RentCafe recently released data that suggests one-in-three renters are willing to downsize their homes to save more money for a down payment on a property.
In an analysis of 200 markets, the city with the best opportunity to save cash by downsizing by just one bedroom was Dayton, Ohio, where renters could save an extra $3,168 annually. Given Dayton’s cheap housing market—with starter homes costing a median price of $57,652—it would take a renter a little less than two years to save the money needed to make a 10% downpayment.
Sounds great! Right?
Not really. Why downsize when you can sublet? In this article, we’re going to cover subletting and how it makes more sense to sublet your rented property than to downsize in the name of savings.
What is Subletting?
Subletting, or subleasing (usually used in commercial real estate), is where you rent out a room or part of your rented home to another tenant. Think of it like house hacking, but you’re a renter, not a homeowner.
Subletting can be an excellent way to create passive income if you have the extra space. However, it’s not always possible to sublet. You’ll need permission from your landlord first. Then you’ll need to ensure local laws allow for it and if your renter’s insurance will cover it.
If you get the green light from your landlord and the other two pieces are in place, then this would be an excellent opportunity for you to earn extra income and dramatically accelerate the path towards homeownership.
How Much Time and Money Can Subletting Save You?
In this analysis, we’re going to use the same markets that RentCafe suggested had the best savings potential, but show the difference between subletting and downsizing.
To do this, we used data from Rent.com to find the average cost of a one-bedroom rental property in each market. This is used as the market price for what the average two-bedroom renter would sublet one of their rooms for.
In this scenario, you would sublet your second room at market price and collect monthly revenue. For simplicity, we’re not going to factor in the various expenses associated with landlording. Instead, we’re just calculating the length of time it takes to generate enough revenue to place a 10% down payment on the typical starter home in the market.
The results are pretty amazing.
Here’s what each column means:
- Market – Location
- Avg. 1BR Price – The average price of a one-bedroom unit in the market
- Annual revenue – Avg. 1BR price multiplied by 12
- Median 10% Downpayment – Based on median sales prices in the market
- Time Needed to Save – The amount of time it takes for revenue to reach the 10% downpayment
- Time Saved by Subletting – The amount of time you save subletting compared to downsizing by one bedroom
Quite clearly, it is significantly more lucrative and efficient to sublet a room than to downsize. Of course, you’d be paying taxes and other expenses during the process, but you could still shave as much as two years off in some of these markets.
In Cleveland, for instance, subletting instead of downsizing results in time savings of nearly three years! If it’s allowed, why would you not sublet?
Conclusion
I think the biggest takeaway from this analysis is that with an extra few minutes of thought, you could accelerate the path to homeownership by years while generating extra income at the same time.
Of course, subletting is not always an option, but perhaps that’s something you should be thinking about when looking for somewhere to rent in the first place. It shows that even as a renter, there are still ways for you to get actively involved in real estate investing.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
