How To Invest in Shared Housing To Generate Passive Income

Investing in shared housing to generate passive income is an attractive strategy for many real estate investors. Shared housing, also known as co-living or house hacking, involves renting out individual rooms or units within a larger property. This can lead to higher rental yields than traditional single- or multi-family rentals. In addition, shared housing can be a worthwhile social investment, offering a much-needed affordable option or providing accommodations for vulnerable populations. Follow this step-by-step guide on how to invest in shared housing to generate passive income.

Key Takeaways:

• Investing in shared housing involves purchasing one or more properties and renting out rooms or units to multiple tenants.
• Before investing in this type of property, you should research the market and learn about local or state laws regarding shared housing.
• You can secure a conventional or other type of loan for a shared housing property or consider alternative financing options, such as living in one unit and renting out the others.
• Operating a shared housing property involves legal, financial, and property management.
• Shared housing can create a sense of community among tenants, and some investors even choose to market their properties toward specific groups of people, such as veterans or seniors.

Research the Market

First, determine the target area where you want to purchase property for shared housing. Once you know where you want to invest, research the market to understand the demand for shared housing in the area. If you plan to create shared housing for a specific population segment, such as veterans, seniors, or people in recovery, research those demographics in your target area. Locations near universities, business hubs, or city centers often have the highest demands for affordable housing, so they’re good places to start looking.

In addition, make sure you study the local regulations and zoning laws in your target area. Some places may have rules regarding shared housing. For example, a city may have restrictions on renting to people unrelated to you. In some cases, a municipality may require you to have a license or permit for shared housing — research city ordinances and local and state laws before moving forward with your investment.

Choose a Property

Once you’ve chosen where to invest and researched the market, start looking for properties. Make a list of must-haves for the property so you can narrow your search. Typically, it’s best to look for a property with multiple bedrooms or units. Duplexes, triplexes, and other large multi-family properties can be ideal because they have enough space for multiple tenants. Additionally, consider properties with common areas, such as living rooms, kitchens, and laundry facilities, that tenants can share while they live there.

When looking for a property, also consider the surrounding neighborhood. Is the home located in a safe area where people will feel comfortable? Does it offer convenient access to public transportation, such as a bus stop? Consider these factors and purchase a property in a quality neighborhood to attract tenants.

Finance the Property

You have several options when it comes to financing your real estate investment. Typically, you can secure a traditional mortgage for a shared housing investment. Keep in mind that a lender will likely require you to have a higher down payment for a rental property than for a primary residence. Usually, lenders require you to have a 15% minimum down payment. They’ll also consider your credit score, debt-to-income ratio, and savings.

In addition to a traditional mortgage, some lenders may offer specialized products, such as short-term loans, for multi-family properties. You may qualify for a government-backed loan, such as a Federal Housing Administration loan. Another option to consider is house hacking, where you live in one of the home’s units and rent out the others. This option can help with both financing and property management.

Make Renovations

Unless you purchase a turnkey property, you’ll probably have to make some renovations to get it ready for shared housing. First, make any repairs noted in the inspection report and ensure the property is up to code. Then, make sure each room or unit that you plan to rent is in good condition. If individual spaces don’t have locks, consider adding them for privacy.

Then, think about other updates you can make to attract tenants. For example, you may upgrade shared facilities, such as the bathrooms or kitchen. Even small updates, such as new light fixtures and paint, can appeal to potential tenants. While renovations come with upfront costs, they can often increase your net income once you rent to tenants.

Set the Rent

Before you market the shared housing to potential tenants, you have to determine the rent you’ll charge. Start by researching comparable rents in the area. While this research may provide a baseline, remember there will be a difference between charging per room or unit and renting the entire property. Usually, shared housing commands a premium on a per-room basis.

When setting the rent, also consider whether you plan to include utilities in the price. While not necessary, including utilities in the rent can simplify billing. It can also be an attractive selling point for potential tenants.

Screen Tenants

Once you have a prospective tenant, begin the screening process. Conduct thorough background checks on each person who applies. Remember that tenants will be living closely with others, so ensuring they’re reliable and capable of living in a shared housing environment is essential. In addition to background checks, you may request references or hold interviews with potential tenants. During this process, clearly explain the rules for the shared living space, such as common area usage, noise levels, and guest policies.

Handle the Legal Aspects

You’re ready to rent to your first tenant — congratulations! Before they move in, draft a lease agreement specific to the shared housing arrangement. For example, the lease may describe tenant rules related to common areas, maintenance, and conflict resolution. The lease also outlines the terms of the shared housing, including the rent amount and collection method. It may be helpful to have a real estate attorney review the lease agreement to ensure it follows local laws.

Besides the lease, other legal aspects to consider as you begin renting the shared housing property include local regulations. Stay updated on laws regarding tenants’ rights and eviction processes. By knowing the laws and regulations for shared housing, you can ensure you continue to operate legally in your area.

Manage the Property

If you’ve never managed a rental property before, it can be overwhelming to start. The process involves finding tenants, performing maintenance and repairs, collecting rent payments, enforcing the lease, and handling other concerns, such as tenant complaints. Many people who invest in shared housing hire a property manager who can handle tenant issues, maintenance, and rent collection. This option may be worth considering, especially if you invest in multiple shared housing properties.

If you choose to manage the property yourself, make sure you routinely inspect it. Drive by to look at the property’s exterior and examine common areas inside the home. Also, promptly address maintenance issues to keep tenants satisfied and build your reputation as a good property manager.

Build a Community

Shared housing often differs from other types of rental properties because it can create a sense of community among tenants. As a shared housing property manager, take steps to build this community. When people enjoy living in a shared space, it can lead to longer tenancies and fewer conflicts among tenants. You may consider hosting occasional meet-ups or social events for the people living on the property. For example, you may host a monthly game night or an annual holiday party.

Have an Exit Strategy

When investing in shared housing, having an exit strategy is essential to maximize your profits. Have a clear exit plan to serve as a timeline for your investment. For example, your exit strategy may be to sell the property, convert it into a traditional rental, or even live in it yourself. When you have an exit strategy, you can work toward your long-term goals and have a plan to leave when the time is right.

Next Steps for Investing in Shared Housing

Remember, while shared housing can offer higher rental yields, it also comes with challenges, such as higher turnover rates and potential conflicts among tenants. It’s essential to be prepared and proactive in managing these challenges to ensure your investment remains profitable.

If you’re ready to take the next steps toward real estate investment, sign up for an Infinity Investing membership. We offer a range of membership options, whether you’re a beginner or an experienced pro. With a paid membership, you’ll gain access to exclusive, members-only content, such as strategy sessions, online weekly stock rooms, and live real estate data analysis. Shared housing and other types of real estate investing can allow you to generate long-term wealth for yourself and your family. Buy a membership for the tools and resources you need to succeed.