If you’re 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’re not alone – shared housing has been a rising trend over the past decade. According to a 2017 Pew Research Center study, over 7 million adults are in shared living arrangements.
However, before you start putting up ads online, it’s important to understand the legal distinctions between that of 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’re renting – Sublease / Room Rental Agreement
The act of renting out a room to someone–when you yourself 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 their own 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 agreement.
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’re a homeowner – Lease / Rental Agreement
You couldn’t ask for a more fulfilling life goal than finally purchasing your own home.
However, homeownership is a costly endeavor, and you’ve been mulling over how to secure an additional revenue stream in order 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
Mortgage Companies
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.
Typically, renting out part of your home, as long as it is your primary residence, will not negatively impact your mortgage.
Insurance Companies
Like mortgage lenders, most homeowners insurance companies simply request that you inform them prior to renting out 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 that may be caused by a renter, as your property no longer qualifies under the terms of an owner-occupied or single-family insurance policy.
Look into applying for landlord 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 the name of your tenant and will protect their personal belongings, if a fire occurs for instance.
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 various 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 tenant must be notified 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 a tenant if you’re certain that they are reliable, and you plan on investing in your room rental long term.
If you’re renting a room short-term – Roommate Agreement
You may wish to allow yourself more flexibility when renting out 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 documentation of responsibilities between a tenant and the primary occupant of a home, however without the need to classify the primary occupant as a landlord.
As the head of household, you’re able to lay down certain ground rules that your tenant must abide by.
For instance:
- Instituting a curfew
- Limiting the frequency of guests
- Requiring the completion of various chores or tasks
Preparing to Rent a Room in Your House
Determining Rental Costs
It can be difficult to know exactly how much to charge for a room rental, but by and large, asking for the current fair market value in your area 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 swimming pool
Listing Your Room
While federal housing laws do prohibit discrimination, renting a room in your house is a slightly different affair, and it doesn’t fully 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 certain sex.
For example, a female wishing to rent out 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 it easier than ever to advertise your short-term or long-term room for rent.
- AirBnB – While it may be the go-to service for vacation lodging, AirBnB provides homeowners the ability to showcase their home to a wide-reaching audience of potential short-term renters. Keep in mind, 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 making sure that the room (and the home) is in good shape, and you’re taking the proper precautions.
The room should be as presentable as possible, and the home itself should be welcoming and well-kept.
See to it that any repairs or modifications that need to be made are done before you begin 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 kept in a safe, secure location.
Finally, it’s time to schedule an appointment with a potential renter.
Be sure to inform all members of your household before scheduling viewings of the room, so that they may make accommodations.
Screening a Tenant
Screening a tenant 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 background of the tenant.
You should request copies of their driver’s license and social security card in order to run a criminal background check.
It’s standard practice to request a nonrefundable fee in order 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, it must be reported come tax day.
There are special instructions laid out by the IRS dependent on whether or not you used the dwelling unit (rental property) as your primary residence and how long the home was rented for.
| 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 that you receive during the course of renting out a room cannot be used to qualify for a larger loan should you choose to refinance your mortgage.
Wrapping Up
Renting a room in your house can be a valuable learning experience for any homeowner with in interest in property management.
You’ll gain an important perspective on what it takes to be 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.
