Many personal finance writers will mention renting out a bedroom, basement, or another part of your house to bring in some extra money. These are usually quick mentions on lists of “how to make extra money” posts and do not go into much detail.
There are many things to consider before renting out a part of your house, whether it’s a basement apartment or a bedroom.
Over the past year my wife and I have rented out a basement apartment for extra income. Throughout the process we have learned a lot and I want to share those things with other potential landlords before they make the plunge.
1) Always “on-call”
– When you have a renter you will always be on-call in case of emergencies like your renter being locked out or other issues like a leaky faucet. Going on vacation? You will need to either be available by phone or have someone else “on-call.” This whole thing can be outsourced but expect to pay a pretty penny for that kind of service.
2) Noise considerations
– How soundproof are your walls? Most houses and even apartment setups are not soundproofed because it’s much more expensive to have soundproofed walls and ceilings versus standard one-layer sheet rock. It goes both ways; it may not be just your renter’s loud music that you want to drown out. What if you watch movies late at night but your renter gets up early? You will need to adjust the volume if the sound carries.
3) Always have a signed lease
– Don’t even consider renting out a part of your house without a signed lease. The lease should explain in clear terms what your expectations are as a landlord and what their expectations are as a tenant. Not having a signed lease can really come back to bite you.
4) Renter’s Insurance
– Renter’s insurance is extremely important. I go into more detail in this post but essentially there are many things that your homeowner’s insurance does not cover. Avoid an ugly situation by doing everything you can to encourage your renter to get renter’s insurance (it’s only ~$10-$15/month).
5) Tax and reporting obligations
– Ah the joy of taxes. If you have a renter you will want to keep very good documentation of income and expenses. Plan on spending a few hours at year-end going through all your documentation to make sure you report accurate income and (accurately) take advantage of expenses incurred.
6) To share or not to share – space
– If you are simply renting out a bedroom will there be any space in your home that is solely yours and not shared by your renter? Another thing to consider is fire code. While we don’t technically share the second half of our basement with our renter, we also don’t lock the door. The basement would either need to be completely fireproofed or else the renter needs access to two exits, such as in our case. This limits our rental pool to people that we actually trust. Something to consider, at least.
7) To share or not to share – utilities
When you are renting out part of your house it’s often much easier to give an “all-inclusive” flat rate each month that includes heat, electricity, trash, etc. There are some risks that come with this, though. What if the renter runs a space heater 24/7? What if they leave the door open when you have the AC running? One way to protect yourself is with a lease, as mentioned earlier. Worst case scenario you have to talk to the renter about how the bills are high and ask them to change their behavior. Absolute worst case scenario your lease should allow you to give them a two month-notice that you will be ending the lease.
8) Parking
Don’t forget your renter will need a place to park. Having a parking spot for your renter will make your property more attractive. At the same time this really depends on where you live. Some cities renters absolutely do not expect to have parking spots because most homeowners usually only have one parking spot. In other cities it’s much more common.
9) Repairs and Upgrades
Taxes aren’t the only thing that will cut into your rental income. Keep in mind that you will likely have a number of repairs and upgrades you will need to make to your rental unit from time-to-time. Some will be expected, such as the $1,500 we put into our rental unit before our first renter moved in. Others will be unexpected, such as a pipe becoming clogged or a toilet needing to be replaced.
BudgetforMore says
I never thought about the fire code aspect of renting a space in your home. That would be hard for me to leave the basement door unlocked but I understand that it is for a good reason. Do you normally just rent to friends or family or how do you decide if you can trust a person to be your tenant?
DebtChronicles says
We didn’t really rent our basement, but we did let some friends and family stay with us for various reasons. It actually went really well and we had ZERO issues. That being said, once they moved out I realized the privacy that my family had been missing and really appreciated just having my family in the home. We won’t do it again….
SenseofCents says
These are all really good things to think about before renting a space in your home. We always try to lay out the ground rules as detailed as we can before we have anyone move in.
Andrew LivingRichCheaply says
Renting a basement apartment is a great way to get some extra income. Here in NYC, I think there are a lot of rules regarding that so you’d have to make sure that you can legally rent it out. I would definitely have to consider this if I want to be able to buy a house here. So with the shared access in the basement, what is in the part that you guys share?
DC @ Young Adult Money says
BudgetforMore So far just people we know. We’re only on our second renter so we’ll see what happens after they move on. As far as the basement, we don’t really use it except for storage. Nothing really valuable down there anyway, but we fully trust our renter so it’s a non-issue. The door to upstairs is locked, though.
DC @ Young Adult Money says
DebtChroniclesIt’s tough for us. There’s just me and my wife and the space would literally just sit empty for years and years and maybe be used a couple times a year. Renting is really attractive because it’s an extra ~$600 a month with little added expense. I do plan on renovating it for single-family use down the road. For now it’s hard to think about that. We’ll renovate the upstairs first and if we have enough money (and no debt) we’ll renovate the basement.
blonde_finance says
These are excellent points DC, especially your first one. I have many clients who think about buying a home and using it for rental income, but they don’t fully think through all of the other “joys” that come with becoming a landlord. There is a great deal of responsibility that comes with being on call all the time and if your rental unit is not somewhere convenient, this adds all sorts of challenges. Fortunately for you, your rental unit isn’t far away. :-)
DC @ Young Adult Money says
SenseofCentsI think it’s a bit different when you are renting a bedroom instead of a seperate space. I also think in your case it was/is your sister? I would be more lenient and, like you said, just make sure ground rules were clearly communicated.
