These living arrangements generate higher rents for the same space, but they should not be implemented without careful consideration.
By Adam Frisch (MultiHousingNews.com Article) — As rents continue to climb in most major metropolitan cities, many people, especially those in their twenties, are keen on living with roommates. This arrangement isn’t just beneficial for tenants in a roommate share who are able to save money on rent, but it’s also a huge boon for property managers who are often able to charge much more in rent. However, with great reward comes great risk, and property managers need to proceed carefully when setting up a roommate share.
If a property manager has 600 square feet to rent, they will often be able to charge approximately 20 percent more if that space is split into two bedrooms with a living room in between, than if it is kept as a one-bedroom unit. If a space is split into three bedrooms (which is the most desirable arrangement for tenants in the current market), arranging roommate shares becomes even more lucrative for the property manager who now may be able to charge up to 30 percent more. It’s important to keep in mind that there will likely be higher turnover with roommate shares, with these tenants typically staying approximately one to two years. Tenants in one-bedroom units, on the other hand, will often stay in place for about three to five years. Of course, when there are more people paying rent, there will be a higher risk of default.
Not Any Roommate Will Do
To help avoid the precarious situation of a tenant defaulting on rent, it’s imperative that property managers screen each tenant carefully. This rule applies to all tenants but especially to those who will be part of a roommate share. Property managers shouldn’t be afraid to reject someone who doesn’t meet their standards and they are completely within their rights to do so. If a new roommate attempts to join an apartment share, the property manager should ensure that their name is on the lease. Rather than a lease being renewed and the new person’s name being added, an entirely new lease should be drafted that contains the names of all of the occupants in a particular apartment. To compensate for the time this takes, property managers are justified in charging a processing fee of around $500 for a name change. Having all names on the lease protects both the property manager as well as the original tenant of the apartment who would be on the hook for rent in the event that the new tenant didn’t pay and their name wasn’t on the lease.
Another factor to keep in mind when dealing with roommate shares is that of guarantors. While some property managers may take great comfort in the fact that guarantors are there to back them up in case of any problems, it’s important to remember that guarantors are more of a threat than a tool that can actually be used. In the event that a tenant doesn’t pay their rent, a guaranty doesn’t take effect immediately. Instead, it’s often only in cases of serious default that a guarantor would have to pay. One guarantor is almost always better than having multiple guarantors. With one guarantor, a property manager’s chances of actually getting paid increase. Sometimes, with multiple guarantors, there will be finger pointing as to whom should have to pay. In cases where the guarantors are the tenant’s parents, as often happens, contacting the guarantors can be a great tool for preventing further damage to the apartment, which is all too common in cases of roommate shares and huge parties gone wrong.
When dividing an apartment to create a roommate share, it’s important that property managers ensure that the rooms are legally large enough and that they contain windows. But, all in all, if you divide the apartment well and are careful about the tenants you allow in, you will likely make higher rent per square foot over a longer period of time. Roommates will often pay higher increases in rent as well because the increases are split among multiple people. In addition, property managers can often take on less expensive renovations in roommate shares because the tenants typically won’t be there for very long, are younger and, thus, are usually less picky than those in the market for a one-bedroom. Roommate shares are a good game for property managers to be in right now but as with most exciting money-making opportunities, there are risks involved. Not surprisingly, careful property managers are the ones who will profit the most and who will enjoy longevity in this business.
Adam Frisch is managing principal of Lee & Associates Residential NYC, the first residential division of the national Lee & Associates brand.