Jul 18

5 Steps Before Renting Rooms In Primary Residences

a houseThe following post is a guest post from Tali Wee at Zillow.

Many homeowners at one point or another consider renting out rooms in their houses to help pay for their mortgages. In theory, earning money for unused space is an advantageous opportunity. However, renting out a room in a primary residence involves taking legal precautions, increasing insurance premiums and preparing for potential personality or lifestyle conflicts between roommates. Although, when homeowners are tight on cash, renting rooms can be the perfect solution.

Homeowners considering renting rooms or units in their primary residences should check off these five steps before inviting strangers into their homes.

1. Legality

Homeowners should research their local municipal websites to gather information about current renting regulations. Depending on the location of properties, different zoning applies allowing or prohibiting homeowners from renting. Some areas allow room rentals, but not divided rentals with separate kitchens and bathrooms. Relatives may be legal, but other tenants forbidden. Plus, laws might require rental inspections and registration before tenancy. Rental stipulations are also written into mortgage terms, specifying whether homeowners can live on site.

Further, if all regulations are cleared, homeowners should contact their homeowners insurance representatives. Some owners may need to acquire landlord insurance to protect properties from damages caused by tenants. Additionally, homeowners may need to notify future tenants that they’ll need to purchase renter’s insurance to protect their own possessions.

Lastly, homeowners running rental businesses should contact their accountants to file taxes accordingly.

2. Preparations

Once homeowners know the legal regulations for rental spaces in their communities, they may need to make improvements to meet requirements. Ensure all upgrades are built to code and properly permitted.

Before remodeling, homeowners should carefully consider the most comfortable layouts for shared living. Many owners prefer to split space where tenants reside on one floor and owners on the other. Consider potential for basement rentals, second-level units, backyard cottages or mother-in-law suites.

3. Tenants

Most importantly, owners should lease space to tenants they feel comfortable welcoming into their homes. Traditionally, first-time landlords reach out to family to see if a natural-fitting relative is looking for rentals. However, renting property is a business transaction and friends and family are more likely to take advantage of the opportunity because agreements are looser and consequences are light. As long as owners can find tenants they’d feel comfortable living with, it’s best to avoid friends and family.

Run credit and background checks before approving tenants. Contact their references to confirm rents were paid on time and property rules were respected. Landlords should familiarize themselves with Fair Housing Laws before marketing units. It’s important to avoid discrimination language throughout the screening process, as every applicant deserves equal opportunity to view and apply for tenancy. Owners can reject applicants who smoke, have pets or don’t meet the background check requirements.

4. Terms

Homeowners should absolutely draw up lease agreements, signed by both themselves and their tenants with copies for each. Some owners prefer to hire attorneys to create legal documents, where others are satisfied with generic leases found online. Regardless of trustworthy verbal agreements, all homeowners should confirm everything in writing to protect themselves from disrespectful tenants who skip payments, disregard household courtesies, damage property or overstay their welcome.

Leases should detail the total costs due upon move-in, such as first and last month’s rent and a refundable damage deposit. Documents should cover rent costs, due dates and penalties for late payments. Additionally, owners should set house rules such as quiet hours, number of allowable guests, maintenance requirements and non-smoking preferences. Leases should designate rules for tenants with pets or who acquire pets during tenancy; indicate the costs of pet rent, due dates and prices of penalties, plus refundable/non-refundable pet damage deposits and breed or size regulations. Lastly, the lease should clarify the length of tenancy, including the date and time of move-out and required notice and consequences for lease termination.

5. Disclosures

If homeowners know of any mold, asbestos or lead paint on their properties they are required to disclose this in writing to tenants. Tenants must report any signs of mold during tenancy and sign disclosure documents.

6. Calculations

Owners should review the total costs of updating their residences to rental code, drawing up leases and then calculating the total insurance and taxes of acquiring renters. Next, compare the rental unit to other rentals in the area to settle on fair rent. If the time and money necessary to facilitate renting rooms is favorable to the total profit, then owners should get started.

Buying a home is typically the most expensive purchase in a person’s lifetime. Besides maintenance, monthly mortgage payments cost between 25 and 28 percent of homeowners’ income on average. If homeowners can earn some cash by renting an empty room, they can apply rents to cover some of their mortgage payments or prepay their principals. The faster homeowners pay down their principals, the less mortgage interest they’ll owe over the life of their loans. As long as homeowners take the necessary steps to safeguard themselves legally and carefully detail the guidelines of tenants’ leases, renting rooms can be agreeable and highly profitable.

Note from KK: When Eric and I bought our condo we talked a lot about having a second bedroom so that we’d have a space to rent out to a roommate if we ever fell on hard financial times. Thankfully we haven’t had to, since our space is pretty compact. But if we ever needed to, we know we could which is really comforting.

If we lived in a bigger home I’d definitely consider renting out a room or two to the right roommate. We’ve also talked extensively about buying a multi-family home in the future so that we have some rental income coming in to help with our insanely high taxes.

Do you rent a room in your home? Would you consider it?

Image: Stephen Harris

9 comments

Skip to comment form

  1. We rent a suite (aka mother-in-law’s apartment) in our home on a temporary basis–one week to two months at a time. We’ve been doing this for four years and it works pretty well. We like temporary because we can take breaks from having tenants as we choose and we meet many interesting people. Also, if we have a tenant we don’t especially care for, they’re gone soon!

      • KK on July 19, 2014 at 11:16 pm
        Author
      • Reply

      I love the idea of having renters but not being “stuck” with them if they are terrible. Sounds like you’ve come up with a great alternative to regular leases.

  2. I have an extra bedroom, but I’m not thinking about renting it out. I have pets which can be an issue when dealing with roommates, plus there’s no separate entrance to the basement of my house. I really treasure my privacy and have tried the whole roommate thing before and it turned out horribly.

      • KK on July 19, 2014 at 11:18 pm
        Author
      • Reply

      I hear you with the pets. Our pets are like our kids and I wouldn’t want a roommate who didn’t love our pets as much as we do (which would be hard). I’ve had roommates in the past and it’s really hard, even if you like each other. At this point in my life I wouldn’t love to share a home with someone I wasn’t related to, but if we had a separate apartment with separate entrances I’d love to have that rental income.

  3. My in-laws just bought their condo and they are planning to have someone to rent on it together with their youngest son. It has a two bedroom condo and they think if they would let someone to rent the other room it can help them to pay their monthly payments.

      • KK on July 19, 2014 at 11:19 pm
        Author
      • Reply

      I think it’s a great idea as long as everyone is comfortable with the situation. I had roommates throughout college and grad school and into my twenties and it was just normal for me. Now it would be harder, but if I needed the money I would definitely do it.

  4. We do rent out a room in our basement (well actually they have the use of the whole basement) to coop students on four month work terms. This way, if it doesn’t work out, we only have 3 months until they are gone. We’ve had really good experience with it though. They have a little kitchenette downstairs and a bathroom so they really stay to themselves. We do invite them for Sat night dinner to eat with us if we’re home. We like to extend a little kindness, I mean after all these are early twenties kids.

  5. Excellent summary. Its really important to check out all the legal aspects of renting out. The rules and regulations can vary dramatically from one city to the next. Its worth investing some time and educating yoursel fon the nuances.

  6. I currently live with a roommate and I’d say that I think I’d prefer to live by myself… So for me I think it depends on the roommate, if I know them well enough and have a good relationship with them I’d most likely be glad to rent out a room for them, but I’d probably never rent out a room to a complete stranger.

Leave a Reply

Your email address will not be published.