Rental Income from Roommates

[Brian Smith]

I have looked through the forums a bit but couldn't find an answer to my specific question. This might be a silly question with an obvious answer but I over-think everything, so I was hoping some of the great minds of BP could offer insight or personal experience.

My question is if I have roommates living with me in my primary residence, and they pay rent, what do I need to do in order to be able to claim that as rental income when it comes to dealing with banks/lenders? My hope is that this extra income can help to improve my debt/income ratio.

I plan to have them sign a lease, and pay via a check or other track-able method. Is there something I am missing? I'm sure I am! Does it need to be zoned differently? Do I need different insurance? Any insight is much appreciated!

[Jon Holdman]

Lenders will generally look at tax returns. Rental income and expenses go on schedule E. Currently, the guideline is you need two years tax returns showing rental income in order for it to be included when qualifying you for a loan.

Consider getting a CPA to prepare your taxes. A shared situation like this is more complex than regular rentals, and I recommend a CPA even with just regular rentals.

That said, many lenders won't consider roommate income at all. I can't say why, but that's what others have reported in their posts.

Zoning may be an issue. Check your city's zoning regulations. In some city's, zoning limits the maximum number of unrelated parties in certain zoning codes to only two. If your property is in a zone like that, one roommate would be OK, two would not. It will be difficult, at best, to change zoning. It may be impossible.

Speak with your insurance agent about what type of policy you need. Normally rentals would require "landlord insurance". It has broader coverage than "homeowner's". In particular, it covers loss of rent if the property is damaged and unrentable. And it includes liability coverage.