If you are a homeowner or renter with extra space in your house, renting out a room may seem like an enticing option to earn extra cash.
And you are not alone – shared housing has been a rising trend over the past decade. According to a 2017 Pew Research Center study, more than 7 million adults are in shared living arrangements.
However, before you start putting up ads online, it is essential to understand the legal distinctions between renting a room in your house and the landlord-tenant relationship.
Here are a few tips to help keep you out of legal trouble and start earning passive income.
Choosing the Right Legal Form for Your Situation
If You are Renting – Sublease/Room Rental Agreement
Renting out a room to someone–when you are a tenant–is known as subletting.
In this arrangement, the subtenant enters into a separate contract with you. The subtenant must adhere to the original lease agreement and agree to the terms outlined in the sublease agreement.
You’ll continue to pay rent to your landlord, and your subtenant will pay rent to you.
Each state, and certain cities, have its ordinances regarding subletting.
New York City, for example, forbids the restriction of subletting in a lease agreement. Be sure you understand what subletting is before signing any contract.
In nearly every instance, you will need to ask your landlord for permission and ensure that you are allowed to sublet under the terms of the original lease agreement.
If You are a Homeowner – Lease/Rental Agreement
You couldn’t ask for a more fulfilling life goal than finally purchasing your own home.
However, homeownership is costly, and you’ve been mulling over how to secure an additional revenue stream to pay for it all.
Renting out an extra room in your house is the ideal solution, but first, you’ll need to do two things:
Step 1: If necessary, get permission from all interested parties
If you are making payments on a house, renting a room to someone is a great way to minimize the monthly cost of a mortgage.
However, your mortgage lender will often require their consent before you start the process of finding someone to rent your room.
As long as it is your primary residence, renting out part of your home will not negatively impact your mortgage.
Like mortgage lenders, most homeowners insurance companies request that you inform them before renting a room in your house.
There are certain precautions to keep in mind if you choose to rent out a room and maintain your standard insurance policy.
Basic homeowners insurance often does not provide adequate protection from any damages caused by a renter, as your property no longer qualifies under an owner-occupied or single-family insurance policy.
Look into applying for landlord insurance or renters insurance.
In addition to covering the cost of repairs to your home or lost possessions, landlord insurance will allow you to recover any outstanding rent payments.
Landlord insurance also acts as liability insurance in the event of personal injury to your tenant and will help you offset legal fees should you ever be sued.
Renters insurance can be taken out in your tenant’s name and will protect their personal belongings if a fire occurs, for instance.
Once you’re the sole proprietor, you no longer need permission from third parties to rent out a room in your house.
Step 2: Draw up a lease agreement
A lease agreement, also known as a rental agreement, is a legally binding contract between a landlord and a tenant.
You and your tenant must sign a lease agreement stipulating the term of a rental and the amount of rent per month, among other mandates.
As a homeowner wishing to rent out a room, once a lease agreement is signed, you’ll officially become a landlord, and you must abide by the specific landlord-tenant laws of your state – be sure to review them.
For instance, many states require that the minimum term that a lease agreement must offer is one year.
A broad example of typical landlord-tenant regulations:
- How far in advance a landlord must notify a tenant before issuing an eviction notice
- The process by which a landlord may enter a rental unit
- Maintenance requirements and the implied warranty of habitability
Consider signing a lease agreement with tenants if you’re sure they are reliable and you plan to invest in your room rental long-term.
If You are Renting a Room Short-Term – Roommate Agreement
You may wish to allow more flexibility when renting a room and choose to forego a lease or sublease agreement altogether.
In that case, a roommate agreement would be a more suitable alternative.
A roommate agreement is a formal contract of the responsibilities between a tenant and the primary occupant of a home without classifying the primary occupant as a landlord.
As the head of household, you can lay down specific ground rules that your tenant must abide by.
- Instituting a curfew
- Limiting the frequency of guests
- Requiring the completion of various chores or tasks
A roommate agreement will be seen as a legal contract and honored by a court of law should any issue arise between yourself and your renter.