DC @ Young Adult Money says
Andrew LivingRichCheaplyThere’s definitely a lot of legislation around it. We share the laundry room. I figure it’s a big perk for a renter to be able to do their laundry at home and it’s not much of a bother for us. They also have some additional storage space in the laundry room.
DC @ Young Adult Money says
blonde_financeHaha yes it can be a bother being ‘on-call’ all the time because you really never know when something will come up. If I had a standalone property I would consider working with a rental management company, though I’m still on the fence about that as well.
Holly at ClubThrifty says
I would totally consider renting out our extra room if we didn’t have kids. It just sits unused 99% of the time anyway. Great post, D.C. As always, it’s best to get everything in writing when you enter an agreement like this.
CSMillennial says
These are great points, especially for those of us who haven’t rented out rooms in our homes before! Thanks for sharing – will definitely need to consider these more before we try to do any renting out.
fitisthenewpoor says
Once we buy a house, we plan on specifically looking for places with rental potential. We would be happy renting out a basement or coach house apartment, but we wouldn’t be comfortable with renting a bedroom. We would certainly be considered about noise, privacy, mess, etc. Plus, we just like having our own space!
JourneytoSaving says
I think you covered everything pretty well! From someone who rents a basement apartment, I have to say sound is our biggest complaint. We try to be respectful, but we can hear everything upstairs. We actually don’t have a lease, which has been okay so far, except that guests take our parking spots which is a bit inconvenient. Plus we had to shovel everything ourselves when it snowed.
Raquel@Practical Cents says
My sister has had renters in her house for many years and she has dealt with all of these issues. Some renters are better than others at following the rules and she has had to speak to them. That’s probably the thing she hates the most and also being “on call”.
BudgetBlonde says
Yeah I just…. don’t want to share my space. I’m selfish like that!!!
DC @ Young Adult Money says
Holly at ClubThrifty The agreement is critical! That way both parties know what they are getting into. It’s great renting the basement as it’s space we would absolutely never use unless we had kids and needed more space.
DC @ Young Adult Money says
CSMillennial Glad you enjoyed it! It’s been quite an experience and definitely has been positive overall. You learn as you go : )
DC @ Young Adult Money says
fitisthenewpoor It sounds like you will be taking the exact same approach my wife and I did! I loved the fact that our house was already set up for rental and we didn’t have to do much work. I also agree with you about not renting a bedroom. I wouldn’t consider anything that didn’t have a separate space.
DC @ Young Adult Money says
JourneytoSavingAh sorry to hear about the noise. The previous owners must have soundproofed our basement ceiling because I tested it out by blaring music upstairs and you could barely hear it, if at all. I shovel everything even though it’s not in the lease.
DC @ Young Adult Money says
Raquel@Practical Cents The on-call part is difficult. I think that’s why it would be ideal to own like 8+ properties so you could outsource it to someone else.
DC @ Young Adult Money says
BudgetBlonde Haha yes, I wouldn’t have considered anything other than our current setup where we have separate areas. I would be lying if I said I wasn’t looking forward to the day I don’t have to worry about renting, though!
20 Something Syndrome says
Wow there’s a lot more to consider than I would have though. I was actually considering renting out rooms in the house I buy but after reading these I may reconsider. I like vacationing too much to have to worry about being on call. That and taxes intimidate me.
brokeandbeau says
Perhaps you can put a renters insurance requirement in the lease with the tenant.
DC @ Young Adult Money says
brokeandbeau That’s a great idea, and something that I would recommend people do.
DC @ Young Adult Money says
20 Something Syndrome Taxes you can have someone else do. Even my friend who is a CPA who also rents part of his house decided to go to a tax accountant because it was just too complicated.
Ugifter says
As someone else mentioned, the part about going on vacation while having a renter can be tricky. These are all good points, and best thought of in advance, like dealing with taxes! If you know which numbers and documents you need from the beginning, it is a heck of a lot easier to put them into some sort of spreadsheet and filing system from the get-go, rather than try to recreate things later on!
studentdebtsurvivor1 says
Oh wow, this post is coming at a perfect time for us. Eric and I have been thinking about buying a place in the suburbs, so we have a little more space (and some space to rent out). We don’t know a lot about building codes and all that and want to make sure the space we rent out is safe and legal. There are a lot of things to think about, but like you said, if you have a really solid lease you can protect yourself and your tenants.
No Nonsense Landlord says
If you are renting a basement room, where the people have access to your own personal home, do a background check. Know what to look for. See my blog for tips.
Remember, even if they do not have access to your own personal space, they will know when you are there, and when you are not.
One bad renter, and you could lose a lot. And remember, Fair Housing laws still apply to a roommate situation,
thebrokeprof says
Glad I came across this I’m definitely considering renting out our basement. It already has a bed and furniture down there. I will keep all these points in mind, along with doing background checks.
JordanJorgenson says
Thanks for your renting tips. I’m currently looking to rent a basement apartment. I like the place, but I hadn’t considered how soundproofed the walls were. I doubt there is much insulation because it is a house. However, I appreciate your post and will check with the owner to talk about how much sound carries.
http://www.sorents.com/Properties-For-Lease.html