might not be enough to cover the transaction costs. If you deal with that by keeping it as a rental property, then you'll find yourself an absentee landlord with a different set of attendant problems.
Basically, landlords don't have it nearly so good as inexperienced young renters suspect they do.
posted by jon1270 at 10:28 AM on June 20, 2012
Why don't we work backwards and figure out what makes an unethical landlord and decide not to do those things?
Things that are unethical, IMHO:
Keeping conditions of the living space just barely legally and tolerably in working order, such that the tenants can't complain, but you spend as little money as possible.
Waiting until the last possible legally binding moment to turn on the heat, even though it's already getting cold.
Raising the rent because you are pretty sure that your tenants make enough money to cover it (especially if you know they're making more money, now) and figuring they don't want to assume the short term costs of moving.
Punitive raises of rent because you want them to move out and replace them with a higher class of tenant.
Not respecting their personal space and treating their space as your space because you "own" it.
If you're not going to do these things, and you're going to give your friends a good place to live, away from all the other possibly unethical and bloodsucking landlords, then you're golden.
posted by deanc at 10:29 AM on June 20, 2012
Things that are unethical, IMHO:
Keeping conditions of the living space just barely legally and tolerably in working order, such that the tenants can't complain, but you spend as little money as possible.
Waiting until the last possible legally binding moment to turn on the heat, even though it's already getting cold.
Raising the rent because you are pretty sure that your tenants make enough money to cover it (especially if you know they're making more money, now) and figuring they don't want to assume the short term costs of moving.
Punitive raises of rent because you want them to move out and replace them with a higher class of tenant.
Not respecting their personal space and treating their space as your space because you "own" it.
If you're not going to do these things, and you're going to give your friends a good place to live, away from all the other possibly unethical and bloodsucking landlords, then you're golden.
posted by deanc at 10:29 AM on June 20, 2012
To me it sounds kind of like you are seeing this as a cooperative venture while executing it as a conventional, single-owner one. I think that has way more chance of going wrong than going right.
If you're not willing to do the legwork to make it cooperative from the beginning (which may affect your ability to get a mortgage, as well as other considerations), you should think about going in whole hog conventionally (with appropriate legal and accounting advice).
If you want to be sensitive to your friends needs and abilities, you can work that out on each of their individual leases, by setting terms for the lease, changing of rent, renewals, and moving out, that give you the flexibility and them the stability that is appropriate.
Consider keeping meticulous track of all of your expenditures (both time and monetary) on the house, so that if some day the group of you want to cooperatize it, you have a basis for figuring out a fair valuation of investment to that point.
posted by Salamandrous at 10:36 AM on June 20, 2012
If you're not willing to do the legwork to make it cooperative from the beginning (which may affect your ability to get a mortgage, as well as other considerations), you should think about going in whole hog conventionally (with appropriate legal and accounting advice).
If you want to be sensitive to your friends needs and abilities, you can work that out on each of their individual leases, by setting terms for the lease, changing of rent, renewals, and moving out, that give you the flexibility and them the stability that is appropriate.
Consider keeping meticulous track of all of your expenditures (both time and monetary) on the house, so that if some day the group of you want to cooperatize it, you have a basis for figuring out a fair valuation of investment to that point.
posted by Salamandrous at 10:36 AM on June 20, 2012
Yes. Not only that, if I were your tenant, and you said, "the boiler broke. I am going to have to charge you an extra $300 in rent this month to replace it" because if I wanted to worry about the boiler and the appliances, I would own, not rent.
Yeah. And it may not be legal for you to do this. Read and make sure you understand what landlords in your jurisdiction are required to do, and are prevented from doing. Just because you want to think of this arrangement as buncha friends living together doesn't mean that you aren't a landlord according to the law, and subject to landlord-tenant regulations. I'd say start with googling "tenants rights" + wherever you live to get an idea of what your rights and responsibilities will be. For instance, it may not be legal for you to save up underpayment of utilities accounts for a yearly payout; you may be required to make those adjustments monthly or quarterly.
posted by rtha at 10:43 AM on June 20, 2012
Yeah. And it may not be legal for you to do this. Read and make sure you understand what landlords in your jurisdiction are required to do, and are prevented from doing. Just because you want to think of this arrangement as buncha friends living together doesn't mean that you aren't a landlord according to the law, and subject to landlord-tenant regulations. I'd say start with googling "tenants rights" + wherever you live to get an idea of what your rights and responsibilities will be. For instance, it may not be legal for you to save up underpayment of utilities accounts for a yearly payout; you may be required to make those adjustments monthly or quarterly.
posted by rtha at 10:43 AM on June 20, 2012
I did this for 3 years. Rented 2 rooms to friends in my 3-bedroom house at market rates, or just under. It meant that they paid my entire mortgage+taxes, and I was fine with that. We split utilities evenly at the end of every month; I just sent them an email saying "Utilities for the month were $X, please add $X/3 to your rent check for next month." Worked smoothly.
