Renting out a room in your home for travelers can bring in extra money for expenses, and it can even help your property pay for itself. According to the National Association of Realtors (NAR), it’s not surprising that rentals among both homeowners and vacation property owners have surged over the last few years, with many homeowners intending to rent out property for short-term stays.
These rentals can produce a helpful revenue stream, but it’s important to know the potential pitfalls—the last thing you want is for this extra income to put you in default of your mortgage, for example. Fortunately, taking some simple precautions can help you avoid common mistakes if you’re renting out property to short-term guests.
Avoid These 5 Mistakes When You Start Renting Out Your Home
Mistake #1: Breaking local rental codes
Rules vary by locality. Some cities may require a landlord to be licensed or have zoning laws that prohibit multiple short-term rentals. Others have separate regulations for “sharing economy” rentals. In San Francisco, for example, homeowners who do short-term rentals have to pay the city hotel tax of 14 percent. In 2013, a vacation rental host in New York City was fined $2,400 for violating city housing laws, according to the Pew Charitable Trust. Bottom line: Check with your local housing office to be sure you comply with the law.
Mistake #2: Not informing your insurer and lender of your rental plans
Go over your mortgage contract line by line. If it prohibits rentals or is ambiguous about them, notify your mortgage lender before you rent out all or part of your property. Depending on your mortgage, an unauthorized rental could technically put you in default.
In addition, check with your insurance carrier to see if your existing policy covers temporary rentals, advises Tiffany Zambrana, an insurance agent with State Farm Insurance in Charlottesville, Virginia. “Depending on how often you rent out your home, you could add an endorsement for renters for a couple days [or more].” She encourages homeowners to ask what kind of coverage they need in case a renter gets hurt and tries to sue. Beyond your own liability, she says, “Check your policy to see if it also covers damage caused by the renters and talk to your insurance agent about a rider for those situations, too.”
Mistake #3: Not fixing safety problems
All states have laws in place protecting renters from unsafe rental properties while ensuring basic livability, such as heating and cooling systems that work. Besides protecting you and your guests, what if the air conditioning breaks down in the middle of your renter’s week in your home? Rental contracts, even boilerplate documents, typically have a cancellation clause allowing guests to bail out for reasonable cause.
Mistake #4: Hiding your rental income from Uncle Sam
You may make from $700 to $1,000 a week renting a vacation room, but that rental income is taxable by the IRS. However, after taking all the allowed deductions for the rental, including cleaning, depreciation, insurance, mortgage interest and a share of utilities, you may not have to pay that much in taxes. If you rent out a room for less than 14 days, however, you don’t have to pay taxes on it at all (although you can’t take any deductions, either).
Mistake #5: Letting the paperwork slide
If a contract expires while a renter is still occupying the property, you’ll be in legal limbo. In Watsonville, California, Poonam Sandhu had guests who asked if they could pay her in cash to extend their stay so they could avoid the agency fees after their initial reservation expired. However, in the stuff of landlord nightmares, they then stopped paying rent and refused to leave. Since Sandhu was no longer protected by the insurance provided by the booking site she used, she had to move out of her home while her attorney tried to evict the so-called “tenants.”
The common-sense fix? Keep everything in writing—and don’t be tempted to agree to terms outside of the contract for convenience.
Steve Evans is an award-winning journalist specializing in business and personal finance. He has worked as a senior writer for SNL Financial, as a magazine and online news editor at the Darden Graduate School of Business at the University of Virginia, as the former managing editor of general media in the Central Virginia Newspaper Group, and as a reporter for the Bristol Herald Courier, The Progress and the Richmond-Times Dispatch. Evans also writes extensively about mortgages and homebuying for MoneyGeek.com.