Understanding a room rental agreement

If you're seeking to make extra income or want to downsize, then consider renting out one of your empty rooms before you decide to sell your home. People who rent out rooms may be empty nesters or they may be younger people who have extra space and need additional income to cover the mortgage.

Whatever your stage in life, you can increase your income by renting out a room in your house. Before you decide to rent a room, though, you should have a room rental agreement in place to protect you and to describe what the renter can and cannot do in your home.

Offering a single room rental

As you consider renting out a room, there are some fundamental rules you'll want to take into account. After all, you'll be sharing common space with your tenant, depending on how your house is configured. If the tenant will have a separate entrance with their own kitchen and bathroom, then you're renting out a unit, not a room. A room rental is different, as you're sharing the kitchen, bathroom, laundry room, and common areas.

Before renting the room, do your homework. Find out if your zoning laws allow room rentals or whether you need a permit or license to have tenants. Also find out from the building department if the room and house need to be inspected. Determine whether you're renting the room furnished or whether the tenant will bring their own furniture. Decide how many suitcases they can move in.

You can screen your applicants and rent to whomever you want, but you'll need their written permission to run a credit check. A good rule of thumb is not to rent to friends or family because, when renting out a room, you become their landlord and this is strictly a business transaction. If you have to collect late rent or evict a tenant, it will be easier if the tenant is a stranger.

Creating house rules

Think about what you want and what you don't, and create some basic house rules. Write out your house rules and refer to them in your room rental agreement. Your rules can include things like asking the tenant not to:

• Play music after 10 p.m. (or whatever hour you choose)
• Do laundry after 10 p.m.
• Use common areas after 11 p.m.
• Smoke anywhere inside or outside the premises
• Use illegal drugs
• Bring in a pet
• Have a water bed
• Keep lights and appliances on when not in use
• Have parties of any kind
• Have houseguests for more than two nights a month
• Paint their room
• Park in areas other than those you designate
• Move in more than two suitcases of personal belongings

These are just some sample rules you can implement and include in your rental agreement. When you interview prospective tenants, you can ask if they smoke and advise them of the rules. If you sense that the applicant won't honor your rules, move on to the next applicant.

Advertising for a tenant

Before putting out an ad, know what you want in an ideal tenant. For example, you can put in your ad that you're looking for a nonsmoker and someone who will respect your house rules. Don't put anything discriminatory in your ad because you can run afoul of the federal Fair Housing Act.

You can put up fliers in town on bulletin boards, or you can hang them in college campuses if you want to attract a college student. You also can advertise in the local newspaper, online, or in free weekly papers. Take photos of the house and the room so prospective tenants know what to expect.

What to include in a room rental agreement

Rental agreements for a room should contain all the necessary details or you could run into future problems. If you have any doubt about understanding what belongs in a room rental agreement, consult a real estate or landlord-tenant attorney, or have a DIY legal service to help you prepare the agreement.

If you write the agreement yourself, make copies and keep the original for yourself. You can get as specific as you want in your room rental agreement, but it should include the following:

• Your name, address, and contact information, including the word "Landlord"
• The applicant's name and contact information, including the word "Tenant"
• The location and address of the property
• The room description, so there's no confusion
• The term of the agreement, such as month-to-month, six months, or one year; month-to-month is a great way to see if you and your tenant get along
• The rules of the house—type them up, attach them, and refer to them in the agreement as Addendum or Rider A
• How much rent you're charging and when it's due
• What fees you're charging if the rent is late
• What chores the tenant must do and when
• Whether the room rental includes utilities and what utilities you're including; consider raising the rent if you're including utilities
• The amount of the security deposit
• How much notice each of you must give to the other to terminate the agreement
• That the tenant agrees to keep the premises, inside and out, in good condition and to advise you in writing if there are any habitability or repair issues
• What you're providing, such as a parking spot, smoke and carbon monoxide detectors in working condition, and bedroom locks
• If the tenant can sublease the room and, if so, under what conditions
• That both the landlord and tenant must allow "quiet enjoyment" of the premises, which requires that each party has peace and quiet, privacy in their separate areas, and the right to use the premises as agreed
• That the tenant must purchase renter's insurance immediately and allow you to see proof of insurance
• That the tenant will hold you harmless from any liability unless the liability is due to your negligence
• That this agreement and the Addendum or Rider constitute the entire agreement
• Signatures and the date signed, with the words Landlord and Tenant under each name

Keep in mind that, as a new landlord, you'll have to report the rent you receive as income, but you're also allowed deductions for making improvements for the tenant. Overall, if you don't want to add a side job to your resume, renting out a room in your house may be the best way to generate additional income.