Also, as others have said, make sure everybody signs a lease, and make sure it addresses your situation. A good lease answers all of the "what if" questions you can think of. What if someone wants to get a pet? What if someone has a SO they start to shack up with, or who stays over all the time? What if the house burns down? What if someone wants to break their lease? Or go month to month? Or sublet for a summer? What if there is no hot water for a week? The more of these questions you ask and answer ahead of time in the lease, the less heartache you'll likely experience later on when these issues come up.
posted by craven_morhead at 10:48 AM on June 20, 2012
Also, as others have said, make sure everybody signs a lease, and make sure it addresses your situation. A good lease answers all of the "what if" questions you can think of. What if someone wants to get a pet? What if someone has a SO they start to shack up with, or who stays over all the time? What if the house burns down? What if someone wants to break their lease? Or go month to month? Or sublet for a summer? What if there is no hot water for a week? The more of these questions you ask and answer ahead of time in the lease, the less heartache you'll likely experience later on when these issues come up.
posted by craven_morhead at 10:48 AM on June 20, 2012
Be sure you know what the law is in your state for how you must handle first/last/security monies given to you. You may be required to place that money in interest-bearing accounts separate from your regular account where rent checks go.
Please talk to an accountant. The tax implications of being a landlord in the house that is also your primary residence might surprise you.
posted by catlet at 10:54 AM on June 20, 2012
Please talk to an accountant. The tax implications of being a landlord in the house that is also your primary residence might surprise you.
posted by catlet at 10:54 AM on June 20, 2012
On utilities, you might be able to call the local utility companies (gas, electric, etc) and give them the address and they'll tell you what the utility bills were for the last few years. It should help you get a better idea of what utilities will cost. Really though, I'd just add them all up and split them every month rather than try and keep it at the same amount each month. It should give everyone an incentive to be thoughtful about the heat and A/C.
As for what to charge, I would figure out what markets rates are and present it to my friends like this, "From my research (present research) the rent on a room in my house should $xx/month. What do you guys think is fair?"
Lastly, please do your friends and yourselves a favor and listen to Ruthless Bunny's (and other's) advice and have everyone sign a lease. You should also at least look over some of the laws for your jurisdiction to get an idea of what tenant's rights are and what your legal responsibilities are as landlord.
posted by VTX at 11:00 AM on June 20, 2012
As for what to charge, I would figure out what markets rates are and present it to my friends like this, "From my research (present research) the rent on a room in my house should $xx/month. What do you guys think is fair?"
Lastly, please do your friends and yourselves a favor and listen to Ruthless Bunny's (and other's) advice and have everyone sign a lease. You should also at least look over some of the laws for your jurisdiction to get an idea of what tenant's rights are and what your legal responsibilities are as landlord.
posted by VTX at 11:00 AM on June 20, 2012
I want to emphasize Sidhedevil's point:
"I would find the average rent per roommate in comparable shared houses/apartments in the neighborhood, and then take 25%-35% off that for the disadvantage of not having equal say in major decisions about the physical plant (because I assume you're reserving that to yourself as the owner)."
It is a little weird when the landlord lives at the house because they can end up with dictatorial power in decisions about furniture, decoration, cleanliness, visitors, etc. You will probably do this at some point despite your best intentions. Your tenants are likely aware of this risk, so a discounted rent will help sweeten the deal.
35% seems large though. I wouldn't go over 25%.
posted by scose at 11:08 AM on June 20, 2012
"I would find the average rent per roommate in comparable shared houses/apartments in the neighborhood, and then take 25%-35% off that for the disadvantage of not having equal say in major decisions about the physical plant (because I assume you're reserving that to yourself as the owner)."
It is a little weird when the landlord lives at the house because they can end up with dictatorial power in decisions about furniture, decoration, cleanliness, visitors, etc. You will probably do this at some point despite your best intentions. Your tenants are likely aware of this risk, so a discounted rent will help sweeten the deal.
