One of the most significant hurdles when you start in real estate investing is generating capital from nothing. To successfully branch out into the broader world of investment, regardless of your larger aims, you need some cash. For many rookie investors who own their own homes, one of the most appealing options to generate some extra income is renting out a room in their home.
Table of Contents - Should You Rent Space in Your Home for Extra Cash?
The idea is relatively simple: you invite someone into your home to rent some space. In turn, they provide you with a cut of your mortgage, which eases the stress on your bank account and allows you to save up some money for the next step in your overarching investment plan.
Deciding to rent out some space in your home isn’t a choice to be made lightly. If you’re considering renting a room in your home, here are some things to consider, plus a few tricks to help you get started.
Full-time renter or Short-term renter?
The very first question to ask yourself is this: are you looking to get a full-time renter in your home, or are you considering renting out a guest room as a short-term getaway for visiting tourists (that is, a site like Airbnb)? The answer to this question will result in two very different types of tenants:
Will provide an additional source of steady income. That said, because they live in your home, they will likely require access to shared spaces like the kitchen and living room. It’s like having a roommate, whether you want one or not.
Is likely to spend less time on your property than a full-time tenant (because they’ll be out seeing the town), so you may not have to interact with them beyond suggesting a good restaurant. Vacationers, however, are also more likely to treat your house more like a hotel. They’ll come and go at odd hours, and they will almost certainly leave behind a mess. The short-term rental market also carries an inherent dry season, when it will be harder to book rentals.
Is your home up to code?
One thing you may not consider when entering a rental agreement is the liability you’re opening yourself up to. As a landlord, you are legally required to meet several regulations that vary from province to province. If your home isn’t up to par, you will be required to make the necessary repairs to get everything ship-shape.
If you are unable to make these repairs, you could be at risk for sizable fines that you didn’t see coming. It could be worthwhile to have an expert walk through your home to make sure it is ready before you start thinking about renting out a room.
Stress the boundaries (and the ground rules)
One of the most commonly overlooked aspects of having someone rent a room in your house is the loss of privacy. Unless you’re a very social person, having someone hanging around the house all the time (or more often than was normal in the past) could cause some undue stress. That problem is compounded if you and your renter aren’t on the same page.
For example, if you aren’t comfortable with your renter entering certain parts of your home, you should immediately tell them. If you aren’t comfortable having a pet on the premises, that’s an excellent rule to explain, too. The point is: before you have someone rent a room in your house, they should know precisely what they’re getting into.
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Make things formal
When you’re initially setting up a rental agreement for a room in your home, the temptation can be to keep things relaxed. Remember, though, you’re their landlord, not their roommate. Maybe finding and drafting the paperwork is intimidating. Perhaps you think a formal agreement may scare off a potential investor by presenting them with paperwork right off the bat, but these are easy problems to solve.
First: drafting a rental agreement in Canada is as simple as doing a Google search. Second: if someone is hesitant to commit to a rental agreement, they may not be the ideal tenant, to begin with. In other words, you should start things how you intend to continue them. If you’re hoping to make a legitimate go of real estate investing, you should start by keeping things as formal and above board as possible.
Do a background check
Before you allow anyone to move into your home, it’s worth doing a background check. Even if you think that you know the person or someone you trust is vouching for them, it’s best to take precautions for your safety and the safety of your loved ones. Performing a simple background check isn’t an invasion of privacy. It’s an inexpensive and reliable way to learn about a potential renter’s credit and criminal history.
These two important factors may not give you insight into a person’s soul, but they might get you reconsidering an invitation into your home. Ultimately, the choice is yours, but a little extra knowledge never hurts anyone.
Tax implications of accommodation sharing
Taxes will vary depending on your specific situation, but the gist is simple: rental income is rental income. Whether you have an apartment building full of tenants or a single room that you’re leasing every month, the tax implications are the same. You have to declare every dollar you get from your tenant as rental income. You may be able to take a deduction on a portion of your utility bills, based on the size of the space you are renting out.
If you’re opening your home as a vacation unit, the rules are generally the same. You must account for any income you received, and you can deduct any expenses that you paid to get your rental unit ready and keep it that way for visitors.
Opening your home up to renters is a big decision, and not one that should be taken lightly—but can certainly be an effective way to generate investment capital.
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