Yes, it's legal to rent a room in your house in most places, however, it isn't permitted everywhere. Local zoning laws can prohibit renting a room or set restrictions on the conditions of the agreement. For instance, in some places, you must get an inspection before renting out a room or provide separate access for the tenant.
Plus, if you live in a condo building or a gated community, the Homeowners Association may have rules prohibiting you from renting a room unless the tenant is a family member. So, you'll have to research the laws in your municipality and review the homeowner's association rules before renting to anyone.
But in most places, renting a room is legal if you own your own home as long as you adhere to any regulations or restrictions. Doing so can not only provide an extra stream of income but can also have tax benefits, as well. So as long as you follow the rules, renting a room in your home can be a lucrative endeavor.
1. Check Your Local Laws or HOA Rules
Before you do anything, check the local laws and understand your responsibilities as a landlord. Some states limit the number of unrelated people who can live in a home together, while others restrict how you can rent a room. Also, your responsibilities as a landlord will vary from state to state. Some states require you to provide heat and hot water, while in hotter states like Arizona, landlords must keep the premises cool if the outside reaches a certain temperature. So, make sure you understand your obligations before looking for tenants. If you have a homeowner's association, check its bylaws to see if there are any restrictions on renting a room, as well.
2. Speak to an Accountant and Insurance Agent
Next, you should consult your accountant about the tax implications of renting a room and determine how much of the income you should set aside. The rent you earn is considered taxable income, meaning you must report it to the IRS. But you can claim specific improvements and costs of maintaining your home as expenses. You can deduct any upgrades, repairs, utilities, insurance, and even the depreciation of the home. But you can only claim the deductions at whatever percentage of the property the tenant occupies. For example, if you're renting out about 500 sq feet in a 2,000 square-foot home, you could deduct 25% of these expenses. It's best to speak to an accountant to create a system for keeping track of rent and tracking deductions. You may also want to talk to an insurance agent to decide if you need additional coverage for being a landlord.
3. Prepare the Room
Once you've done your due diligence and checked all the local regulations and tax laws, you can start getting the room ready. Decide which space in your home you plan to rent and equip it with a separate lock. Take care of any necessary repairs or upgrades that must be completed before the tenant moves in and ensure they have proper access to essential spaces like the kitchen and bathroom. You may also consider creating a separate entrance or finding a way to section off the main home from the room for privacy reasons. But that depends on the home's construction and what makes you feel the most comfortable.
4. Set Your Rent
Before you begin advertising the home, you'll want to sit down and figure out how much to charge in rent. You can try looking online at listings websites or rental apps to determine the average rents in the area. Plus, you should consider what kind of access and amenities you're going to include. Does it have a separate bathroom or access to the swimming pool? The more you include, the more you'll ultimately be able to charge in rent. Also, decide whether you're going to include utilities in the rent or have the tenant make separate payments for things like electricity, WIFI, and cable.
5. Market the Room
When you feel the home is ready, you can start looking for prospective tenants. You may decide to enlist the help of a real estate agent, although some won't market a room for rent unless you make it worth their while. You could also place an ad on Craigslist, Facebook Marketplace, or Roomi, where people often search for rooms to rent. Apps like VRBO and Airbnb can also be helpful, especially if you're only looking for a short-term tenant.
6. Vet Interested Applicants
Once you start getting responses, you should vet any applicants carefully. You not only want to be sure that they're reliable and financially stable but also that they're safe to invite into your home. If you're living under the same roof, you want to know that they won't present any potential dangers. So, you will want to run a credit and criminal background check and get as much information as possible on their past rental history. Also, review their financial documentation to ensure they can afford the rent. You may want to consider several applicants and pick the one you feel is the best fit.
7. Sign a Lease and Establish the Ground Rules
Finally, once you've found a suitable applicant, you should draft a lease and discuss the ground rules and expectations. You can skip this step if you're only doing a short-term rental, but if the tenant is expected to occupy the residence for more than 30 days, you should have them sign at least a month-to-month lease. Also, be clear about their rights and obligations. Establish which areas of the house they're allowed to access and which they are not, whether you allow smoking, house guests, or pets, and let them know if they are expected to chip in for things like utilities, groceries, cleaning services, and so on. Setting clear expectations from day one will make things much smoother in the long run.