35% seems large though. I wouldn't go over 25%.
posted by scose at 11:08 AM on June 20, 2012
Just a note (I am not a tax professional, but my mother is, and we looked into doing this very thing) if you charge your friends less than market rate, if you get audited, you will have to pay taxes on the full market rate, with the difference classed as a taxable gift to your friends. You should probably get a lawyer and talk to an accountant before renting any part of your house out.
posted by furnace.heart at 11:08 AM on June 20, 2012 [2 favorites]
posted by furnace.heart at 11:08 AM on June 20, 2012 [2 favorites]
Just FYI, Quicken (and TurboTax as well) have editions for rental property. They make setting up tenant accounts a snap and are well worth the investment, especially with the number of tenants you're expecting to have.
I agree with those who say you are best off approaching this as a professional landlord which I am and charging market rent. That doesn't just pay for your mortgage, but it covers taxes, insurance, maintenance, and contingency costs -- such as the tenant who is chronically short, the tenant who loses their job, the tenant who moves out on you. Sure, you're all friends now -- but renting to friends has a tendency to expose any cracks in your relationship, and with a dozen people you're going to get the gamut no matter how well you think you know them now. Charging market rate takes your subjectiveness out of the equation (a lot, not entirely, of course). I'm not sure I would offer any discount whatsoever, and if I did I'd keep it small and nominal, like 10%. Any less and, I'm sorry, your tenants won't have respect for you as a landlord. They'll think your small generosity here will entitle them to larger favors later. Learn now to be hard-nosed and dispassionate. The day will come sooner than you think that you'll need to serve notice to a friend of yours that they owe you money or that they owe you so much money you're evicting them. Don't start the game acting like a soft touch as it will be your undoing.
posted by dhartung at 11:19 AM on June 20, 2012
I agree with those who say you are best off approaching this as a professional landlord which I am and charging market rent. That doesn't just pay for your mortgage, but it covers taxes, insurance, maintenance, and contingency costs -- such as the tenant who is chronically short, the tenant who loses their job, the tenant who moves out on you. Sure, you're all friends now -- but renting to friends has a tendency to expose any cracks in your relationship, and with a dozen people you're going to get the gamut no matter how well you think you know them now. Charging market rate takes your subjectiveness out of the equation (a lot, not entirely, of course). I'm not sure I would offer any discount whatsoever, and if I did I'd keep it small and nominal, like 10%. Any less and, I'm sorry, your tenants won't have respect for you as a landlord. They'll think your small generosity here will entitle them to larger favors later. Learn now to be hard-nosed and dispassionate. The day will come sooner than you think that you'll need to serve notice to a friend of yours that they owe you money or that they owe you so much money you're evicting them. Don't start the game acting like a soft touch as it will be your undoing.
posted by dhartung at 11:19 AM on June 20, 2012
My parents and I owned a house when I was in college, and I rented rooms to friends. Most everything was hunky-dory while we lived there, except for some plumbing issues. It was when we sold the place that I realized that a few of my friends were jerks who did things that would have cost them their deposits, should they have been in a normal rental situation. Luckily for me and my parents, the guy who bought the place had already rented the house to some fratty dudes who didn't care about the appearance of the place.
In short, I agree with everyone here who is suggesting you treat this as the business transaction that it is. You noted that there are income discrepancies, and now you have the power discrepancy of landlord vs renters. Put everything in writing, and your life will be easier in the future should disputes arise.
posted by filthy light thief at 12:05 PM on June 20, 2012
In short, I agree with everyone here who is suggesting you treat this as the business transaction that it is. You noted that there are income discrepancies, and now you have the power discrepancy of landlord vs renters. Put everything in writing, and your life will be easier in the future should disputes arise.
posted by filthy light thief at 12:05 PM on June 20, 2012
catlet: "Please talk to an accountant. The tax implications of being a landlord in the house that is also your primary residence might surprise you."
Big +1 to that. I had boarders in my house for a while. My taxes were already complicated enough, but that rocketed me to a whole new level.
posted by adamrice at 12:51 PM on June 20, 2012
Big +1 to that. I had boarders in my house for a while. My taxes were already complicated enough, but that rocketed me to a whole new level.
posted by adamrice at 12:51 PM on June 20, 2012
With our housemates, we sat them down and said, "Okay, so this is what we spend for the house each month," and broke it down into mortgage (including property taxes, etc.), utilities and maintenance, so they could see where those numbers were coming from. From this, we gave them a number that we want to be charging them. They literally could not afford that, and showed us how their income breaks down. (This is a couple renting a room.) Because we're friends, we're open to that kind of negotiation, and gave them a break on the rent.
HOWEVER, we are remodeling, and part of our agreement with them involves them helping us with that. The other part of our agreement involves the potential raising of the rent as their circumstances allow. (Probably after the remodel is finished, since what we are doing will substantially improve their living arrangements.)
