When my friend Deni found herself a broke single mom with four young children, she didn’t know how she would make her rent payments each month. To make ends meet, she rented out the master bedroom and moved her bed into a walk-in closet.
The woman who moved in became a close friend and ended up providing frequent free babysitting. It gave Deni the breathing room she needed to build an emergency fund, advance her career, and reclaim control over her finances.
But housemates aren’t just a last resort. Although I could afford my last mortgage, I brought on a housemate to cover 70% of my payment and supercharge my savings rate.
Follow these steps to use your home as another source of income, and get ahead faster.
Steps for Renting Out a Room
How do you go about finding a trustworthy renter? What about federal, state, and local laws? And how do you protect yourself after finding the right roommate?
With a few simple guidelines, you can make the experience all upside.
1. Check Your Lease or HOA Rules, Plus Local Laws
If you rent your current home, double check your current lease agreement. Many don’t allow subleasing at all, and others only allow it with written permission from the landlord.
If you own and your home is part of a homeowners association (HOA), confirm that your HOA allows renting out rooms as well.
Remember that long-term leasing isn’t your only option. You could alternatively rent out your spare rooms on Airbnb to short-term guests — again, if allowed by your landlord or HOA.
Next, double check your local laws. A few cities put heavy restrictions on short-term rentals. Others limit the number of full-time residents based on square footage, or the number of bedrooms or bathrooms.
Call your local housing authority or visit your city government website to find legal information regarding renting a room in your area.
2. Talk to Your Insurance Agent
After ensuring that you are legally allowed to rent a room in your home, check to see whether your homeowners insurance policy allows it.
Some companies do not have a problem with it, while others specifically prohibit renting parts of your house. Additionally, some companies increase your premium if you rent out a room.
I confess I didn’t do this when I rented out a room in my own house. But if you want to play squeaky clean by the rules, disclose it to your insurance agent.
3. Set Up Space to Rent
Now that you have the green light from legal and insurance requirements, you can start thinking about the business-oriented details.
In an ideal scenario, you rent out a completely separate space in your home, with its own entrance, kitchen (or kitchenette), and full bathroom.
Examples include a finished basement apartment or above-garage apartment, or a guesthouse such as a detached tiny home. That way, you don’t have to share any living space with your renters, and you can charge higher rents for the private living space.
Or you can follow the more traditional route of renting out a room in your home. Consider renting out the master bedroom, especially if it includes an en-suite bathroom. You can charge significantly higher rents when the renter feels they have more privacy with their own attached bathroom.
My friend Renee used to rent an apartment with a second bedroom and bathroom on an upstairs half-story. The stairs entered the upstairs bedroom in an open layout, with no door that closed.
So she got creative and hung a series of heavy cloth curtains over the open stairwell, which created a sense of privacy and dampened sound. She ended up renting it on Airbnb for around seven days per month, which covered the bulk of her rent.
Before advertising space for rent, however, make sure it complies with local housing codes. For example, some cities require bedrooms to have windows large enough to be used as a fire escape.
Lastly, consider whether you should rent the space furnished. Short-term rentals must be furnished of course, but even some long-term housemates may pay more for a furnished room or unit, such as grad students or newly arrived transplants.
Just bear in mind that furnished units tend to see higher turnover rates and expose your furnishings to damage or wear and tear.
4. Price Your Room or Unit
Don’t just make up a number for rent. Check comparable rental rates in your area to find out how much you should charge for your space.
Make sure you price in any unique amenities that your home offers. I was able to charge premium rent for my spare bedroom because I had (insanely) installed a hot tub on the rooftop deck. It haunted me later, but at the time I thought it was the bee’s knees — and so did my housemate.
5. Create a Magnetic Listing
Today, services such as Roommates, SpareRoom, and Roomster make it easy to find potential tenants based on their personality and habits. Think of it as online dating, but for housemates instead of soul mates. These sites allow you to advertise your room and sort through potential tenants based on their online profile and lifestyle.
And, of course, Craigslist offers another classic platform to advertise your room.
When it comes to your listing, be transparent about both the room’s and the house’s features, layout, and amenities. Also explicitly outline shared spaces included, such as shared living space, kitchen amenities, and storage space.
