Renting out a spare bedroom through sites like Airbnb or Craigslist is a popular way to make some extra rental income. However, it’s not without potential drawbacks. Letting a tenant live in your extra room opens you up to all kinds of potential consequences, from vandalism and theft to tenants who simply don’t pay. What seems like an easy opportunity to make extra cash comes with many important considerations you shouldn’t ignore.
There’s also a consequence that many potential landlords don’t think about—the potential impact on your home insurance. Taking on a tenant can increase your home insurance premiums or even force you to get a different kind of insurance.
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How to Start Renting Out a Room
Start by making sure you’re legally allowed to rent out a room in your home. Then, think about your potential tenants. Who are you renting part of your home to? Consider things like:
The profile of your potential tenants. Are you renting to college students or vacationers?
How long will your tenants stay?
Do you have any house rules they’ll need to agree to, such as quiet hours?
How much will you charge for rent?
The answers to some of these questions can affect your insurance requirements.
Next, check with your homeowners insurance company to see how your decision affects your home insurance. Some companies don’t have a problem with renting, while others may specifically prohibit you from renting out your extra room. They may simply have some restrictions—for example, no more than two tenants. Or you may have to get an entirely new policy.
Why do they care? Well, hosting someone in your home increases both your liability and your risk of property damage. That means it’s more likely the insurance company will have to pay out for an incident on your property. Never try to rent out a room without telling your insurance company. Sit down with or call an agent and talk about whom you’ll rent to and for how long. Particularly, the length of their stay can affect your premiums. Here’s how.
Tenants who only stay with you for a few days or weeks may be considered visitors under your current homeowners policy. However, this isn’t the case for all policies, so you need to check with an agent to be sure. It’s also possible that the insurance company might require an endorsement or rider to your existing insurance policy to cover your tenant.
Regular short-term rentals to many different guests, on the other hand, are usually considered business activities. If renting to lots of people is your plan, you probably need a business policy because the standard homeowners insurance policy doesn’t cover business activities conducted in your home.
With so many different considerations, it’s crucial to notify your insurance company to make sure you have the right coverage. They need to know that you have a tenant, especially because your tenant could get hurt on your property or damage the premises. Not notifying the insurance company of tenancy in advance could give them a reason to deny your claim.
Planning on renting to the same person for months or a year at a time? You may need to get landlord insurance, which usually costs about 15–20 percent more than a homeowners policy, or to add room rentals to your existing policy. This is necessary because most standard home insurance policies don’t cover room rentals. You may decide to charge slightly higher rent to offset the cost of landlord insurance.
5 Tips for Renting Out Spare Rooms
Require renter s insurance. Have your tenant obtain their own coverage so that you know everything important is covered. This will make sure your renter ’s belongings can be replaced if a pipe bursts or another disaster happens. Landlord policies usually only cover the structure and the loss of your personal property, not your renter ’s things.
Use a written rental agreement. It can be tempting to take shortcuts by accepting a verbal contract, but to protect yourself, you should really use a written lease agreement spelling out things like the expected security deposit (usually equal to a month’s rent ). These agreements help protect tenants, too, so good renters will be happy to sign.
Familiarize yourself with fair housing laws. Make sure you don’t run afoul of federal, state, or local requirements for fair housing. You cannot discriminate against tenants based on race, color, religion, sex, disability, familial status, or national origin.
Observe landlord-tenant laws. Many cities, like Los Angeles and New York City, have local requirements covering the rights of landlords and tenants. Know what you can and can’t do when it comes to property management and what your responsibilities are with your rental property.
Understand the tax implications of renting out a room. This can get complicated, so make sure you’re talking to an accountant if there’s anything you don’t understand. The key thing to know is that expenses from rental activities are deductible, but it’s a little different if you’re renting a room vs. renting out your whole property. The same tax rules apply, but if you’re renting out part of your home, you have to divide the expenses between the part of the property you rent and the part you live in, as if you had two separate pieces of real estate.
You can fully deduct any expenses for the room your tenant is renting, like fixing a window or painting the walls. You can also deduct the extra premiums you might be paying because you’re renting out a room. But when it comes to expenses for the rest of the home, like trash removal, roof repairs, or fixing common areas that you and your tenant share, you have to divide those expenses.
The easiest way to do this is by measuring the square footage of the space you’re renting and comparing it to the total square footage of your home. For example, if the room you’re renting covers 15 percent of your home’s square footage, then you can deduct 15 percent of your home improvement activities as rental expenses. Be sure to keep good records of all the work you do around your home to make sure you’re taking the deductions you’re entitled to.