Preparing to Rent a Room in Your House
Determining Rental Costs
It can be challenging to know exactly how much to charge for a room rental, but by and large, asking for your area’s current fair market value will increase your chances of successfully renting a room.
Attempt to find similar rental rates for single rooms within your vicinity via sites like Craigslist or Trulia.
Compare several factors when calculating the rent:
- Total monthly mortgage payment (if applicable)
- Monthly homeowners insurance premiums
- The cost of utilities
- Square footage of the room for rent and common areas
- Any desirable amenities, such as a swimming pool
The law affords tenants (renters) several legal rights regarding their tenancy. Knowing these tenants’ rights will help improve your relationship with your tenants. Check local, state, and federal laws for rules on obtaining security deposits from tenants, a notice of rent increase, lease termination, and other legal issues that may arise when renting a room.
Listing Your Room
While federal housing laws prohibit discrimination, renting a room in your house is a slightly different affair and doesn’t entirely fall under the standard purview.
Unlike renting a house, you can include language in your room rental listing which specifies a preference for someone of a particular sex.
For example, a female wishing to rent a room in their home to another female is within their right to deny a male tenant. However, if you dismiss a tenant for any reason, you must do the same for all tenants.
Various websites make advertising your short-term or long-term room for rent easier.
- Airbnb – While it may be the go-to service for vacation lodging, Airbnb provides homeowners the ability to showcase their homes to a wide-reaching audience of potential short-term renters. Keep in mind that most users seek nightly accommodations.
- Trulia – An online real estate database. Homeowners can easily connect with renters seeking long-term room rentals.
- Roomster – Homeowners can create a listing for their long-term room rentals in less than a minute.
Getting Everything Set
The next step in successfully renting a room in your house is ensuring that the room (and the home) is in good shape and taking the proper precautions.
The room should be as presentable as possible, and the home should be welcoming and well-kept.
See that you take care of any repairs or modifications before showing the room.
- Paint the walls
- Clean all floors or carpets
- Check that all electrical outlets work
- Replace batteries in the smoke detector
- Inspect all windows and doors
Next, go through each area of the home that you will want to remain private. Consider installing new locks on rooms deemed “off-limits” to your new tenant, such as a child’s bedroom.
Take stock of any personal possessions or valuable items, and ensure they are in a safe, secure location.
Finally, it’s time to schedule an appointment with a potential renter.
Be sure to inform all household members before scheduling room viewings so they may make accommodations.
Screening a Tenant
Screening a tenant and conducting a background check is a necessary step in the room rental process.
Once you’ve shown them the room, have them fill out a standard rental application. The primary purpose of this rental application will be to verify the tenant’s background.
You should request copies of their driver’s license and social security card to run a criminal background check.
It’s standard practice to request a nonrefundable fee to process the background check.
Dealing with Taxes
Whatever your reason for renting out a room in your house, you may find yourself shouldering new tax burdens.
Rental income is considered taxable income by the Internal Revenue Service. As such, you must report it come tax day.
The IRS lays out special instructions depending on whether or not you used the dwelling unit (rental property) as your primary residence and how long you rented the home.
|Not used as a home||Used as a home (rented for less than 15 days)||Used as a home (rented for more than 15 days|
|Report all rental income||Not required to report rental income and expenses||Report all rental income|
|Divide expenses between personal use and rental use||Divide expenses between personal use and rental use|
|Deduct all rental expenses if you had a net profit|
|Deduction of certain rental expenses are limited if you had a net loss|
It’s important to note that any rental income you receive while renting out a room cannot be used to qualify for a larger loan should you choose to refinance your mortgage.
Renting a room in your house can be a valuable learning experience for any homeowner with interest in property management.
You’ll gain a critical perspective on what it takes to be a landlord without the need to navigate the entire legal landscape associated with becoming one full-time.
Nevertheless, it’s also a great way to minimize the hefty cost of homeownership and provide a reliable income for you and your family.