Renting a room in primary residence

[Abbas Jamal Eddine]

Hello BP! My wife and I are thinking about renting one of the rooms in our house to one of my really good friends (my best friend) in Georgia. But I had a few questions:

1) Would that increase my monthly insurance? I will be calling my insurance company after I go through the numbers and decide if its a good idea

2) Do I need to talk to my mortgage company about renting a room?

3) Taxes. I think I should be able to write off some items such as utilities, cable, and repairs. What about property taxes? Can I write those off as well? 

4) What are the disadvantages of renting out a room?

5) I have lived with this guy for a year before and I loved having him as a roommate. When it comes time for filing taxes, what do I need to keep as records (I am thinking that I would definitely need a lease)

I think that this is going to be a great way for me to start getting involved in real estate. Any and all comments are greatly appreciated!

[P.J. Bremner]

@Abbas Jamal Eddine

I can give you advice based on what I have done in the past, but it may or may not work for you.  Take them with a grain of salt please :)

1) I wouldn't even notify my insurance of this because it shouldn't even be an issue.  If you live in the house, you have a homeowner's policy.  If you rent the whole house out, you have a landlord policy.  Since you have a mixed use, you will most likely have HIGHER coverage keeping the homeowner's policy in place.  When you switch to landlord policy, it does not cover very much but the cost goes down.  It really is none of their concern if you rent a room out, much like if you have guests over.  If your guest burns the house down, is your insurance still going to cover everything? Etc.

2) If you pay your mortgage on time, then your mortgage company really doesn't give a hoot about a room rental.  There may be some obscure clause in the fine print about not using it for business while you're living there, but you have to keep in mind how and why they would enforce something like that.  How would they enforce that?  No clue... As a business, it would require employees or contractors to look into that.  Not only that, if they do indeed find someone using the property for business use and they call the loan due, they just took a perfectly good and performing mortgage on their books and turned it into a lump of coal.  NO WAY would they want that.  Pay your mortgage, pay it on time, they will never want to hear from you again (unless you refi through them and they get commission from it lol).

3) If you're going to use all the proper write-offs for renting a room out, you would have to calculate what percentage of use the renter has and you can deduct that from the gross rents collected.  It's a pain in the @$$ and **speculation alert** I have heard it can flag an audit from the "you know who".  The other option is to collect cash and leave it off the books.  You lose the tax deductions but don't pay tax on rental profits.  I'm not going to recommend one way or the other, I'm simply telling you the options available to you and you decide what's best for you :)

4) When you rent out the room, you give up legal ownership and usage to the room and have to deal with a tenant in the same common area living space as you.  If they have quirks that you don't like, you have to deal with it.  If there are disputes (loud noise at night, not cleaning up after themselves, bringing over rowdy guests, etc.) then you have to deal with it.  If you already know the person and have lived with them before, then you mitigate a lot of those downsides.

5) Again, as far as taxes go, you have to determine which way you are going to go.  If you are going to do everything by the books, then you need to track all of the rent payments and all of the bills that you plan to use as a write off.  Another option that might be a good compromise is to figure out what a fair amount you would use to write off for bills and just claim the balance as profit.  (eg. you collect $500 in rent and you determine his utility and bill usage would be $50, you claim $450 in profits).

On top of these, I would like to offer you a few pieces of advice... I've been doing room rentals for a while and lived in the same house as my tenants for a few years and found a few things to be efficient:

• Month to month lease ONLY (if there is an issue, you simply don't renew the lease the following month, no need to evict.  On the flip side, you explain it to your tenant that month to month is a benefit to them for being more flexible AND you, as the owner, have to be a great landlord and earn their business every month or they will simply leave).
• Average your utility bills for a year, calculate what portion you will be charging them for it and then add it to their rent AS A FIXED AMOUNT.  The last thing you want to do is chase your friend around for rent + electric bill + gas bill + internet + TV + etc. etc. etc.  You simply collect one bill (the rent) and be done with it.
• I prefer to furnish all of my rooms, but if you're renting to a friend then he may already have stuff.  For those who want to do this with strangers, I recommend furnishing the rooms.  If you are doing month to month, the last thing you need is people moving furniture in and out on a monthly basis.  You can charge a premium for a furnished room (bed with mattress, night stand, dresser, desk with chair and mini fridge is what I equip all my rooms with).  My goal is to make the move in as easy for my prospective tenant as possible.  Yes, it's month to month and they could move out in a month, but the odds are if you do your job right as a landlord and provide a clean/safe place to live, they won't be moving anytime soon.  I've had tenants stay for more than 2 years at this point, all on a month to month lease.

Sorry for the long book lol but I hope you get some useful info from this :)  Best of luck!