What To Expect When Renting a Spare Room

By: ROS Team

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The idea of renting a room in a house to help cover a portion of the monthly mortgage payment may be an appealing choice for some homeowners. After all, having someone chip in on household expenses can ease the financial burden for many and possibly contribute to upgrading to a larger house in the future thanks to the extra income.

If you’re considering renting out a room in your primary residence. Such as an in-law suite or basement apartment, be mindful of some of the following potential issues before handing over the extra set of keys.

IMPORTANT TIPS

  • Whether or not you rent out in your house, you as the homeowner will still be responsible for paying the marginal tax rate on your rental income in addition to any state and local income taxes.
  • By reporting your expenses, you may be able to minimize your taxable income in some situations.
  • You have no way of knowing what you’re getting with a renter. Including if the individual will damage your home, be it unintentional or otherwise. You also have no real way of knowing whether they will pay their rent on time.
  • Your state’s rental restrictions may subject you to legal action if you purposefully or, in some situations. Accidentally break the law because you were not aware of all of the rules and regulations about renters.
  • There is a possibility that your tenant will refuse to vacate the premises after the lease period has expired. Forcing you to initiate eviction proceedings, which can be both expensive and stressful.

Rental Income Is Subject to Taxation

If you are striving to earn a minimum amount of income from your rental property each month. Keep in mind that taxes will consume a significant portion of your rental income. Your marginal tax rate determines how much tax you will pay on this income.

Suppose you pay taxes at a marginal rate of 25% on a rental income of $800 per month. You will only be able to pocket $600 in rental income per month after taxes. Make sure to factor in state and local income taxes to see if you’ll still have enough rental revenue to meet your monthly rental income goals once taxes are deducted.

Remember: If you rent a room in your house is it taxable income.

Fortunately, you can deduct any rental related expenses from your taxable rental income. Expenses related to property advertising, cleaning and upkeep, insurance premiums, repairs, supplies, utilities, and depreciation are considered rent-related expenses as well.

You may be able to demand more rent if you rent a room in your house since it is taxable income; nevertheless, you can only charge the market value. Anything above the market value will be taxable income. The IRS requires that you disclose your rental income and expenses on Schedule E of your annual federal tax return.

A Renter May Cause Damage to the Property

A security deposit is designed to cover any potential property damage that goes beyond normal wear and tear. While you may anticipate and accept accidental damage, it is vital to save up a sufficient financial cushion to cover other possible repair expenses.

Remember, your homeowners insurance policy will not cover any loss to the time and effort spent securing or rebuilding your house after a major loss. Insurance money also cannot replace treasured keepsakes.

You’ll want to have a good pest control company in mind because your tenant may also bring bedbugs or roaches into your home. Which may be expensive and difficult to remove. Also, tenants may purposely vandalize or steal your property while renting out a room in your home. Landlords have been horrified to learn that a renter was running a shady business out of the room they rented in their home. Which resulted in the tenant getting arrested on criminal charges.

You Might Become Contravention of the Law

To protect tenants from unscrupulous landlords, landlord tenant legislation provides numerous pitfalls into which even the most careful landlord can fall if they are unaware.

Be careful here, as you may slip up in one of these areas:

  • Entering the tenant’s apartment without adequate notification or authorization (and so violating the tenant’s privacy);
  • Inadequately maintaining a safe dwelling. When a tenant is renting out a room in your house, you may be tempted to put off maintenance and repairs that only affect you;
  • Renting out a room that is moldy might make a tenant sick;
  • Housing code violations (for example, some cities limit the number of people renting a room in a house based on square footage or the number of bedrooms it contains);
  • Violating the rental agreement by failing to deliver or maintain amenities, such as a pool;
  • Charging a security deposit that exceeds state limits, misusing the funds, or neglecting to return it when the renter moves out;
  • Renting out a room in primary residence while providing insufficient heat or cooling.

 

Losing your tenant as a result of these mistakes could be the very worst case scenario. In this instance, you could be sued and have to pay fines and compensation to the renter. Research your state’s landlord-tenant laws since they may be different from the laws in other states.

The Renter Won’t Move Out

You will most likely not want to keep renting out a part of your property indefinitely. You may have to ask your renter to move out if your family circumstances change (i.e. you plan to have children, or an aging parent must move in with you).

It is also conceivable that you want to give yourself some privacy. Even if a tenant is not violating any law, they may not be a suitable fit because their personality clashes with yours.

Renters will either move out when they are unable to pay rent or when their lease expires. There are some cases, however, in which a renter might not leave, even when they are supposed to. You will have to initiate the eviction process in these instances. Landlords must follow the applicable regulations during the eviction process.

Final Thoughts

Regardless of the issues, you may have rented out part of your house, all landlords should assess the advantages and disadvantages before embarking on this path.

Read Also:

Everything You Should Know About Renting Mobile Homes
What is the Difference Between Buying and Renting an Apartment?