8/20/2012 2:15 PM ET|
Should you rent out a room?
More and more financially pressed homeowners are taking in lodgers for the extra income, but they need to know how to avoid potential problems.
In checking old census records, I discovered something interesting: My relatives in the 1800s and early 1900s often had boarders in their homes. It wasn't uncommon for working- and middle-class families to rent out rooms to help make ends meet.
And that trend may be making a comeback. The number of unrelated adults living in someone else's home jumped 12% between 2008 and 2010, to 7.3 million, the Census Bureau says. That includes roommates sharing rentals as well as adults renting out rooms in other people's homes.
A troubled economy and high unemployment are causing more people to delay starting households of their own, census experts say. The same causes are leading strapped homeowners to consider opening their doors to lodgers.
Stephen, one of my Facebook fans, recently rented out a room in his home for the first time.
"The decision was based purely on financial reasons," he wrote. "It was easier to bring someone into my home than to uproot an entire house and look for something smaller."
Taking in lodgers works out well for many. Michael Barton, 22, of Lincoln, Neb., rents bedrooms in his home to two other young guys.
"I get $1,050 a month in cash while my (mortgage) payment is only $710," Barton wrote on my Facebook page. "This arrangement is perfect as I pay nothing to live essentially as they cover my payment and utilities."
Kelly McCarron Sisk of Forest Lake, Minn., has rented out a room in her home for 15 years.
"They've always been good friends," Sisk said. "I've never rented to a stranger. I've never advertised; a friend has always come up to me and asked when they know someone is moving out."
Some people buy a home knowing that they'll have roommates to help pay the cost. That's what my friend Rachel did when she bought her first home in San Francisco.
"I was 20-something and single, but I knew a two-bedroom would be a better investment, so I made sure it was a place I could afford alone -- but could comfortably share with a roommate," Rachel wrote. "In my case, that meant comfortable public space (living room + eat-in kitchen), and an extra half-bath -- not enough to have us each get our own bath, but it made a huge difference to have just the second space."
Of course, not all rentals end well.
"After the last renter we had, we will never do this again!!!" one woman wrote of a boarder who played Second Life nonstop. "She wouldn't shower for three weeks at a time (and) she never left the house ONCE in three months of living with us!"
Another one-time landlord rented a room to a friend of her mother's, only to discover the woman had limpetlike tendencies.
"She felt that any time we had a family event, outing, going out to eat, it automatically included her . . . which no, not always," the woman wrote. "She felt entitled to eat any food in the house although we thought we had made it clear she had to provide her own."
The family might have overlooked the boarder's flaws, but then the boarder opted to buy holiday presents rather than pay her rent.
"She felt it more important to buy her daughter (an adult) some expensive Christmas gifts and clothes, complain about how much she HAD to spend, and therefore couldn't afford to pay us her rent . . . not one dime!"
If you're considering renting out a room, you want to make sure the experience is positive for your household as well as your pocketbook. Here's some advice from legal and tax experts, as well as from those who have done it.
Know the law
You'll want to research landlord-tenant laws in your area so you understand your rights and responsibilities. You'll find a guide to the states' laws on the U.S. Department of Housing and Urban Development's website. Boarders or lodgers renting a room in a home may be treated slightly differently from a typical tenant but often have many of the same rights. Violating those can lead to lawsuits. Local zoning laws also may limit the number of nonrelated adults who can live in your home. Check with your city hall or county administrator.
Tap your social networks first
Renting to a friend, or a friend of a friend, doesn't guarantee against disaster. But several people who have experiencing renting out rooms said they were more comfortable renting to people they knew or who knew people they knew.
"All my roommates were friends of friends," Rachel wrote. "Nowadays I'd use Facebook; then it was just a matter of sending a mass email to friends."
Figure out what to charge
As with a stand-alone apartment or house, the rent you can command depends on what you're offering and the location of your home. For example, you can charge more for a large room with a separate entrance and bath in a great neighborhood than a closet-sized space with a shared bathroom in a run-down area. Trolling Craigslist for "rooms & shares" should give you some idea of going rates. So, too, can a visit to a local college's housing department, where rooms might be advertised.
Talking with other local landlords can give you an idea of what kind of security deposit to charge and whether asking for first and last month's rent upfront is standard practice in your area.
Screen your prospective lodgers
Getting rid of a bad tenant is painful for any landlord. Imagine the stress if the person you're trying to shed is living in your own home.
"Screen carefully," advises Eva Rosenberg, a tax pro who has several clients who rent rooms in their homes. "It can take 90 days to evict someone, and they could be living with you the whole time."
One woman who rents out her converted garage advises investing time in phone interviews first.
"I never let them just come over to see it until I thoroughly interview on the phone. If they are too anxious and don't want to give me answers to my questions, they don't get to come and see it," she said. "I like to find out about them, see if we have similar lifestyles; that's always best when living with strangers. Find out how they live, what they do for fun, what their work ethics are. I will spend a half hour interviewing."
You'll want to get, and check, references from landlords and employers. You also may want to commission background and credit checks.
Good boundaries make good boarders
You'll need to come up with a set of house rules that cover common areas of conflict. Is smoking allowed? How about pets? What parts of the house are off-limits, and which are shared? Are utilities included, and can the lodger change the thermostat? How will meals be handled? Can the lodger cook and consume meals in her room? How about guests, including overnight guests? Where should the lodger park? What hours are set aside as "quiet time"?
And don't rely on verbal agreements, advises Manda Rae of The Colony, Texas, who rented two of her three bedrooms before she had a family and then rented a room to her sister in exchange for child care.
"The biggest thing, even with my sister, was to have EVERYTHING in writing. Think of every possible annoyance or potential for conflict and put it in the 'roommate agreement.' That way there is no pressure on you as a landlord when something comes up because both parties have agreed and signed the contract."
Take care of your taxes
Rental income is taxable income, but you can offset that by deducting a portion of your housing costs, said Rosenberg, who is also known as Tax Mama.
First, determine how much square footage is exclusively for the lodger's use (the size of the room and any other areas that are for his or her use alone). Then measure the size of any shared areas.
"Divide the shared areas by the number of people sharing the areas," Rosenberg said. For example, three family members plus one tenant means you divide the shared area by four.
"Add one-quarter of the shared area to the tenant's exclusive area. Divide the total rental area by the total square footage of the house."
If the lodger's rental area is 15% of the house, you can deduct 15% of home-related costs such as:
- Mortgage interest
- Property tax
- Maintenance and repairs
- Janitorial work
- Pool service
- Gardening work
- Cable TV
- Alarm service
You can deduct all the cost of any expense for the tenant's benefit, such as painting the room or fixing anything he or she broke.
You'll also take depreciation on 15% of your home's value -- "just the building, not the land," Rosenberg advised. This depreciation can create some complications when you sell your home, because it reduces the amount of profit you can take tax-free from your home. For full details, talk to a tax professional.
Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.
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