Upload pictures of the room or unit from every angle, along with the bathroom that the renter will use. Also snap photos of the broader house or apartment itself, as well as any common areas you’ll be sharing.
The photos matter, so make sure they’re crisp and well lit. Take them midday with as much natural light as possible.
Allow prospects to text you in addition to emailing you. Most platforms nowadays allow anonymized messaging for both, and responding promptly by text makes a good first impression and helps you secure a new housemate quickly.
6. Freshen Up on Federal and State Housing Laws
As you consider applicants, familiarize yourself with federal and state housing laws to prevent yourself from wrongfully denying someone.
Under the Fair Housing Act, it’s illegal to refuse to rent or sell a home to anyone based on:
- Mental or physical disability
- Familial status
- National origin or ethnic background
Some states, such as California, also prohibit housing discrimination based on sexual orientation and gender orientation. Visit the Human Rights Campaign to see a guideline of laws by state.
Even convicted criminals now receive some protection under the Department of Housing and Urban Development’s most recent interpretation of Fair Housing laws.
That said, most states allow a little more flexibility when you rent out a room in your own home.
You can usually specify the sex of your roommate with violating Fair Housing laws or require a clean criminal background check, for example. Known as the Mrs. Murphy Exemption, it’s named after a hypothetical senior woman who wants to rent out a room in her home to supplement her limited income.
However, not every state recognizes The Mrs. Murphy Exemption. Check this list to see if and how it applies in your state.
Keep Your Approval Process Consistent
Fair Housing laws also prohibit holding different applicants to different standards.
For example, imagine that you don’t want pets in your home. Then say a disabled applicant with a service dog applies, and you turn him down despite having stronger credit and income than another applicant. That constitutes discrimination under the Fair Housing Act.
Keep your tenant screening consistent by running a credit report, criminal background check, and eviction history report on all applicants. Verify income and employment, call current and former landlords, and check references (more on tenant screening shortly).
Keep your screening consistent to avoid Fair Housing fines and liability. But even so, you can still screen prospective roommates for personal compatibility as well.
7. Ask Personal Questions
Now that you know what you shouldn’t be asking a potential tenant, it’s time to plan the questions you should be asking.
Start with these screening questions to ask potential roommates. They include financial questions such as their employment status, income, and whether they have the security deposit and first month’s rent ready.
But they also include personality and lifestyle questions. Questions that explore your mutual compatibility for living together, such as their working and sleeping schedules, their pet peeves, their ideal cleaning schedule, and how often they like to entertain guests or host people overnight.
These are extremely personal questions — and extremely relevant to living with someone. If you don’t feel comfortable asking a stranger these questions, you aren’t ready to live with a stranger.
8. Perform a Background Check
Once you’ve interviewed possible tenants and found one whose personality seems to mesh well with yours, the next step is to run tenant screening reports.
These reports provide a tangible, measurable way to explain why you chose one roommate over another, which protects you in case a litigious would-be roommate ever threatens to sue.
If you decide to turn down a potential tenant based on something you find in their background check, you are required by law to give them a reason.
Explicitly, the Consumer Financial Protection Bureau states that “The landlord must provide [the tenant] with an ‘adverse action’ notice that includes the name and contact information of the consumer reporting agency from which the landlord got the consumer report.”
In other words, you must tell the applicant exactly why you’re rejecting their application and give them the contact information of the company you used to get the report.
Pro tip: If you choose to pull the credit report for a potential tenant, you can do so directly through Experian or Transunion. Both allow you to pass along the cost directly to the potential roommate. Alternatively, you can use a service like Rentprep which will give you the chance to pull credit reports, run a background check and much more.
9. Secure Your Valuables
It takes time to build trust. Eventually, you hope to discover that your tenant is entirely trustworthy and you could leave piles of cash on the counter without worrying.
However, until that happy day comes, take steps to secure your most valuable possessions.
You may need to put your jewelry in a safe or install a lock on your bedroom door to keep larger items secure when you’re not at home.
For that matter, everyone should own a fireproof safe to store their most important documents. If you don’t own one, now is as good a time as any to buy one.
