A great way to save money on your mortgage and passively build wealth is by renting a room in your home. This is called house hacking; you’ll use the rent payment to pay at least some, if not all, of your mortgage, allowing you to save more and earn more over your lifetime. Unfortunately, many homeowners are wary about renting out a room in their home to a stranger, wondering if it’s safe and if they can trust the person they live with. Is it safe to rent out a room in your house? It can be, but it can also affect your financial health.
Dangers of Renting Out a Room in Your House
While people can be dangerous, we’ll discuss more than the possibility that the person you rent your room to is a criminal. Of course, anything is possible, but there are many downsides to renting out a room in your home. For example, is renting out a spare bedroom safe for your wallet? Let’s take a look.
Taxable Income
Money you collect as rent is considered part of your income by the IRS and state government. This means you’ll have to pay taxes. What you make after taxes will depend on how much you charge for rent, but since you’re renting out a room, you’ll become a landlord and be subject to income taxes. Luckily, many of the costs associated with becoming a landlord are deductible as expenses on your tax returns, so anything from insurance to repairs and depreciation can reduce your tax liability. You can also charge higher rent to offset the amount you pay in taxes.
Damages to Your Property
You can run a background check on prospective tenants before you agree to give them a room, but you can’t always predict whether or not they’ll treat your property with respect. Of course, you should always collect a security deposit, but the deposit might not cover the costs of damages. In some cases, your homeowner’s insurance will cover some damages to the property. Still, since you can’t replace personal items, you risk a tenant destroying your belongings or even stealing from you.
Dangerous Tenants
Of course, if you’re renting out a room in your home, you may want to look into adding locks to your bedroom door. Even if a tenant’s background check came back without a single mark on it, you never truly know who you’re renting to. Tenants can be dangerous, or the people they bring home can be. If you live with pets or have children, you likely won’t want to rent a spare room to anyone.
Legal Problems
Depending on where you live, renting a room in your home might not be legal. You should check your local laws and with the HOA to determine if there are any restrictions on renting any part of your home. For example, many HOAs no longer allow short-term rentals. Even if you can legally rent a room in your home, there are other laws you’ll have to contend with. Tenants and landlords have rights, so you want to ensure you’re not breaking any rules regarding how you deal with tenants. For example, many states require you to give at least 24 hours notice before you enter a tenant’s unit.
Ultimately, you should understand your responsibilities as a landlord to ensure you’re not violating your tenant’s rights. Of course, while you still own your home, there are different laws you’ll have to follow. For example, there is an implied warranty of habitability, which states that your tenant must be able to actually live in the unit without it causing health issues. You could be liable for things like mold to a broken heater.
Preventing Landlord Issues
When renting out a room in your home, you should always do your research. Don’t just list your room and hope for the best because you won’t know what to expect. Here are a few tips to make renting out a room easier:
Run Background Checks
Always run background checks on tenants to ensure they’re safe and reliable tenants. There are several background checks to consider, such as criminal and credit history. A criminal background check will prevent you from renting to someone potentially dangerous. For example, you won’t want to rent to someone after you learn they were found guilty of stealing from their previous landlord or of committing identity theft. In addition o a background check, you should always run a credit check. A credit check will ensure your tenant has a history of paying their bills on time to ensure you’ll get monthly rent payments.
You can also call references on their rental application. For example, you can contact someone’s boss or previous landlord to determine whether or not you want to rent a room in your home to them. Learning about a prospective tenant by talking to people who know them is a great way to ensure they’re someone you can trust to live in your unit.
Learn the Laws
It’s your responsibility to follow the law as a landlord. When you rent a room to someone in your home, you’re no longer a homeowner—you’re a property manager. Therefore, you should learn what your responsibilities are and how to respect your tenant. If you do anything against the law, your tenant can sue you and stop paying rent, as is their legal right.
In addition to learning laws for landlords, you should research the laws for tenants. Of course, your home is still yours, so you want to ensure your tenant isn’t violating the lease. Always learn about the precautions you can take and your rights to protect your property.
Have a Lease
Always give your tenant a lease that states specific rules and guidelines for living under your roof. The lease sets expectations for tenants and landlords and ensures everyone follows the rules to protect you and your tenant. Everything from your pet policy to quiet hours should be listed.
Should You Rent Out a Room?
Determining whether renting out a room in your house is suitable for you involves considering various factors, particularly the trustworthiness of potential tenants. However, if your goal is to decrease your mortgage expenses and save money, house hacking could be a favorable choice. It’s essential to acknowledge that there is inherent risk involved, so the decision ultimately rests with you in determining if it aligns with your needs and preferences.
Guest article was written by Ashley Nielsen. Ashley earned a B.S. degree in Business Administration Marketing at Point Loma Nazarene University. She is a freelance writer who loves to share knowledge about general business, marketing, lifestyle, wellness, and financial tips. During her free time, she enjoys being outside, staying active, reading a book, or diving deep into her favorite music.