YOUR MONEY: Renting a room can yield income , and expensesDuring the economic downturn, more homeowners are looking to rent space in their homes. Postings from homeowners seeking roommates on classified-ads site Craigslist.com have increased 160 percent across the country in the past two years, a spokeswoman said.
By: Gregory Karp, The Morning Call (Allentown, Pa.)
Part of the value in a home is not just equity, but spare bedrooms that could be rented out. Roommates are not for everybody, however, and additional expenses will eat into rental income.
During the economic downturn, more homeowners are looking to rent space in their homes. Postings from homeowners seeking roommates on classified-ads site Craigslist.com have increased 160 percent across the country in the past two years, a spokeswoman said.
But just because you can find a tenant for $500 a month doesn't mean you're $6,000 a year richer. You'll have a lot of associated costs with becoming a landlord.
"Don't be so focused on the income that you don't think very carefully about the expenses too," said Ilyce Glink, a real estate book author and founder of the money Web site ThinkGlink.com.
Here are several considerations:
Finding the right tenant is among the biggest challenges. Safety is a primary concern. And, of course, you don't want a tenant who doesn't pay the rent.
But checking out a potential tenant probably isn't free. Running credit checks — both credit history and scores — and criminal background checks usually cost money. You can try some free sites that give a little information, such as CriminalSearches.com. But it can be worthwhile to pay for in-depth reports that cost $50 or $100, Glink said.
"You should really spend the money you need to make yourself comfortable," she said.
MyFico.com, is a popular place to pay for credit reports and scores, and RentBureau.com provides rent-payment history. Simpler is paying for a bundle of screening services such as one available from credit bureau TransUnion at MySmartMove.com. It provides such data as identity verification, credit checks and criminal background checks in a $25 service. The landlord can direct prospective tenants to the Web site, where they pay for the background check and give the landlord permission to view the information. That way, the landlord doesn't have to collect credit-check fees or handle Social Security numbers and other sensitive information.
Knowing prospective roommates is important, said Mike Mauseth, a vice president of product development at TransUnion. "If you burn down my rental house, that's one thing," he said. "But if I'm living in it? You really want to know who you're dealing with."
College students, especially graduate students, can make good tenants, Glink said. And you might consider part-time tenants, such as bed-and-breakfast guests on weekends if you live in a tourist area or weekday commuters if you live downtown.
UTILITIES AND MAINTENANCE COSTS
Bills for electricity, water and heat can increase with an additional person in the house. Will the tenant expect a certain level of cable TV service, a phone line and wireless Internet? As tenants turn over, you'll need to do the usual maintenance, perhaps painting the bedroom or cleaning the carpet.
These variable costs can make it difficult for landlords to charge an effective amount for rent. Your room needs to be competitively priced. Check local listings and sites such as Move.com for comparable listings.
And then you have issues that might not cost money but hassle. Will the tenant entertain guests? Share a bathroom with you? What about pets, parking or shared food in the refrigerator? What are expectations for cleaning common areas?
Uncle Sam wants in on the action when you're renting a room. You'll probably want advice from an accountant or tax preparer on how rental income affects your tax liability and what additional deductions you might qualify for as a landlord.
Check with your insurance company to determine what additional coverage you might need for house damage and liability. "Your regular insurance may or may not cover damage done by a tenant," Glink said.
"I absolutely think you should have a contract," Glink said. If you use a boilerplate lease, make sure it's valid in your state and adheres to local ordinances, and, if applicable, homeowners-association rules. It could be worthwhile to have a real estate attorney draft a lease that you can use for each tenant. A stationery store or the local housing authority might carry leasing forms that are valid in your state, Glink said. Build in escape clauses for yourself in case the tenant isn't compatible with you, and consider the procedure for eviction.
"You should never just take (a form) off the Internet, use that and think you're going to be OK," Glink said. "It's not spending smart to use a $75 form and it costs you $2,000 in legal bills to defend yourself in small claims court."