Don’t forget to secure any documents that might put you at risk for identity theft, such as birth certificates, Social Security cards, credit card applications, and other financial forms. Also stay on top of the incoming mail to shred or put away sensitive documents.
10. Define Boundaries and Sign a Lease
Once you find a tenant you like and feel you can trust, set and communicate your boundaries before even signing a lease agreement. Then put those rules and expectations in writing, in a legally binding lease contract. For instance:
- Does the rent cover their portion of the utilities, or do you simply split each bill as it comes?
- Do they have access to common living areas?
- Are pets allowed? If so, do you want to implement any breed or size restrictions?
- Are they allowed to have overnight visitors?
- Who is responsible for which cleaning responsibilities? How often?
- Do they get access to the basement or other storage areas?
All of these details need to be worked out and discussed before your tenant moves in. Also be careful about managing money with roommates.
Last, collect a security deposit and the first month’s rent (plus possibly the last month’s rent). Again, research your state’s housing laws to make sure you don’t charge too much for a security deposit.
Many states also require that you put the security deposit in an escrow or other “holding account” until the tenant moves out. You can also visit HUD.gov to see a list of each state’s laws and resources when it comes to renting.
11. Respect Their Privacy and Be a Good Housemate Yourself
Once your tenant moves in, it’s important to realize that their room belongs to them while they’re paying rent. For example, you cannot enter their space without giving advance written notice unless it’s an emergency.
Extend the same level of respect and privacy to your tenant that you expect them to extend to you. Treat your tenant’s room as their private residence.
Don’t forget that their rent entitles them not only to their bedroom but also to any shared living spaces.
You suddenly have to share the TV (and the remote!), the refrigerator, the oven, the garage, the backyard, and every other shared space as outlined in your lease agreement. You may have to rediscover the meaning of the word “compromise.”
12. Claim the Income and Expenses on Your Taxes
Rental income is taxable, which means Uncle Sam expects you to declare all incoming rent on your taxes. The amount you pay will depend on your marginal tax rate. You’ll also have to pay state and local taxes on your rental income.
Additionally, you must claim any services you receive from your tenant in exchange for rent.
For example, if your tenant agrees to do yard work in exchange for a $100-per-month rent credit, the IRS still considers it “income” and requires you to claim it on your taxes. Find more information about taxable income via the IRS.
Many people who rent out rooms collect rent in cash under the table. But that doesn’t mean the IRS won’t find it if they audit you.
The good news: you can fully deduct expenses to maintain or repair that room. For example, this could include upgrades such as new paint or new carpeting. You can also depreciate any capital improvements, such as finishing the basement as a separate apartment.
You can also deduct expenses you incur for the entire home; however, you must divide those expenses by the square footage of the room you’re renting out.
For example, if your home is 2,000 square feet and the room you’re renting out is 400 square feet, you’re renting out 20% of your home’s total square footage. You can then deduct 20% of your entire home repairs, upgrades, or expenses, such as:
- Plumbing repairs or replacements
- Roofing repairs or replacements
- Flooring repairs or replacements
- Homeowners insurance
- Mortgage insurance
- Utilities such as water, electric, and gas
- Security system expenses
- Trash removal
Speak with an accountant about these deductions, as they can get complex quickly. Your accountant can also tell you which tax rules you may be able to bend — and which you should never break.
Renting out a room helps offset the cost of homeownership or even your rent, whether you bring in a long-term housemate or rent rooms short-term on Airbnb. You can use this additional income to help pay off your mortgage faster, pay off a credit card or student loan debt, invest in home renovations, or pad your emergency fund.
Depending on how you structure your lease agreement, you might benefit from having your renter help out around the house in exchange for a discount on rent. For some families, an extra pair of hands to help with household chores or pet sitting might be worth charging the renter a little less per month.
Or, if you’re a senior and live alone, having another person live in your home can provide peace of mind. You know someone is nearby in case of a medical emergency or a bad fall.
For all that, renting to roommates does come with a few risks and downsides. You could bring a deadbeat into your home who decides they don’t feel like paying rent anymore. Or you may find yourself fighting over what to watch on TV every other night.
Weigh the pros and cons, and do your homework before committing to a housemate.