If this kind of thing seems reasonable to you and your friends, there's nothing wrong with it. But get it in writing, at least so you can make sure everyone's on the same page.
posted by linettasky at 1:24 PM on June 20, 2012 [1 favorite]
HOWEVER, we are remodeling, and part of our agreement with them involves them helping us with that. The other part of our agreement involves the potential raising of the rent as their circumstances allow. (Probably after the remodel is finished, since what we are doing will substantially improve their living arrangements.)
If this kind of thing seems reasonable to you and your friends, there's nothing wrong with it. But get it in writing, at least so you can make sure everyone's on the same page.
posted by linettasky at 1:24 PM on June 20, 2012 [1 favorite]
why should they pay the mortgage when I am keeping the house?
Because that's what renting a place to live is. Someone owns the place, someone else pays to occupy the space that the first person owns.
I rented an apartment for about 7 years before I became a home owner. I don't expect to now own 7x of the apartment building, where x is my annual rent.
Unless you have some deep philosophical reason for thinking this is a bad arrangement, simply charge them the market rate for the type of accommodations that you're providing them with and then, if you want, throw in a bit of a discount because they're your friends.
posted by asnider at 2:08 PM on June 20, 2012 [1 favorite]
Because that's what renting a place to live is. Someone owns the place, someone else pays to occupy the space that the first person owns.
I rented an apartment for about 7 years before I became a home owner. I don't expect to now own 7x of the apartment building, where x is my annual rent.
Unless you have some deep philosophical reason for thinking this is a bad arrangement, simply charge them the market rate for the type of accommodations that you're providing them with and then, if you want, throw in a bit of a discount because they're your friends.
posted by asnider at 2:08 PM on June 20, 2012 [1 favorite]
I just want to say, for people getting ripped off by landlords everywhere: the market rate for rent is whatever the market will pay.
…why should they pay the mortgage when I am keeping the house?
You actually have two ethical questions, well three:
1) Why should they pay mortgage when I own the house?
2) How do you split something shared among people with different means/incomes?
3) How do you ethically own real estate.
Personally, as a homeowner, I think the individual ownership of real estate is the root of all evils. LIke it or not, you've already trespassed against (3) by being an owner... i.e. it's like saying, how do I ethically own a slave? Welcome to the club.
2) is trickier, but the first thing is to actually figure out how much the house is going to cost to live in. Trust me, if you haven't owned a house before, it's more than you are thinking.
1) this is actually the easiest problem to solve. It might actually be right on your mortgage statement, but each month you are paying in parts the principal of the loan (your money) and the interest on the loan. For most fixed-rate mortgages, the interest payments are front-loaded over the time of the loan: much of your monthly payments for the first, say, 10 years, are going to interest on the loan. So, you can discount the amount you are paying the principal and only split the interest.
How to make a true coop house is hard, I wish you luck. It sounds like the rent isn't going to be too large for anybody, friendships are worth more than money. It sounds like you are probably going to end up shouldering the cost of repairs, so make sure, whatever you charge, you aren't going to end up feeling like one of your friends screwed you over if you are left with a big bill.
posted by ennui.bz at 3:26 PM on June 20, 2012
…why should they pay the mortgage when I am keeping the house?
You actually have two ethical questions, well three:
1) Why should they pay mortgage when I own the house?
2) How do you split something shared among people with different means/incomes?
3) How do you ethically own real estate.
Personally, as a homeowner, I think the individual ownership of real estate is the root of all evils. LIke it or not, you've already trespassed against (3) by being an owner... i.e. it's like saying, how do I ethically own a slave? Welcome to the club.
2) is trickier, but the first thing is to actually figure out how much the house is going to cost to live in. Trust me, if you haven't owned a house before, it's more than you are thinking.
1) this is actually the easiest problem to solve. It might actually be right on your mortgage statement, but each month you are paying in parts the principal of the loan (your money) and the interest on the loan. For most fixed-rate mortgages, the interest payments are front-loaded over the time of the loan: much of your monthly payments for the first, say, 10 years, are going to interest on the loan. So, you can discount the amount you are paying the principal and only split the interest.
How to make a true coop house is hard, I wish you luck. It sounds like the rent isn't going to be too large for anybody, friendships are worth more than money. It sounds like you are probably going to end up shouldering the cost of repairs, so make sure, whatever you charge, you aren't going to end up feeling like one of your friends screwed you over if you are left with a big bill.
posted by ennui.bz at 3:26 PM on June 20, 2012
This thread is closed to new comments.
posted by primethyme at 9:52 AM on June 20, 2012 [5 favorites]