Gary Foreman is a former financial planner who currently edits The Dollar Stretcher website and newsletters. He wrote "New Frugal You," a weekly Q&A column about frugal living, for CreditCards.comAsk a question
Dear New Frugal You,
wife and I are considering renting out a spare bedroom. We could use the extra
income and the bedroom is just sitting there empty. Can you give us any advice
on the pluses and minuses of renting a spare room? And, if we do rent it out,
what can we do to make it work for everyone? -- Seth
You're right. Renting out a spare bedroom can be a great way of taking an unused asset and turning it into extra income. But, renting out a spare room doesn't come without risk. There's a right way and a wrong way to do it. Let's work on some guidelines to decide whether it's a good idea and some tools to make it successful if you do decide to rent out a room.
Begin with a little self-examination. Are you very private people? Or do you enjoy having other people around? You may be the type who value privacy so much that having a renter isn't realistic.
You'll also need to be honest about how important the money is to you. If the income from renting a room is necessary to help you pay your mortgage, you need to be willing to put up with some inconvenience. On the other hand, if it's just a little extra income you want, then you'll be less willing to change your lifestyle to accommodate a tenant.
Estimate how much income renting will generate. In addition to extra income, you'll also have increased expenses -- especially utilities. You may be frugal about running the hot water or cranking up the air conditioner, but tenants tend to care about comfort first.
And as far as the Internal Revenue Service is concerned, the rent you receive is taxable income. You will be able to deduct expenses, but there's a good chance that you'll owe some taxes.
Finally, decide if you have what it takes to be a landlord. Find out what the law is in your state regarding removing a tenant from rental property. In many states it's very hard to do. That can be very frustrating, particularly if they're living in your home.
Will you be able to stand firm if your renter isn't living up to his side of the agreement? If not, renting a room might not be a good idea.
If you decide to go forward, you'll want to use these tools to increase the odds of success.
Begin with the renter. Decide whether your new roommate will be more of a renter or a family member. Your decision will have a major impact on how you proceed.
For instance, you might want to limit a renter's space to their bedroom and a bath. But a friend could have access to the entire house.
Try to find a renter whose lifestyle is similar to yours. If you're a quiet person, renting a room to a partier is likely to become a problem. Similarly, messies shouldn't rent to neatniks.
Choose your renter carefully. A background check might seem silly, but it's essential with strangers. You'd be surprised at what you don't know about even longtime friends.
Work out schedules for any common areas. For instance, if you're allowing access to your washer and dryer, make sure that you don't both want to use it at the same time. The same thing goes for the kitchen.
Anticipate household trouble spots. Bathrooms and kitchens are potential problems. No one likes to clean up someone else's mess.
Clearly define any house rules in advance. Is your renter allowed to entertain guests? If so, is the guest limited just to the tenant's room or are the common areas OK for the guest, too? Are overnight guests allowed, and for how many nights?
Next, you'll want to have a written lease. Don't kid yourself that you won't need one if you rent to a friend. A written document is even more important with a friend.
Make your written agreement specific -- not only in terms of the monthly rent, but when it's due and what happens if it's not paid on time. Specify if your renter is responsible for any household chores. Make sure you include a security deposit.
Work out in advance what happens if the rent is late and whether your roommate will need to give you advance notice if he intends to move out.
Working out lease issues before someone moves in is important. You can coolly set up parameters, responsibilities and the consequences if one side doesn't hold up their end of the bargain. Working out troubles after they occur will be much harder.
Allow for a trial period of two or three months. At the end of that time, either party should be able to walk away without any hard feelings. If you decide to continue, have an ending date in the lease.
Renting a room isn't always an easy way to earn extra income. But, if you have the right temperament and find the right tenant, renting out a spare room can be a wonderful way to help balance your family's books.
See related: The nitty-gritty of sharing a house, Advantages, drawbacks to owning a duplex
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