Renting out a room in your house can be a good way to generate income and help cover the mortgage. Learn about regulations, taxes and more.
Renting out a room in your house can be a good way to generate extra income and help cover the mortgage. But as with managing any kind of rental property or space, if you want to be successful and avoid issues which may make the debacle more effort than it’s worth, it’s important to approach renting out a room in your house with the right mindset.
By renting out a room you are positioning yourself as a landlord and as such there are certain regulatory and legal implications that you need to be aware of. If you aren’t you may end up with bad tenants you can’t get rid of, or worse open yourself up to potential lawsuits.
In this article, we are going to talk about the laws that regulate tenants rights when it comes to renting out a room in your house, how to track income and expenses to ensure you aren’t overpaying taxes on this income stream (there are modern digital solutions to help with this), and we’ll outline a few of the best tips when it comes to managing your tenant.
Clearly identify what the house rules and agreements are and include these as part of the rental agreement. Be sure to have this document signed by both parties. Once established, these house rules should not change unless agreed upon, in writing, by both parties.
Include the overnight guest policy in the house rules & agreements – are guests permitted, if so how many? How often? Are there penalties if they have guests over too often? For example, an increased share of the utility bills.
Specify the laundry privileges – if necessary, specify a day and time each week when the roomer can do laundry. How many loads allowed per week? Is there an additional charge?
Is parking is provided, eg. does the property have a driveway or garage? If so it may be helpful to designate a spot in the driveway for each vehicle. If vehicle shuffling is necessary, will the roomer and landlord have access to each other’s car keys?
Specify whether or not smoking is allowed. In which rooms? Outside only? Also, are pets allowed? Again, if so, in which rooms of the house?
Unsupervised entry into the renter’s room could be seen by the tenant as an invasion of privacy. Specify clearly the circumstances in which the landlord will enter the roomer’s room.
For example: In case of fire or other emergencies, or if they go away for the weekend and leave the windows wide open. Both parties must be respectful of each other’s right to privacy.
Specify what services are provided, if they are shared, any rules for sharing, how costs are shared, and how and when the renter is expected to pay.
Roomers need to be informed about how household waste is disposed of. What is the recycling policy, how should they sort their waste? When is rubbish collected?
Open and honest communication, right from the start, is the key to a successful relationship with a tenant when renting a room in your house.
Whilst it’s not always necessary for you to provide a written rental agreement (depending on your location and the length of their stay) it is a very good idea to do so. Oral agreements can be incredibly hard to enforce.
Your room rental agreement should clearly outline exactly what your expectations are from your roomer as well as state clearly the important details of the agreement like:
Below we go into more detail around issues that should be established clearly in your rental agreement to make sure for a frictionless tenancy.
It’s a great time to ask your tenants to pay rent online, which can be automated to eliminate late payment headaches.
You can download our free room rental agreement template using the button below.
Laws and regulations regarding landlord/tenant relationships vary widely from state to state and even depending on the city that you are in within a certain state. To ensure you stay compliant with the law it’s well worth investigating any location-specific restrictions that may be in place regarding renting out a room in your house.
For example, it might be that you own a condo, however, your local homeowner’s association might prohibit additional occupants that aren’t family members – effectively meaning you can’t rent out a spare room in your property. There could also be restrictions on things like the number of people to whom a homeowner can rent to. Check your city zoning laws to ensure you are proceeding legally.
In other cases, there might be conditions rather than restrictions. For example, it might be a requirement that a renter has independent access to the rental space. Or, as is the case in some municipalities you might need to get an inspection completed on the room before you can rent it out.
Make sure your unused space complies with whatever regulations govern your area.
When selecting someone who will be living in the same house as you there are some exceptions to the Federal Fair Housing Laws’ traditional protection classes.
The Federal Fair Housing Act doesn’t allow any discriminatory language to be used when advertising a rental listing, or for you to base your final choice based on discriminatory factors.
The protected classes are:
There are some additional state-specific laws dependent on your location.
However, when selecting a tenant who will be living in a space in your house, and you are also occupying that space, the Federal Fair Housing Laws do, as we mention above, make some exceptions.
What this means is that due to the shared space factor you can be more selective of the tenants that you choose. For example, if you are female you might advertise for a female roommate. If you are strictly religious you might advertise for someone of similar beliefs and dietary restrictions. In a traditional rental situation, this would be illegal.
“Because we find that the FHA doesn’t apply to the sharing of living units, it follows that it’s not unlawful to discriminate in selecting a roommate.”
We still recommend being as unbiased as possible, and if you do want to consider one of the above-mentioned categories when selecting a tenant, do further state-specific research to ensure that you remain on the right side of the law.
How much can you charge when renting out a room in your house? You can only charge what the market will bear and anything extra you charge will also be taxable.
Numerous factors will affect how much you can charge including but not limited to: Size of the room, furnishings, amenities (eg. transport, parking, AC), age of the building, type of rental (short term vs. long term).
You will want to start by getting a comprehensive rent comparison done. Analyze what others are charging in your neighborhood for similar rooms of comparable size. Or, if there aren’t many in your area, look at similar neighborhoods. You can do this kind of comparison on rental listing sites such as Zillow or take a look at rooms for offer on sites such as Oodle.com, Craigslist, and Facebook Marketplace.
