Becoming an Innkeeper: The Pros and Cons of Turning Your Basement or Spare Room Into a Vacation Rental
5 Risks of Renting Out Part of Your Home and How to Protect Yourself
With the rising popularity of Airbnb, many homeowners are becoming interested in turning their basements or spare rooms into rentable spaces. This is especially the case for those who live in tourist-heavy locations. But, while the money can be good being an innkeeper, there are some things you need to take into consideration before making such a move.
Here are some of the benefits and disadvantages of renting out part of your home as a vacation rental, and how best to protect yourself from risks.
Why Being an Innkeeper Is So Appealing to Homeowners
The most obvious reason why homeowners are interested in renting out parts of their homes is, of course, the extra money that the rentals bring in. If you live in an area that attracts tourists every summer, then you can take advantage of the tourists’ need for temporary housing by offering part of your home or basement to them during their stay.
This will allow you to charge premium rates, and with the tourist season lasting well into September, you can reliably collect a lot of money over that time to help offset your home’s expenses and mortgage payments.
One of the other advantages of renting part of your home is that any renovations you do to enhance the look of the space will add value to the property. For instance, if you finish your basement and rent it out, you will be adding livable space to the home, and this will boost its resale value.
If you have your eyes on another home, but you can’t afford the down payment for it yet, then the extra income from your rental can also go a long way toward helping you achieve your savings goals.
Disadvantages and Risks of Renting Out Part of Your Home
While the extra income is helpful, that money is considered taxable income by the IRS. This means your extra income could land you in a higher tax bracket. For instance, if you rent your basement out for $900 per month, after the IRS takes its due (25%), you’re left only pocketing $625. And, this isn’t even taking your state and local taxes into consideration.
Another big risk for DIY innkeepers is that they can easily break the law if they aren’t careful. Your tenants are protected by the usual landlord-tenant laws, meaning you have a litany of rules, regulations, and requirements you need to meet. These range from providing sufficient heat and cooling, to providing proper advanced notice before entering the tenant’s space.
There’s also the risk that the renter may accidentally or purposefully damage your property. To help reduce this risk, you should always require a security deposit to be paid in advance of the renter moving in. In some cases, a renter may cause significant damage that their security deposit won’t cover. For this type of situation, you will most likely have to rely on your homeowner’s insurance to cover your financial losses and this can be a time-consuming process.
While most renters are responsible and decent people, there is always the risk that a renter might stop paying the rent and/or refuse to leave. This will require you to start eviction proceedings, and these can be time-consuming and expensive. In some cases, you may also have to hire an attorney. To successfully evict someone, you will need to follow the laws to the tee, or else your case could fall apart in court.
What to Do Before Your Rent Part of Your Home Out
There are five important things you should do before you make the decision to rent out part of your home. These include:
- Have a Savings Fund – Your rental space will need to be maintained on a regular basis, so you should have savings in an account that is dedicated to funding the repairs and upkeep costs. This way, the future expenses for the space won’t come out of your primary source of income.
- Study the Laws – To be a successful landlord, you will need to have a good understanding of state and local rental laws and landlord-tenant laws. Study them and get to know them well.
- Create a Rental Agreement – Never rent out your space without a rental agreement. This document is essential for ensuring and identifying both the tenant’s liabilities, as well as your own.
- Have a Flexible Mortgage – You don’t want to have a fixed mortgage when renting out part of your home because this type of loan just isn’t flexible enough. In the event something happens that causes you to miss a mortgage payment, or you want to make additional payments to pay your mortgage off earlier, then you will need a flexible mortgage because this type offers you more pliability in terms of your payment.
- Don’t Go It Alone – Being an innkeeper is not a solo job, and you should bring in professionals where needed. For instance, a real estate lawyer will help you avoid any legal problems. A mortgage expert can help you get the best type of mortgage for your new lifestyle. A real estate agent can help you navigate the rental market and attract more responsible tenants.
After your tenant moves in, you should check in with them at least once a month to make sure they are happy, to check on maintenance needs, and to see how they are taking care of your property. Remember, when your tenant is happy, you will be happier and your life will be easier.
Being an Innkeeper Is a Responsibility
It is important to accept the responsibility of being an innkeeper before you become one. Renting out part of your home isn’t always easy, and it is in no way a means to get rich without any effort. There are times where you may be inconvenienced or need to put out a lot of money for a repair. But, if you do it right and follow the laws, renting out your basement or part of your home can be an excellent source of supplemental income.