Living On Social Security: Is Renting Out A Spare Room In Your Home A Good Idea?
Renting out unused rooms in your home or vacation property may seem like a good way to offset housing costs. The income boost can make a mortgage or repairs more affordable. The right tenant may also be handy helping with transportation, mowing or small repairs in exchange for a break on the rent. But sharing your home comes with its own set of pros and cons. Here are a few important considerations:
- Be aware of zoning rules and landlord laws. If your home is designed to allow you to rent out a separate unit, like a basement, you will be subject to local zoning rules that govern single-family dwellings. Landlord laws require that the housing you provide is safe, habitable and in good repair. Renting a unit that contains mold, for example, might get you in trouble if your tenant becomes sick.
- Rental income is taxable and would potentially increase the portion of your Social Security benefits that is taxable. If you are counting on generating a certain amount from your rental you need to figure taxes into your calculation when you are setting the rent. State and local taxes may also take a bite. You can reduce your tax liabilities by expenses associated with the rental like mortgage interest, homeowners insurance, repairs, utilities, and depreciation. But there are rules for determining the portion of your expenses that you can deduct. It’s a good idea to get help calculating the monthly rent you need to charge from a tax professional before you take on a tenant.
- Screen tenants thoroughly. You need a tenant that pays the rent on time, takes good care of your property, won’t be making noise or turning your basement into a meth lab. Ask prospective tenants to fill out an application. You need to verify identity, credit and rental history as well as to check references. There are tenant screening services that charge about $30 to $50 to do this for you. Some landlords charge a fee to cover this cost.
- Consider a monthly lease. When renting out your home, you don’t want to be locked into a long-term lease— especially with someone you can’t stand. A month-to-month lease will “self renew” unless you or your tenant ends the lease with proper notice. You should charge a security deposit. These are usually limited by state law to one or two months’ rent to cover a departing tenant’s unpaid rent or the cost of repairs and cleaning beyond normal wear and tear. You will need to learn if your state requires that you put the security deposit into an escrow account and pay interest on it.
- Check with your insurance agent. Renters can damage property. Your tenant needs to show you proof of a current renters’ insurance policy, to reduce the risk they would sue you in the event of a theft, fire, or flood (if they could show negligence.) Considering that your tenant will likely have access to your home, you may want to increase your coverage of valuable items like jewelry, antiques, or other items and increase your liability coverage.
To learn more, see Every Landlord’s Legal Guide, from www.nolo.com.
Download IRS Publication 527 Residential Rental Property at www.irs.gov.
Sources: “How to Profit From Your Basement Rental,” Pat Esswein, Kiplinger, August 2011. “How Renting Your Spare Room Can Backfire,” Amy Fontinelle, February 9, 2012.