Maximizing Your Income by Renting Out a Spare Room

If you find yourself fortunate enough to possess an unoccupied room in your home—unencumbered by clutter—you may be in a prime position to generate additional income. While concerns about a roommate consuming your leftovers may linger, the potential financial benefits of renting out that extra space far outweigh such inconveniences. Let us explore how you can transform your spare room into a profitable venture.

Once you begin to receive rental income, our partners at Baselane can assist you with your banking and accounting needs, which we will discuss further on.

Understanding Local Regulations

The first step for anyone contemplating becoming a landlord through room rentals is to familiarize themselves with local regulations. This entails adopting the mindset of a prudent landlord and securing a landlord insurance policy in addition to your standard homeowner’s insurance.

If you are a tenant subleasing your space, be aware that each state—and even individual cities—has its own regulations governing subletting. For example, while a lease in Texas may prohibit subleasing, such restrictions are not applicable in New York City.

It is equally important to understand your state’s landlord-tenant laws—while this may not be the most engaging read, it is crucial. Certain locations, such as Washington, require a rental license and home inspection before you can hand over the keys, while others may have more nuanced stipulations regarding tenant access and privacy.

Additionally, remember to check your local laws, as traditional long-term leases are not your only option. Platforms like Airbnb have opened the door for short-term rentals, which come with their own set of regulations. For instance, in New York, you must be present if you wish to rent out a room for fewer than 30 days, effectively eliminating the possibility of renting your home while traveling abroad.

Ensure you review the following regulations to maintain compliance:

• Local laws
• City ordinances
• Zoning regulations
• State laws
• Homeowners association rules (if applicable)

You should also be aware of some federal regulations, including:

• Uniform Residential Landlord-Tenant Act
• Fair Housing Act
• Fair Credit Reporting Act

Preparing the Space for Tenants

The room you intend to rent must be habitable and meet health and building standards. Preparing the space should follow a systematic checklist that includes:

• Privacy: Install deadbolts on each room to enhance security, and secure any valuables.
• Maintenance: Stay vigilant about repairs to ensure the property remains safe and functional.
• Clearing the Room: Ensure the room is free of clutter; it should not resemble an episode of a hoarding show.
• Sanitation: Conduct a thorough cleaning of the room and address any cosmetic issues.

If you choose to furnish the room—most tenants prefer this—be sure to document the condition of each item with photographs. The furniture should be clean, comfortable, and of reasonable quality; avoid very inexpensive options, as they may deteriorate quickly. Conduct a walk-through inspection with the tenant upon move-in and document the condition of the property.

Listing Your Room for Rent

Now that your space is prepared, it’s time to list it on popular rental platforms. While Zillow is the leading option, other sites like HotPads and Trulia can also attract potential renters. Social media platforms, including Facebook Marketplace, Instagram, and TikTok, can be powerful tools for marketing your property.

To make your listing competitive, consider the following elements:

• High-quality photographs
• Comprehensive property descriptions
• Nearby amenities
• Shared spaces
• Pricing
• Room dimensions
• Parking availability
• Public transportation access
• Policies regarding pets and smoking

Screening Potential Tenants

Overlooking the tenant screening process can lead to regrettable experiences. While you may not be able to determine if a tenant snores excessively, there are critical aspects to assess:

• Credit Score and History: A score above 630 is generally considered fair, while 690 is good, and 720 is excellent. Ideally, a tenant with a strong credit score will seek to maintain it.
• Employment Verification: Confirm the tenant’s employment history by contacting their previous employers to verify the duration of employment and salary.
• Background Check: Verify the tenant’s identity and any criminal history while being mindful of Fair Housing Act regulations regarding tenant denial.
• References: A potential tenant should provide their rental history and contact information for previous landlords. It’s advisable to reach out and confirm they were responsible tenants who paid rent on time.

Fortunately, Baselane offers a tenant screening tool that provides comprehensive reports online for your convenience.

Finalizing the Lease Agreement

A well-structured lease agreement serves as a crucial legal document governing the terms of your rental arrangement. Ensure all relevant details are clearly articulated in writing and signed by all involved parties. A real estate professional or attorney can assist in drafting a lease that protects your interests.

Important lease elements to include are:

• Duration of the lease
• Rental amount
• Methods and dates for rent collection
• Late payment fees
• Eviction procedures
• Included utilities and amenities
• Garbage and recycling policies
• Any specific rules or restrictions

Be sure to clarify details related to common areas and house rules, addressing issues such as noise, overnight guests, pets, and any other potential sources of conflict.

Collecting a security deposit is essential to safeguard your financial interests, particularly if a tenant decides to host a party while you are away. Baselane’s online rent collection tool is an effective method for managing security deposits and rental payments, avoiding the limitations of platforms like Zelle, Venmo, or Cash App.

Avoiding Financial Commingling

It is advisable to avoid mixing your personal finances with your rental income and expenses. Establishing a dedicated business checking account allows you to maintain financial clarity and ensure that security deposits are kept separate in a non-operational account. Utilizing Baselane’s digital checking account can streamline these processes and provide the added benefit of earning a competitive interest rate on your cash deposits.