Pay Down the Mortgage Faster
One of the primary reasons most people rent out a room is to get help paying down the mortgage or property taxes. This additional income stream means you can spend less on your own housing costs or pay back the loan faster. Plus, the money can also be put toward improvements and renovations that will increase the home's value.
Someone Else to Help with Chores
Having a tenant can also be helpful because you have someone else to help with chores. If you live alone or you're a working couple, keeping up with all the yardwork, maintenance, and other work required to manage a home may be challenging. So, if you have a good relationship with your tenant, you may have someone else who can help you with some of these tasks.
Build a Relationship with the Person
You may soon start building a relationship with your tenant that turns into a lifelong friendship. Living under the same roof can be a bonding experience that turns a business venture into a new addition to your family. While you don't necessarily have to develop a friendship with your tenant, even just having a cordial relationship can be a bonus.
Renting a room can also bring significant tax deductions. Even though the income you earn is taxable, you can claim substantial expenses associated with improving and maintaining your home because you're now using it as a rental property as well. You should consult a tax professional to determine the rules regarding what qualifies as a deduction.
Renting out a room also means you'll have less privacy in your own home. You can't enjoy unrestricted access to the house because you'll also have to respect their privacy. Plus, you probably will want to put locks on all the doors and keep valuables in a safe or another restricted area unless you are confident you know the tenant well. Inviting a stranger into your home naturally creates danger, so make sure you carefully vet tenants and take the necessary precautions.
More Traffic in and Out of the House
An additional person or even multiple people living in the home will naturally bring more traffic. If they invite friends over or have family members visit, you will consistently have strangers coming in and out, which can be disruptive and lead to more wear and tear. So, it may help to be upfront with your tenant and let them know your rules regarding guests.
Dividing Up Expenses Can Get Complicated
Depending on your living situation, dividing up bills may get complex. For instance, if you share groceries or all chip in for utilities, you'll need a clear system to establish who pays for what. If you don't set these ground rules early on, it may cause conflict or create resentment if someone isn't paying their fair share.
Potential for Disputes
Living in close quarters naturally creates the potential for disputes. Even if you generally get along with your tenant, there is always the chance that conflict could arise. That's why it's essential to set rules and expectations early on, so if the tenant breaks them, you have the right to hold them accountable. Also, be upfront if there is any other behavior you didn't initially prohibit but would like them to stop. That way, it doesn't snowball out of control.
To avoid renting a room to a total stranger, many chose to rent a room to a family member instead. This can be beneficial as long as everyone is on the same page.
Depending on how close you are, you may have already lived with them and know their habits and financial situation. Plus, it will be much harder for them to stiff you on the rent or do something that would damage your relationship because they will still have to see you in the future.
But that being said, the landlord-tenant relationship can get tricky to navigate with close relatives, especially if they start ignoring your rules or failing to pay rent on time. So, be sure you agree about the expectations and consequences so you don't damage your relationship.
Renting a room to a friend can be even trickier. Finding a tenant you know personally and like spending time around may be beneficial, especially if you're sharing parts of the home. But again, the landlord-tenant relationship naturally creates a power dynamic that can damage a relationship if you're not careful.
Before renting to a friend, be sure they know that you have to treat them like any other tenant and that they won't get special privileges or breaks. Otherwise, it may be easy for them to take advantage of your relationship by failing to pay on time or otherwise violating the rules.
Renting a room can be a good source of additional income, but it comes with challenges and setbacks. It's less work than owning a rental property, but you also get less separation between your business and your personal life. So, a problem tenant won't only be a financial headache; it can also be disruptive to your life.
Before you take on a tenant, be sure that you carefully weigh the pros and cons and know what you're getting yourself into. Also, carefully vet any applicants, even if they are your friends and family. The more you prepare, the easier it will be to avoid conflict.