Homeowners feeling the pinch from the stumbling economy are tapping a source of cash close to home: their basement, attic or extra bedroom. If the idea appeals to you, be aware that the number of legal hoops you’ll need to jump through depends on whether you create a separate unit in the basement or share your living space with a housemate. If you rent out a separate unit — with a kitchen and full bath ?– you’ll be subject to municipal rules that govern the conversion of a single-family dwelling into a multifamily one, as well as landlord-tenant laws. But if you share your space, you’re probably off the legal hook (although you should still check out any zoning or homeowners-association restrictions).
Before you list your unit for rent, check out the amenities and rents for similar units that your competitors are advertising. The most popular spots for ads are Craigslist or www.sabbatical.com; local classifieds, list serves and bulletin boards; and the housing offices of local employers and colleges. Most landlords include the cost of utilities in the rent or set a flat monthly fee.
You want a tenant who will pay the rent on time, take good care of your property and not create excessive noise or hassles. Ask all prospects (including co-tenants) to fill out an application so that you can verify their identity, employment, credit, rental history and references. It’s a good idea to ask them to sign a separate release that gives references permission to talk with you.
Go with a monthly lease. If you lock a renter into a yearlong contract and then discover that you can’t stand your tenant, you’re stuck — unless your tenant commits an evictable offense, such as not paying the rent.
Call your insurance agent. With a tenant comes increased risk. Require tenants to show you proof of a current renters insurance policy. That will decrease the likelihood that they will sue you for the loss of their possessions after theft, flood or fire. Then notify your homeowners insurance company so that it is aware of this change in your risk profile.
You generally must add rental income to your gross income for tax purposes. But you can offset it with deductible expenses related to the rental unit. You can depreciate the rental unit and the furniture and equipment you install in it, as well as deduct a prorated portion of your mortgage interest, qualified mortgage insurance premiums and real estate taxes on Schedule E of your Form 1040. For more information, see “Renting Part of Property” in IRS Publication 527, Residential Rental Property.
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