Stay up to date with economic news, and make sure you understand the value of your home’s location. For example, a room in a flat in the center of Boston would be in high demand and you could likely charge a higher rent than for a place out in the suburbs.
A final point is that it may be worth chatting with a local real estate professional. No one is more aware of rental prices than the professionals and they are especially good at identifying the drivers of housing supply and demand unique to your market.
The specifics (again) vary from state to state. Owner-occupiers have the right to enter the rented room when necessary. However, they cannot harass the renter or take any of their possessions.
As a general rule, it is advisable to not enter their room without permission as this can be taken as an invasion of the renter’s privacy, and can increase tension between the owner-occupier and the renter.
A non-resident landlord must give at least 24 hours’ notice before entering the property except in an emergency.
It is a good idea to take a security deposit from the person to whom you are renting a room. This will protect you against damages or potential lost revenue in rent.
Make sure you check your specific state laws to determine what the maximum deposit you can collect is, and how you should deal with the deposit eg. does it need to be lodged with a deposit scheme? Or kept in a separate bank account? Demanding a deposit over the state maximum will see you on the wrong side of the law.
1 month’s rent is a common amount to collect for a deposit and in general, a deposit must be returned within 21 days of them moving out. If for any reason you are going to make any deductions from the deposit once they move out make sure you have an itemized report detailing the amount and reason for any deductions.
You can easily manage the security deposit using landlord software like Landlord studio. For more information on this read our article: What Landlords Need to Know about Dealing with Security Deposits.
The room you are renting out must be “habitable”, in other words, it needs to be fit to live in and comply with health and building codes. Making the space habitable is the landlord’s responsibility.
A few of the things that need to be considered:
Many people looking to rent a room are seeking one that is furnished. If you do decide to provide furnishings with the room, make sure you take a careful inventory with images. And make sure the tenant signs an inventory. Before they move in, do a quick walk-through inspection with them too.
Most renters are decent people who will move out when they can’t pay or when their lease expires, but sometimes sadly, a renter won’t move out when they should. The first thing to do is open a dialogue expressing your concern and what they can do to rectify the situation. Or if the situation isn’t rectifiable ask them to move out, again expressing your concern.
If they still don’t leave after this, you will need to begin eviction proceedings. Be aware that eviction laws are strict and landlords must follow them exactly for an eviction case to stand up in court.
A roomer, or lodger as they are called, has similar rights as normal tenants. However, in most states, they do not have the quite same legal and privacy rights as someone renting out a non-owner-occupied property which makes it easier for owner-occupiers to remove unwanted guests from their property. Additionally, owner-occupied situations allow the owner access to all parts of the property, even the lodger’s private room.
To evict someone who is renting a room in your house then you will not need to go through the same eviction process as a traditional landlord. Instead, you need to give the longer adequate notice – generally this must be in writing – and if they do not vacate by the time the notice requires you can have the tenant removed for trespassing.
Each state has its own laws and regulations regarding how you must manage this exact process. However, as a best practice make sure you put the notice to vacate in writing and keep a copy for your records with proof that the tenant received it.
The notice to vacate must state the date that the tenant needs to leave by, and in general the notice period cannot be shorter than the payment period that the tenant pays rent. For example, if they pay rent monthly then the notice would need to stipulate a one-month notice period to vacate. Make sure you also sign and date the notice.
When it comes to tax time there is both good and bad news if you are renting out a room in your house. The bad news is that income made from renting out the room needs to be reported to the IRS as taxable income. Report your rental income and expenses on Form 1040, Schedule E.
The good news is that as a landlord you qualify for particular tax benefits that allow you to offset partially or even completely your taxable income against expenses.
Items you can deduct that will reduce your tax liability include:
It’s important to carefully track your income and expenses throughout the year so that you can accurately file your taxes at the end of the year without having a huge admin task pile up right at the end of the year.
Tools like Landlord Studio can make this process much easier saving you hours every month and even more come tax time. Track income and expenses, generate professional reports, digitize receipts, and more, from any device wherever you are.
If you’re renting out a room it’s extremely important you get a good renter in your home. Normal tenant issues are amplified when you’re sharing a home with the renter. Which is why it was deemed an invasion of privacy for regular FHA laws to apply in this scenario.
To ensure you get a good tenant who will respect your home, your privacy, and pay rent on time and in full you will want to put them through a rigorous screening process.
We have put together a detailed tenant screening guide that will walk you through how to find a great renter and screen out the bad, including red flags to watch for.
Renting out a room in your house can allow you to cover a portion of your mortgage and dramatically reduce your financial stress. However, it definitely pays dividends to carefully select the right renter – run them through a rigorous screening process and ensure you carefully track your income and expenses using software like Landlord Studio to capitalize on the tax benefits that come with being a landlord.
Thanks for reading and we hope you found this blog interesting! However, do note that the purposes of this article are for general information. We are not licensed financial or legal professionals and as such nothing in this article should be understood to be financial or legal advice. If you are in need of financial or legal assistance please seek the help of a competent professional.