Financial Considerations When Renting a Room in Your House

With the cost of living increasing, it can be difficult to find ways to make extra money without sacrificing more of your personal time.

If you’re asking yourself, “Can you rent out rooms in your house?” the answer is yes! Renting out a room in your house could provide extra income without the commitment of a job. We’ve compiled a list of what you should consider before deciding to put a room for rent advertisement online.

What to know when renting out a room:

• Costs to set up the room/do repairs: There are numerous costs associated with setting up and maintaining a rental room¹, such as maintenance costs² like cleaning, painting and possibly even pest control. If the room for rent looks dated, or could use some new carpet or flooring, you may want to consider doing some home improvement projects prior to renting out the room.
  
  You may also want to consider whether to rent the room out as furnished or unfurnished. If furnished, you’ll need to make sure you have a nice bed and items that would attract prospective renters.
  
  Some repairs might be unpredictable, making an emergency fund essential to rent out a room in your house.

• Impact on taxes: Once you start renting out a room, you’ll be required to report any income earned to the IRS.³ This is completed by filling out Schedule E on a 1040 form to report income and expenses from renting out a room. Consider talking to a tax advisor or accountant before you begin any new business venture.

• Increased utility costs: Another person living in the house means that your water bill and electricity are likely to increase. As a landlord, you can choose to cover these expenses or negotiate with your tenant to include the cost of the utilities⁴ in the total price of the monthly rent. However, the most common way is to split the cost of utilities each month, since monthly prices can vary.

• How much to rent out a room in your house: If you’ve been asking yourself, “How much should I rent my room out for?” the answer is: depends on your situation and goals. Your location, the room’s set up and size and if it’s furnished should also factor into rent costs.
  
  While you want the cost to be competitive in your area to gain traction, it is important to consider how much you are hoping to profit after utilities and maintenance. Creating a budget to estimate your costs versus how much income you are hoping to bring in can help you determine how much to rent a room out for.

Other considerations when renting out a room in your house

• Rental laws in your area: Each state or region has different laws on renting ⁵ when it comes to how to rent a room in your house. These laws range from state and safety standards to antidiscrimination and need to be taken into consideration for both the landlord and the tenant. Consider speaking to a licensed attorney about your rights and duties as a landlord.

• Thoroughly interviewing potential tenants: Having strangers live with you is something that should be taken seriously and with large consideration. Requiring background checks⁶ and an interview to get to know the potential renter can help ensure your safety and comfortability with your roommate.

• Official contract: Be sure to use a reputable source when creating your lease agreement. There are many templates on the internet that may not be suitable for your state and circumstances. An attorney can help you create a customized agreement. There are websites that provide DIY legal help for a modest fee, but they are not always a good substitute for a lawyer.⁷

• Long-term rental vs. short-term⁸

  • Long-term rentals: Usually refers to a 12-month lease, which helps ensure consistent income for a year.
  • Short-term rentals: Refers to rent paid on a daily, weekly or monthly basis. This could provide a higher potential gross income, but lacks consistent income and there are more complex laws to take into consideration with short-term rentals. Companies like Airbnb can help landlords find short-term renters.

So, is renting out a room in your house right for you?

If you have the extra space in your house and are looking for a way to make some extra money, renting a room out could be a good opportunity. While navigating the laws and costs of renting might be intimidating, there are plenty of resources to help with planning. Once you take all the pros and cons into consideration and have a solid lease, you’re all set to start earning.