Is there a room in your home that you rarely use, such as a spare bedroom or den? If so, under certain circumstances, it might make sense for you to rent that space out to a tenant, especially if you live in a big city or desirable suburb with high demand for rentals.
Renting out a room can increase the income you use to make your mortgage payments, add to your savings account or enable you to make an investment, such as to fulfill your entrepreneurial spirit. That said, it’s not as easy as cleaning up, posting an ad and inviting potentially a complete stranger into your home.
Before we get started please, be aware this post is for informational purposes only, and not intended to provide tax, legal or accounting advice. You should consult your tax, legal and accounting advisors for information as it pertains to your situation.
Here’s a step-by-step guide for your consideration to turn an unused room into an income-generating rental:
Know the Laws and Nuances
If you are a renter, it is likely written in your rental agreement that you are not allowed to sublease without the landlord’s explicit permission. If you are a homeowner, you have a little more – but not necessarily complete – jurisdiction to do as you please with your spare room. Landlord-tenant laws are different from state to state, and enforce tenant-protecting guidelines for everything from security deposits to ventilation to repairs. And, with the rise of home sharing-platforms such as Airbnb and HomeAway, smaller governing bodies, such as municipalities and homeowner’s associations, are taking steps to further regulate rentals.
In addition to reading up on the laws, it’s also imperative that you understand rental income is taxable. Depending on the additional income you are able to generate from your rental, you will need to have a handle on all of the impacts on your taxes, including certain expense items, insurance and depreciation that could be used to offset income. Be sure to crunch the numbers with your accountant beforehand to confirm what you need to be charging in order for your rental income to make sense.
Create an Ideal Living Situation
There are a lot of spatial and territorial details to think about before you share your home with someone else. Bathrooms, foyers, stairways, door locks, and the kitchen are just a few of these considerations. You want to create an ideal living situation – not just for your tenant, but, most importantly, for you and your family. Look first to your local tenant-landlord laws for the essentials that you must provide for your tenant, and always adhere to those laws. Keep in mind that if a situation doesn’t work out, it can take 90 days to evict someone, and they could be living with you during that time.
Set the Rent and Advertise
Unless you’re going to bring in a real estate agent to manage your rental for you, renting out your spare room will require you to become at least somewhat comfortable using the back end of listings sites such Craigslist, Zillow and Trulia. You can also use these resources, along with sites like Rentometer, to determine what you can reasonably charge.
Once you have arrived at a rental rate that you are confident will attract interest, it’s time to create and post your ads. Be as descriptive as possible explaining what the room includes, and highlight the amenities you believe are most desirable. Also, consider hiring a professional photographer to capture the best of what your rental has to offer. Lastly, the ad might be a good place for you to express upfront any “non-negotiables,” such as pets, smokers, or partiers.
Create Your Paperwork
The window from when you post your first ads to when you begin receiving responses is the perfect time for you to develop your lease agreement, which should outline:
- Shared spaces
- Rent (including due date and late fees)
- Security deposit
- House rules
- Length of lease
There are many free rental agreement templates online. If you don’t feel comfortable editing one for your use, it’s not a bad idea to hire a landlord-tenant lawyer on an hourly basis to ensure your agreement covers everything and provides adequate protection. If you’re going to commit to being a landlord long-term, a knowledgeable attorney will be a good person to have in your contacts list, regardless!
Choose the Right Match
Once you’ve begun showing your rental unit, it will take some time to find the right tenant. Interview and evaluate each candidate honestly, without discriminating (this includes gender discrimination). But, also know the type of tenant you’re looking for, and don’t settle for someone who evokes uncertainty.
Even when you think you’ve found “the one,” confirm their history with a background check and credit check. RentPrep discusses the pros and cons of various tenant background check services, while MassLandlords offers its take on the best tenant screening services.
Run Your Rental Like a Business
Most importantly, approach every aspect of renting out your spare room with the diligence, dedication and professionalism of a business owner. Have a plan, an exit strategy, and a vision for making the most of the opportunity to generate additional income for your family.
Looking for more insight and additional ways to discover financial freedom? See how we can help!