Should You Rent Out a Room in Your House?

With the economy down because of the coronavirus pandemic, it is not ideal to think about generating extra income from your own house. You can start your own home-based business, look for a side job, or earn passive income from renting out a room in your house. That last one might be the easiest for anyone who needs to earn some extra cash today. Besides, there is a huge market for renting out a room, too, since people lost their jobs and are looking for a more affordable place to stay.

But renting out a room in your house is more than about putting up a “for rent” sign. You are acting as a landlord. As such, you are going to be responsible for your tenant and the maintenance of the house. Are you sure you are ready for it?

What Room Should You Rent Out?

In a study, 43% of the respondents said they rented out an extra bedroom or two. About 27% said they want separation from the tenant, so they offered the basement or the loft. For both, you might need to call a basement or loft conversion company to transform the room into a more habitable space. About 16.6% of the respondents said they preferred to build a detached house or a granny flat for more privacy.

Should you renovate the house before you let someone move in? More than 63% of the respondents felt the need to redesign and renovate the house while others cleaned and furnished the room. Renting out a room is a great way to generate more income, but it doesn’t mean you should turn the room into a five-star apartment unit.

Laws and Regulations

Every state has a different set of rules and regulations for renting out space in your house. Make sure to check what laws cover you renting out a room. You might have to register as a landlord because you’re essentially under this setup. Some other restrictions that you should note are the number of people who can live in the house and the zoning laws (if you built a detached guest house).

Marketing and Discriminatory Language

In a traditional rental situation, the Federal Fair Housing Law does not allow discriminatory language when advertising for a rental property. You cannot choose a tenant according to their race, ethnicity, color, gender, religion, marital status, and mental or physical disability. But if the landlord is also living in the same house, the rules have to change.

For example, a landlady might not be comfortable letting men stay in one of her rooms. Families with young children might also prefer female tenants to men. For strictly religious landlords, you can also pick a tenant depending on their beliefs and even food restrictions. Ordinarily, the FHA will not allow this, but you still better check your specific state laws regarding this.

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Even though you own the house, the tenant is entitled to privacy. Meaning, you cannot enter the rented room without permission from the tenant. If you are a non-resident landlord, you need to give the tenant 24 hours before entering the property, except in an emergency. At the same time, there are also ground rules for the rooms and areas of the house that the tenant can access.

Reporting Your Taxes

Income derived from renting out a room in your house needs to be reported to the Internal Revenue Service (IRS). However, you can also offset it partially or completely, depending on the expenses allowed under the rules. You can reduce your tax liability, for example, if you take care of maintenance fees, shoulder utilities, spend on repairs, and update your insurance coverage.

Security Deposit

You have to ask for a security deposit from the tenant. This is protection from possible damages to the property. Check your state’s laws on the maximum deposit you can collect. Normally, you can only demand a security deposit equivalent to one-month rent. You also need to return that money within 21 days after they moved out, provided that there are no damages to the property.

Renting out a room in your house is not a walk in the park. It’s a nice source of passive income, but it is also a lot of responsibilities. You have to be aware of the legal and taxable implications of having a rental. Besides that, you also have to take care of the nuisance, such as when the tenant cannot pay but doesn’t want to move out. Make sure you are ready for the responsibilities before starting to prep the room for a tenant.

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