Renting out a room in our spare apartment

We have a spare apartment in the Northeastern end of Singapore for my parents to stay when they visit, and it’s empty about 90% of the time. To gain some extra income, I decided to rent out the 2 rooms that they aren’t staying in.

I entrusted an agent to handle the process for me, gave him a 2 key requirements, no pets, no smokers, and began my travels. He found a tenant quickly at $1250/month, and I agreed for her to commence the contract in 2 days (while I was still away). I only returned 2 weeks after she moved in.

Lesson #1: Get involved in the tenant selection process. The agent’s job is to find the tenant. As the owner, you have to meet the prospective tenant and judge suitability and rent payment reliability.

When i returned and visited the apartment, I realize the tenant smokes, keeps 2 small dogs and she installed items in the living room which was outside of the contract’s stipulated room rental – I’m usually not so picky, but because my parents coshare the place, I need to be very detailed. The agent clearly didn’t check for my 2 key requirements and was only keen on securing his 1 month rental commission for this 2y contract. I asked her to remove the items she installed without permission, and decided to keep the contract since I already paid the commission and didn’t want to go through the trouble of refunding and finding another tenant. It wasn’t worth my time/effort/agony and it’s opportunity cost at the end of the day. If a property is to be rented out, it should be occupied 100% of the time, else it’s lost $. Time doesn’t turn back. So I set some ground rules with the tenant and moved on with life.

Lesson #2: Focus on the bigger picture. It’s $1000/month after expenses to deal with occasional whining. As long as the place isn’t used for illegal activities or being ruined, it’s $12k/year in extra cash flow.

As time went on and my parents visited, I realized this tenant (although she keeps the place extremely clean), is extremely whiny. If things don’t go her way, or as per her request, she complains about EVERYTHING and kicks up a big fuss. She behaves like she’s renting the whole apartment, at a room rental rate. I guess at this rental rate, this is the type of people I have to put up with. A different experience, but you learn and see things from different perspectives along the way.

Are we being taken advantage of? Perhaps so. How much more can I gain if I put in the effort to squeeze every single drop out of it (say $200/month, $2.4k/year more) and is it worth my time? Probably not. Good tenants shouldn’t bother you, and she doesn’t bother me much (other than the occasional whining) and she keeps the place clean. It’s about managing your own/my parents’/tenant’s expectations and living harmoniously.

Lesson #3: Reinvest the extra cash into dividend blue chip stocks, or finance another property with it.

The yield is pretty good at 3% for a room rental (it’s usually lower around 2% for entire condos), and will double if we rented out the entire place, but i’d like to keep the flexibility of housing my parents here. This option is much cheaper than them staying in a hotel whenever they visit.

Keeping it in cash is not worth it, especially if you have already accumulated your emergency stash of 6-9 months worth of expenses. If you use it to finance another property, make sure this extra cash flow is not considered as income under the loan calculation; consider it as a bonus for early loan payoff. If the bank doesn’t let you do early loan payoffs, then invest it in higher yielding blue chip stocks to increase your dividend payouts to offset the loan interest.

Lesson #4: Know what role each property plays in the entire portfolio

This can be the yield play, a capital appreciation play, or simply a hedge. I reckon this is the hedge + yield play at this juncture.

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