A 2022 Retrospective on Renting a Room to a Lodger in California
After one year of renting a room in my condo to a lodger (aka house-hacking), I've learned some lessons about being a landlord. Let's discuss them!
Before we begin, I shall call to your attention my original article discussing my steps to getting my first roommate:
Of particular note from that article is my stance that rentals should never be treated as passive income.
Far too many people in the personal finance and wealth communities tout landlording as an easy occupation where you keep your hands off and receive great cashflow passively.
Instead of that, I view renting out housing as providing the skilled service of property management for renters who don't want to manage a building themselves – it's a job all on its own, especially in California where renters are relatively favoured by the systems.
Even if you pay a professional to manage your properties, you still need to manage the professionals. Vet them, hold them accountable, and be actively involved in the operations of your properties.
Thinking of rentals as passive income is a sloppy way of framing it, which will lead to neglect or abuses of power.
With that in mind, let's look closer at the basics:
What Is House-Hacking?
House hacking is about landlording and managing rentals. That's the gist of it, but the famous Mr. Money Mustache has an article that goes into a little more detail:
The summary is that house-hacking has two components: turning your living space into a rental to optimise your property, and relying on leverage (debt) to explosively grow the real-estate empire whilst times are good.
In my case, I only dabbled in the first component. We transformed our spare bedroom into a lodger's room to rent out, with a shared bathroom and kitchen.
This is an efficient way of using what would otherwise be expensive, underused space. It works out, though I'm stopping that in favour of letting my dear lady live in the spare room.
House-hacking is also praised for being an "accessible" wealth-building – despite requiring significant down payments and good credit and so forth. Yet nobody can really stop you from landlording, as long as you have money for it.
Often it feels like the people who love that aspect of landlording are really saying that they love the lack of oversight and accountability. They can get away with anything that makes a profit...
A Trend Taken Too Far to the Extreme
For a lot of house-hacking success stories, people have taken cheap debt to balloon up in growth, and end up with a bunch of renters paying for their mortgages.
This strategy is relatively risky, and that's one point that drove me away from it. It's true that housing is a basic necessity for people, so it should be relatively in-demand all the time. Yet there is always the risk of downturns and vacancies.
Times may be fine now, but 20 or 30 year mortgages leave a lot of time for things to change and go wrong.
As with everything, there are also people who take this trend to the extreme.
In my original article about lodgers, I discussed being transparent about renting. I emphasised that I want to attract similarly principled people – thus I would call forward everything I was doing, and be honest and open about the process.
Yet some people choose dishonesty and exploitation:
One of the things that stood out as reprehensible was how the article ended – on people who hide the fact that they're property owners from their roommates, and hide the fact that they're subsidising their costs on renters without providing any service in return.
Such dishonesty is disheartening to see, though I know that it is only a small minority of people right now.
Also of particular note from that article is the predatory practise of forcing housing "deals" through tax lien evictions:
Earlier this year, another TikTok user, @ayehxncho, attracted the internet’s ire when he promoted tax liens as “the new #1 side hustle.” He boasted of allegedly looking on local websites for homeowners who were behind on their property taxes. By paying taxes on the homes, he could put the homeowners in his debt and evict them if they didn’t repay him, he said. “I know a lot of people say, ‘Why would you take their house?’” he said. “If you don’t do it, the banks will. You either eat or you starve.”
– Inside the Awful World of Young Landlords on TikTok
This is an extreme example of someone trying to make money at all costs using houses, at the expense of other people. It's blatant profiteering, and manufactures crises for other people.
Whilst not actually house-hacking, tax lien abuses have adjacency that shows some problematic areas of the property system in the US.
There's a great tweet I saw a while back:
In short, people take housing based strategies to the extreme in the name of "investing" and house-hacking. They have a sum-zero approach to accumulating wealth, and willingly exploit others for profit.
Often the people pushing real estate talk up the basic arithmetic of cash flow. "If you get two houses with $1k rents each, $500 mortgages, then you have $1k in spending money each month."
However, people who talk up real estate often don't discuss in as much detail what happens when things go wrong. Sometimes you'll find pragmatic people that have a factor for lost rent/vacancies and repairs, but they don't disclose the other dangers.
They also tend to frame their investments in terms of real estate vs. stock market as if they are in the same class of investments in terms of returns and risk.
Risk, Luck, and When It Rains, It Pours
We're lucky our roommate was an amazingly great one, with minimal issues to resolve. Most especially, there is always the looming threat of needing to evict a tenant or lodger.
Allegedly, it's easier to evict a lodger in California than a normal tenant, thanks to trespassing laws. However, I've never tried to and know nobody that has tried to either.
With house-hacking, if evictions go poorly, you have a nightmare situation living in your own house. Even if evictions go smoothly, you still have a month at least of tension to deal with.
Real estate is one of the more risky investments, especially compared to index fund stock investing. It requires a modest amount of luck and skill to get good tenants, skill that is difficult to acquire without first making mistakes.
Problems with real estate tend to be huge hassles. Court cases, months-long evictions and clean-up and re-listing, and so on. This is why I'm so adamant as describing real estate ownership as an active pursuit instead of passive income.
Furthermore, when it rains, it pours, luck can go poorly and if you have a portfolio of houses for rent these can all slam you at once. Especially if it's a broad based issue, such as multiple houses in a small town that just lost its primary industry for workers, loss of income due to Covid-19 like at the beginning of the pandemic, and so on.
