People often think that because I'm cheap, I don't really enjoy life. In fact, it's just the opposite. Because I don't need to spend a lot of money to enjoy life, I don't need to spend a lot of time getting a lot of money. But, you do need to know how to get the most enjoyment with the fewest bucks, and that's what this section is about.

Houses That Earn A Living: A Beautiful Thing

Wednesday, September 19, 2007

For most people, their home is their biggest expense, both in terms of mortgage payments and the cost of upkeep. But what if your home actually made money? I'm not talking about the likely appreciation of your property's value over time. I'm talking about homes that produce their own cash flow, homes that earn a living of their own.

When my wife and I purchased our first (and only) home almost twenty years ago, as a young couple just starting out the house we fell in love with was a real stretch for us financially. But, as the real estate agent eagerly pointed out, this particular property had a small, one bedroom guest apartment attached to the main house, a unit that could be rented out to help cover the ominous monthly mortgage payments.

At first this proposition really turned us off. We had no experience managing a rental property, and we had nightmarish thoughts of ill-mannered tenants destroying our home and then sticking us for the rent. We loved the privacy and solitude of our dream house, qualities that we imagined being ruined by boisterous tenants living only a wall away.

Nonetheless, our adoration for this special home got the best of us, and we decided to do whatever was necessary to swing the mortgage payments, including using the guest apartment as a rental unit. We reassured ourselves that we would get out of the landlord business the minute our incomes allowed us to cover the mortgage without relying on a monthly rent check.

But nearly two decades later, with our house now entirely paid off, we're still happily renting out our little guest apartment, and we have every intention of continuing to do so forever more. Rather than being a pox upon our home ownership experience, we have found that our rental unit has not only steadily augmented our income, but it has been a net-positive in terms of creating lasting friendships with the like-minded tenants who have shared our back wall over the years.

The financial beauty of such an arrangement cannot be overstated, if you're fortunate enough to find a home that will accommodate it. First, of course, is the monthly rental check, which in our case covered roughly one-third of our monthly mortgage payment, month in and month out. That's not bad when you consider that our rental unit is only about 20% of the total square footage of our property. In nearly 20 years of renting, the unit has sat empty for a total of only three months between various tenants.

Thankfully, after closing on our dream house our incomes did indeed continue to rise over the years as we had hoped. But, because we continued to rent out the guest apartment, we were able to apply that additional income toward paying off our house early, retiring the original 30-year mortgage in just over 15 years, all thanks to the folks living in our guest apartment during that period!

But the financial benefits of such an arrangement don't end with the monthly rent checks. While that rental income is taxable, you are able to deduct a variety of expenses against that income, including mortgage and other interest expenses associated with the property, depreciation, and a host of maintenance, repair and upkeep costs. While in most years we have in fact had a net increase in our taxable income because of this rental property, by keeping careful track of our offsetting expenses the year-end tax liability has been minimal.

Most surprising though to us have been the non-financial rewards of this arrangement, which are largely why we have continued to be landlords long after we could have afforded otherwise. Through careful interviewing of applicants, we have been most fortunate to find tenants who share our love of our special home and its solitude. While I'm sure that it's possible to have the type of tenants-from-hell that at first we imagined would be the norm, our experience has been just the opposite. And, since our home is rather secluded, having an extra set of eyes and ears on the property has also been a plus from a security point of view.

Now, as we grow ever nearer to retirement, it's comforting to know that our retirement income can be augmented by this rental income, an amount that neatly covers our monthly groceries and other incidentals. And unlike other retirement investments, this one is inherently hedged against inflation, since what we charge for rent steadily increases, along with the cost of bread and milk. On the other hand, should we require on-site health care or other living assistance as we grow older, or should an aging family member need our close-by care, our guest apartment could always be converted for those purposes as well.

I recognize that not every house has the potential to generate income like ours does, and renting out a room in your house, while an option worth considering, might well cramp your style more than our rental unit with its separate entrance. But more home buyers should consider searching out homes that offer potential for this type of income generation, which opens your search up to include properties that might otherwise seem out of your price range or homes that require some remodeling in order to create a hassle-free rental unit (or two).

And, although it's not the subject of this article, there are other ways your home can earn a living of its own. When canvassing properties, consider possibilities for using a house for a home office or other home-based business, hosting weddings, retreats, meetings, or other events, or even the potential for renting storage space on your property. Obviously with every special use, check with your insurance agent to make sure you're properly insured, and consult your local zoning authorities regarding allowable uses.

Homes that earn a living of their own are beautiful homes indeed.

posted by Jeff Yeager at 11:02 AM


Blogger cgrinder said...

i have a house with an upstairs apartment. everytime i think of selling it i can't, i brings in too much money!

February 3, 2008 6:00 AM  
Blogger Ginny said...

I wish I had good comments to say about renting but I don't. I have nothing but horror stories about tenants. They promise you the world when they move in and then don't pay the rent and destroy your property in the meantime.

February 4, 2008 5:26 AM  
Blogger Vanessa said...

If you have a great team: tenants, contractors, agent, property manager (if needed), etc, it's worth it. My one-year as a landlord has been horrific. It takes lots of patience and money. Attend seminars, read books and shadow someone who is a landlord. I could write a book on the do's and don'ts. It can be a dream and a nightmare. (great tax right off though)

February 28, 2008 12:08 PM  
Blogger Toyhabilitation said...

I've never been a landlady myself, but my parents managed a rental house for someone else & had a great deal of trouble finding good tenants. If you are renting a small apartment, perhaps post an ad in your local college or university's housing department, looking for a quiet, responsible graduate student. If you are just advertising in your local newspaper, you can expect all sorts of riffraff to show up...

April 4, 2008 9:46 AM  
Blogger Susan said...

My husband and I have been landlords for over 14 years, although not at our home. We own a duplex, a 4 unit (one bedroom) apartment building and a single family home. Our most challenging tenants have been in single family homes and our best tenants are the one bedroom apartments. Although landlording is not easy, the potential income is well worth the risk, especially now that almost all of our properties are paid for.

April 6, 2008 7:20 AM  
Blogger Parent Watch said...

I would be interested to know why the single family home renters seemed to give you the most trouble.

June 16, 2008 5:24 PM  
Blogger T.W. Day said...

Like many of your readers, I had a terrible experience with being a landlord. I learned a little about myself and a lot about the cast of characters who call themselves "rental managers" and too much about the kind of people who rent a nice suburban home in Denver, Colorado. My home lost value, was abused in a variety of ways, my rental managers (I triend two in 5 years.) were less than worthless, and I discovered that some people will do practically anything to a rental property.

April 6, 2009 1:37 PM  
Blogger Jane said...

I own a B&B, which of course is in my home. A local factory hosts workers from other countries for several months at a time and occasionally they stay here at a lower rate. I have had many wonderful tenants, through these arrangements, and have met many interesting people. Except one person from hell (big drinking problem) it has been great! The extra money was wonderful!

April 9, 2009 6:46 PM  
Blogger Kellie Alexander said...

My husband has a part time brokerage with an office in the basement and I run an in home infant daycare. Besides the income, we get tremendous write offs at tax time. I pay almost no taxes myself. We have a great accountant and plenty of insurance to offset any risks. It's been super for us. I get to be available for my teens and husband.

April 21, 2010 8:20 PM  

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