If you are lucky enough to have a spare room in your house that is not filled with random junk, congratulations—you may be sitting on some extra cash. The threat of a roommate eating your leftovers is not as high as the cash flow you can bring in, so let’s dive into how to turn your extra room into extra revenue.
Once you get some rent money flowing in, our friends from Baselane will be able to help you on the banking and accounting side. More on them later.
Know Your Local Laws
The first thing to understand if you are considering becoming a rent-by-room landlord is local laws. This is when you need to think like an intelligent landlord and purchase an additional landlord insurance policy on top of your homeowner’s insurance.
If you are renting, you will be subleasing if you bring on an additional renter. Each state and certain cities within states have their own rules around subletting. In Texas, a lease can state no subletting, but New York City cannot restrict this.
Secondly, you’ll want to get familiar with your state’s landlord-tenant laws (not exactly a beach read, but essential). Some places, like Washington, won’t let you hand over the keys without a rental license and a home inspection first. They like to keep things official. In other areas, it’s less about burdensome restrictions and more about nuanced conditions—like ensuring the tenant has their way to get in without turning your living room into Grand Central Station.
Also, don’t forget to review your local laws because leasing long-term isn’t your only game in town. Thanks to Airbnb, you can play host to short-term guests, too.
Short-term rentals come with their own set of rules. For instance, in New York, if you want to rent out a room for under 30 days, you’ll need to be around—so say goodbye to your dreams of renting out your place and jet-setting to Bali.
Check through these laws to make sure you comply with the appropriate regulations:
- Local laws
- City ordinances
- Zoning laws
- State laws
- Homeowners association laws (if applicable)
Some federal laws to be familiar with include:
- Uniform Residential Landlord-Tenant Act
- Fair Housing Act
- Fair Credit Reporting Act
Prepare the Space
The room you are renting must be habitable and comply with health and building codes. Making the space ready should follow a consistent checklist, covering significant things such as:
Privacy
You should add deadbolts to each room for maximum security and never leave any valuables out.
Maintenance
Stay proactive on anything that needs to be repaired for the safety and functionality of the property.
Empty the room
The room can’t look like an episode of Hoarders. It should be completely clear for the tenant coming in.
Sanitation
Clean the entire room deeply and address any issues for cosmetic appeal.
If you decide to furnish the room (most tenants will want this), inspect it with images of everything in the room. The furnishings should be clean and comfortable, and I would avoid buying very cheap furniture. It will break before you can even blink. When they are moving in, do a quick walk-through inspection and document the property.
List It for Rent
Now that you have the space ready, it is time to list it on the major rental platforms. Zillow is the reigning champ in this department, but others like HotPads, Trulia, and more offer more eyeballs on your property. Social media and places like Facebook Marketplace, Instagram Reels, and TikTok are extremely powerful. Marketplace is for more than just your grandma’s couch; fortunately, it is for investors.
Several things make your listing stand out compared to the competition, including:
- Professional photos
- Detailed property descriptions
- Amenities available and nearby
- Any shared spaces inside
- Price
- Room size
- Parking
- Access to public transportation
- Pets and smoking policy
Screen Potential Tenants
One of the easiest ways to regret ever starting this type of rental is when you overlook screening the potential tenant. While you won’t be able to find out if this person snores louder than a train rolling in, there are a few key details to check for.
Credit score and history
Any score over 630 is considered fair, over 690 is good, and over 720 is excellent. Ideally, a tenant with a good credit score won’t want to mess that up.
Employment history
Verify your potential tenant’s employment history, past and present. Call the listed employers to confirm the length of employment and their wages.
Background check
Verify the tenant’s identity and criminal history. Understand the Fair Housing Act to know the rules of what you can deny.
Check references
A tenant should be able to provide rental history and the previous landlord’s information. Call them and verify they were good tenants, paid on time, etc.
Luckily, Baselane has a tool that screens tenants precisely for this. You can view a report in minutes, all online for ease of use.
Signing the Lease
A proper lease agreement will be the “law of the land” on your property and is extremely important when sharing common areas. Put everything that needs to be addressed in writing and have it signed by all parties. A real estate agent or attorney can help form a proper lease agreement to protect you.
Items to include in your lease are:
- Lease term
- Rental rate
- Rent collection methods and dates
- Late rent fees and penalties
- Eviction clauses
- Amenities and utilities included
- Recycling and garbage collection
- Any policies or restrictions
You’ll also want to define a few specific house-related things, such as the common areas and the house rules. This includes any shared areas, noise, overnight guests, pets, and anything else you could think of to help prevent conflict in the future.
Collecting a security deposit is a must and can help protect you financially if your renter decides to throw a raging party at the end of their lease when you just happen to be out of town. Online rent collection from Baselane is one of the best ways to collect security deposits and rent payments. Don’t get bogged down by the limitations of Zelle, Venmo, or Cashapp.
Tip: One thing to avoid is comingling your funds with your real estate rents and expenses. It’s best to open a separate business checking account so you can keep all real estate funds separate, and make sure to collect and hold your security deposit in a separate nonoperational account. Using Baselane’s digital checking account allows you to do all those things in a few minutes while giving you the opportunity to earn high APY on all your cash deposits.
How to Evict Someone Renting a Room in Your House
In most states, tenants renting just a room don’t get the complete VIP legal and privacy treatment as those renting a whole property. The upside? It’s a bit easier for owner-occupiers to let an unwanted guest go.
If you need to evict someone renting a room in your house, you won’t have to go through the entire dramatic eviction process that a typical landlord would endure. That said, every state has its own rules for this. Usually, you’ll need to serve up a formal “notice to vacate” to your unwelcome housemate. You’ll have to spell out when they need to pack up, and the notice period can’t be shorter than their rent cycle. So, no surprise, last-minute “time to go!” sticky notes on the fridge.
Is Renting a Room Out Right for You?
Renting out a room can be a great way to offset the cost of homeownership with either long-term or short-term renters. You can use your additional income to pay off your mortgage faster, travel more, or pad your emergency fund.
Some risks of living with another adult are apparent, like noise or conflicts over bathroom time. But there are also the not-so-obvious things, like assuming total financial liability for the lease, property damage, theft, or even evicting your tenant.
If you follow the steps to manage risk and use a tool made for real estate investors like Baselane, most situations won’t turn sour, saving you money in the long run.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.