Navigating Tenant Eviction

In most states, tenants renting a single room do not receive the same level of legal protections as those renting an entire property. The upside is that evicting a housemate can be a simpler process for owner-occupiers.

Should the need to evict arise, you will typically not need to undergo the lengthy eviction process associated with standard rental agreements. Each state has its own regulations, and generally, you will need to provide a formal “notice to vacate” to the tenant, specifying the deadline for their departure. This notice period must correspond with the tenant’s rental cycle, so avoid delivering last-minute eviction notices.

Assessing Whether Renting a Room Is Right for You

Renting out a room can effectively alleviate the financial burden of homeownership through either long-term or short-term rentals. The additional income can help expedite mortgage payments, fund travel, or bolster your emergency savings.

While the potential challenges of living with another adult—such as noise and bathroom conflicts—are apparent, there are also less obvious risks, including financial liability for the lease, property damage, theft, or eviction processes.

By diligently following the outlined steps to mitigate risks and leveraging a specialized tool like Baselane designed for real estate investors, you can navigate the rental landscape successfully and safeguard your financial interests in the long run.

Federal Reserve Rate Cuts and Trump’s Return: What Lies Ahead?

On November 7, the Federal Reserve announced a new rate cut of 0.25%, following a 0.5% reduction in September. While some investors hope this decrease could usher in a more accessible housing market now that inflation appears to be under control, the outcome might not be as straightforward.

The latest cut adjusts the federal funds rate—used by banks for interbank borrowing—down to a range of 4.5% to 4.75%, but it likely won’t significantly impact mortgage or borrowing costs immediately.

LendingTree’s chief credit analyst, Matt Schulz, told CBS News, “The effects of this latest rate cut may not be highly noticeable right now. However, with a few more cuts over the coming months, the cumulative impact could start making a difference for people struggling with debt.”

Don’t Count on Lower Rates Right Away

Many prospective homebuyers, who paused after the September rate cut expecting further reductions, were surprised to see mortgage rates climb over the past month. According to Freddie Mac, the average rate on a 30-year fixed mortgage rose to 6.79% from a low of 6.08% in September. Other economic factors, including the unemployment rate and the election, influence these changes, meaning rates may remain steady for a while.

Jacob Channel, LendingTree’s senior economist, explained to CBS News that investor concerns about the economy’s future are keeping Treasury yields, and therefore mortgage rates, elevated.

Trump’s Election Win Alters the Economic Landscape

Initially, the Fed’s interest rate hikes aimed to curb inflation and consumer prices. With Trump’s return, less regulation and more tax incentives for real estate developers could also influence the market.

Mike Fratantoni, chief economist at the Mortgage Bankers Association, told MarketWatch, “We’re already seeing Treasury rates increase by about 20 basis points since the election, so mortgage rates may rise similarly.” He anticipates a stronger economy, higher inflation, and consequently, higher interest rates under Trump.

New Homeownership Challenges

With the incoming administration, housing market volatility could increase, according to Lisa Sturtevant, chief economist at Bright MLS. She cautions that policies favoring higher-income individuals may make homeownership harder for first-time and moderate-income buyers.

Sturtevant also warned that expecting a return to low-interest rates by 2025 might be unrealistic: “Bond yields are rising due to anticipated fiscal policies that may widen the deficit and reverse inflationary progress,” she said.

National Association of Realtors’ chief economist Lawrence Yun added that with the budget deficit concerns, mortgage rates are likely to rise, even as the Fed lowers short-term rates. He noted that only a significant reduction in inflation would lead to substantial rate cuts.

Mike Fratantoni of the Mortgage Bankers Association also pointed out that pandemic-era low rates might only reappear under significant economic downturns.

Potential Benefits of Deregulation for Loans

With Trump’s administration expected to be less regulated than the previous one, lending might become more accessible. This could mean more approvals for new builds, more homes for sale, and a somewhat relieved market. But those hoping for immediate changes may need to be patient.

Daryl Fairweather, Redfin’s chief economist, told MarketWatch: “Housing supply remains low. Even with economic growth, rents and home prices may still rise. The cost of borrowing won’t likely decrease much.”

Final Insights

Although the Federal Reserve’s actions aim to stay above the political fray, Trump’s election win adds an element of uncertainty for growth and inflation.

Blerina Uruci, chief U.S. economist at T. Rowe Price, remarked to the New York Times, “His election brings heightened uncertainty into economic expectations.”

Columbia University professor Stijn Van Nieuwerburgh noted that Trump’s anticipated tax cuts are expected to expand the deficit, potentially increasing the debt burden. The market is reflecting expectations of these policies’ impact.

In light of recent developments, both investors and homebuyers are advised not to focus solely on rate cuts when planning their investments. Real estate investing, when approached thoughtfully, can succeed regardless of political shifts or economic fluctuations. Key considerations should include cash flow analysis and clear investment criteria to avoid risky speculation. By carefully evaluating cash flow and conducting thorough deal analysis, investors can make sound decisions that align with today’s economic conditions.

In the previous post: “Is Now a Better Time to Invest in Real Estate Debt or Equity?“