House-hackers also tend to tout leveraging their way into an inflated net worth with several houses in an undiversified portfolio.
One of my first articles on this domain talks about how net worth conceals weakness, and how broken cash flow can destroy real estate empires:
In short, leverage is a high-risk, high-reward approach to investing. Finding a healthy balance with debt is important.
I won't state any hard ratios or numbers for what is healthy, since that depends on individual risk tolerances – despite being young and taking some risks, I'm fairly conservative when it comes to investing risk.
As with all things, some people take leverage too far to the extreme – like in the above article's mentioned "Queen of Versailles" family.
Getting a Roommate in the Condo Made Sense
In my case, having a roommate in the condo made a lot of sense. Most of the property management tasks and utilities are provided by the Homeowners' Association (HOA) for a significant fee.
A lot of the harder tasks in property management are handled for us. Termites, exterior repairs, landscaping? All covered.
Another significant detail listed in the original article about getting a lodger is that we weren't doing it for just the money. We did it for the experience.
When you're not in the market for pure profit motive, you can afford to take your time and find good matches in renters. This is precisely what we did, and we found someone who met our life's needs.
For one thing, our lodger stayed for only a set period of time. Since we knew in advance the exit date, we could plan around that for my dear lady's cross-country move to live with me.
For another, our roommate had an active life away from the condo on a compatible schedule as ours, thus minimising our interactions. No racing to be the first to the shower in the morning, for instance, and she was often gone during the weekend.
The experience of renting out a room was worth it. We needed to try it at least once in our lives, for growth reasons. I've now drafted a lease, navigated credit checks, and dealt with a stranger in a business transaction.
Another significant reason why getting a lodger made sense was because we needed income to cover my potential return to school. Any small amount would help bridge the gap needed, should I have lost my job. Better to prepare in good times than to struggle in downturns.
Of course this didn't come to pass, but the extra cash helps regardless in these recession times.
A Gay Landlord is Still a Landlord
Ultimately, I decided to forego rentals because a queer landlord is still a landlord.
There are systemic issues I want to no longer be a contributing factor in. Even if I try to act in a respectable manner, landlording pressures you to compromise your morals to get things done/stay profitable.
Trying to be a "good" landlord means being lucky enough to not have problems, and then knowing when to quit while you're ahead. At least, that's what I'm doing for now.
I might settle for being an "okay" landlord in the future, but there's the typical problems associated with landlording:
- Extracting wealth from people (rent seeking)
- Slumlording, where problems don't get fixed and quality of renters is not considered in favour of quantity
- Short-sighted investments, cosmetic repairs, and being strapped for cash mean not doing things right the first time
- Abusing the power imbalance of landlords over renters to disrupt people's lives
I'd rather not fall into any of those traps myself. The easiest way to avoid that is to not engage at all.
I don't trust my abilities to navigate the pitfalls. Especially early on in my accumulation phase, when I don't have as much wealth for paying through expensive repairs and finding great renters.
Being strapped for cash makes you desperate, and desperation leads to compromises.
Extractive Landlording is Making its Way Into My Workplace
I've noticed tech dudebros touting real estate portfolios at work as a way of achieving independence.
Not just in chatrooms, like with the crypto hype people, but in company-wide seminars. It's more of the same house-hacking repackaging, and the resurgence of real estate investing.
These people focus on housing, since it's such a required commodity in contemporary times. They don't target commercial real estate. After all, the US has severe issues with housing that are an opportunity for the privileged to gather more wealth to their portfolios.
Some of these real-estate investors are indeed treating it like the second job it is, but not enough of them do.
After all, tech dudes are paid obscene amounts of cash and it's easy enough for them to get started with house-hacking. There's no training, no studying community college classes, and no apprenticeships when you're working as a full time tech worker.
Ultimately I want this post today to exist to help quell the spreading word of house-hacking: being a landlord is a lot of work and responsibility. It's not something you jump into blindly, since your mistakes will affect the lives and fortunes of other people.
Especially for tech dudebros, who often think "I'm good at tech therefore I'm going to be good at everything else," and don't embrace the humble learning attitude needed to grow.
I'm still brainstorming ways of arranging housing for my eventual goal of having a compound. Housing co-ops are interesting, as are community land trusts.
I may revisit the idea of at-cost rentals, but I like the idea of ownership structures that help people build equity in a way that they can't easily tap. My dearheart and I could have made more savings each month renting rather than buying a condo, but in practise the extra cash was spent each month.
I believe guide rails like housing equity and 401k contributions are a decent way of helping typical people save for the future. It helps spenders like my dearheart, at least, to save when they would otherwise not.
Ultimately, this experiment in renting a room out was a success. It further cemented my ideals that people are the only worthwhile part of life, and that property is just a necessary part of people living.
Thus I find it weird when people get altogether too caught up in attachments to "stuff" and "things" like houses, that they neglect to see the people surrounding them.
It's not a great feeling when a renter trashes a house you own, as I can attest after cleaning up the ruined remains of my childhood home. Yet with enough time and money, my family mended that damage.
Property is just stuff, after all. The minimalist in me knows better than to get attached.
Finally, I'll call to your attention this recent article as a follow-on reading piece: