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How to Rent Out a Room in Your House

Jul 01, 2020 by Barbara Zito

Do you have a spare room in your house that you're thinking of renting out for extra income? Perhaps you're dipping your toe in the waters of property investing and need help with covering the mortgage on your first property. Or maybe you're an empty nester with bedrooms to spare and a mortgage that's still got some years to pay off. Whatever the situation, know that passive income is not just for those with a separate rental property -- it's also an option for those renting out a room.

If you're ready to hang up a For Rent sign on a room in your house, here's how to do it. Keep in mind that while you can always list your room for nightly rentals on Airbnb, these guidelines are for longer-term rentals:

  1. Check your local laws. It's not illegal to rent out an extra room in your house, but there are plenty of laws regulating the way you do it -- and they all vary depending on your home state. You'll want to stay on the right side of all the tenancy laws, so be sure you know what you can and can't do when it comes to having a tenant in your primary residence.
  2. Call your insurance company. Another person (and their belongings) living in your primary residence means more liability for you as the homeowner. Ask about how this will affect your homeowner's insurance policy. You must consider that you'll be paying a higher insurance premium and will need to subtract that expense from your new monthly cash flow.
  3. Figure out which room you'll be renting. This is not as easy a question as it seems. It might seem obvious that if you have a guest room, that's the one that you'll be renting. But if you're in this to make the most money you can, you'll likely want to rent the best room in your home. "Best room" status is something that will vary from house to house. In yours, it could mean it's the largest room, the one with an ensuite bathroom, the one with the most windows, etc. It's not feasible for all would-be landlords, but if you're able to move into a "lesser" room in order to make way for a tenant at a higher rent, it's an option that will pay off.
  4. Consider the comps and set your price. Check the local room rental listings and see what's being rented in your area. Look past square footage to other details that might drive the rent up or down. For example, does it have a separate entry? Is it on the first or second floor? Are you giving the tenant access to your backyard pool? Space, accessibility, and amenities all weigh into the monthly rental.
  5. Put the word out. Ready to find some potential renters? Check in with your own social network first -- this is one of the best ways to get a vacancy filled because you likely trust the person vouching for your potential tenant. Otherwise, be proactive and advertise your available rental locally. You could post an online listing, or you could go the more traditional route and place flyers in highly-trafficked places like cafes and markets. If you live near a college or university, call the student life office and see if they can post your listing. Be sure that you're clear as possible when writing your listing. Want a non-smoker only? List it. No pets of any kind allowed? List it. These are reasonable preferences for you to have as a landlord, and prospective tenants will appreciate knowing up front what they can or can't do if they rent a room from you.
  6. Screen tenants. While the Fair Housing Act prohibits discrimination against tenants, you can -- and should -- do a background check including references. This will ensure that your future tenant is who they claim to be. A credit check and/or request for recent pay stubs will ensure that they can pay the rent each month.
  7. Get it all in writing. No matter how glowing the recommendations, no matter how strong the mutual friendship you share, no matter if your new tenant is related to you -- get a rental agreement in writing. A signed, lawyer-approved lease will protect both of you and will serve to spell out when rent is due, whether a security deposit is needed, and more. As the homeowner, you'll want to establish a house rule sheet that will help avoid many of the misunderstandings and make it comfortable for all to share the space.
  8. Call your accountant. Rent is a taxable income, so a good chunk of that extra income goes to Uncle Sam. It might make sense to start paying quarterly taxes to avoid penalties and a large tax bill come April, so check in with an accountant for advice. You'll also want to know what kind of expenses you can deduct as a new landlord. This will lessen your tax liability, but make no mistake -- even if you do have eligible deductions, you'll be paying taxes on your rental income.
  9. Secure your valuables -- and your tenant's. Once upon a time, this meant locking up the jewels in a safe. While that's still a good idea today, there's a lot more at stake. You'll want to keep wallets, credit cards, checkbooks, and banking records safely tucked away. Tech devices should also be secured with password protection turned on. Identity theft can add up to a much greater loss than stolen property, so make sure you're careful with your digital belongings as well as your physical ones. The same goes for your tenant; you'll want them to feel that their belongings are also safe while living under your roof. Make sure all bedrooms have locks for both security and privacy.
  10. Welcome your new tenant. When everything is squared away with your new tenant, welcome them to their new home by making the room easily accessible on their move-in day. If they're new to town, leave a list of local businesses and resources they might find useful, like nearby grocery stores, banks, and drugstores. Depending on the lease agreement, you may be seeing a lot or very little of your new tenant, so it's a good idea to be there that day to greet them in person.

The pros and cons of renting out a room in your house

Landlord life comes with a host of advantages and disadvantages -- and that's if you've got a separate property to rent. When you're renting a spare room in your own house; however, there are many other things to consider.

Let's focus on the pros first:

  • You could potentially live in your own home for free. You're certainly lowering your mortgage payment by taking on a renter. Depending on how many spare bedrooms you have and what your monthly payment is, you could be living in your very own house for next to nothing. If you have other income, take advantage of the cash flow from your rental income by paying down your current mortgage or by investing in another property.
  • Take advantage of short-term rentals. People often rent rooms as a stop-gap between apartment leases. If you want to avoid the rapid turnover of an Airbnb rental but don't mind if someone stays for less than a year, you could consider month-to-month rentals.
  • The extra income could go toward home improvements. With the additional income you're making from rent, you could improve your home and increase its value. This could in turn allow you to charge more rent from future tenants or get a higher price when you sell.

And now for the drawbacks:

  • You'll miss your privacy. This is why a rental agreement is so important. Be sure to set guidelines on how your home is to be shared with your tenant so that you can both have privacy.
  • There is a risk of damage. This is one of the main reasons people don't want to become landlords. It's understandable that you'd want to avoid becoming a cautionary tale, but potential property damage is a risk for all landlords. A security deposit and homeowner's insurance will likely cover tenant damages -- but again, get it all in writing.
  • Eviction can be a nightmare. Evicting tenants can cause problems when they're living in a separate rental property. But when someone is living under the same roof, it can lead to a volatile situation. It bears repeating that background and reference checks are imperative for when you're screening tenants -- as well as a very clear lease that stipulates when it's time for a tenant to leave.

Should you welcome a tenant into your home?

There's a lot to consider when you decide to open your home to tenants. Talk to landlords who have done it before so you can get a better understanding of all of the business and personal implications before you dive into renting a room in your house.

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