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Renting Out Your House: What to Consider Before Pursuing This Revenue Stream

Personal Finance
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Senior couple laughing together in front of their home after renting out their house

There are a number of reasons why you may want to rent out your home Whether it's a vacation property or your primary residence, renting out your house — or part of it — could help you generate additional income you could use to pay down your mortgage, pay off debt, or build an emergency fund or retirement savings.

But before you explore this option, there are a few financial implications you may want to consider, especially when it comes to your mortgage, taxes and insurance.

Renting Out Your Vacation Home

One way you could generate income is to purchase a vacation home as an investment property and rent it out when you aren't there. But if you go this route, you'll want to understand the local market, including what other landlords charge for vacation rentals and the quality of their products. For example, if your vacation home is in need of repairs or doesn't feature amenities like a pool, you may have to charge less than other vacation properties.

Security is another consideration. If you're renting out your vacation home, you may want to install a security system if your home will be empty for long periods of time, which can be expensive. To make renting easier, some homeowners hire a cleaning service and a property manager to take care of day-to-day tasks and communicate with renters. If you're considering this approach, you'll want to budget for these ongoing expenses and factor them into your home's rental rate.

Renting Out a Room in Your House

Renting out a room in your home is another option. Similar to renting your entire home, you'll want to consider some of the extra costs. For example, you might need to update the space and do repairs to make it ready for renters. You also might want to consider ongoing maintenance costs, such as cleaning and utility expenses. There's also the matter of how comfortable you feel sharing your space with strangers — paying for a background check and having a thorough interview process that includes references may help you feel more at ease.

How Rentals Can Affect Your Mortgage

Some lenders include an occupancy clause as a condition of giving you a mortgage loan. This clause sets rules for how long you must live in the home before renting it. Violating this clause could come with potentially serious financial consequences, such as being charged with mortgage fraud and having to pay your mortgage balance immediately. Make sure you read the fine print on your mortgage agreement and talk to your lender before you turn your home into a rental.

Tax Considerations When Renting Your Home

Since rental income counts as additional income, you'll need to report it on your tax return. You may also want to check with your local tax assessor about whether you'll have to pay higher property taxes if you convert your home into a rental. You may want to ask whether you'll be able to maintain the homestead exemption on your primary residence to avoid any additional taxes.

However, you might also gain several tax advantages by renting your home. You may qualify for tax deductions for repairs and maintenance costs, utilities, insurance, mortgage interest, property taxes and other expenses associated with maintaining your rental. One caveat is that the IRS imposes what's known as the 10% or 14-day rule. If you use the rental property for personal use for 14 days or more per year, or you occupy the home for more than 10% of the total days you rent it each year, it's still considered your main home and there will be limits on what you can deduct as far as your rental expenses. Consider consulting with a tax expert to better understand these rules before you decide to rent out your house.

How Your Insurance Costs Could Be Impacted

Since renting introduces more unknowns, you may want to consider how much coverage you have through your homeowners insurance before you rent to others. Consider the value of your home and personal assets when deciding how much coverage to get. You may also consider getting landlord insurance, which typically includes property and liability coverage. Just remember that you'll want to add these costs into your overhead and factor this into your rental rate.

Should You Rent Out Your House?

Renting out your house or vacation home can create an additional revenue stream, but it's important to do as much research as possible and consider the costs before you decide if this is the right option for you. Consider seeking out legal and tax advice so you truly understand all of the implications.

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Information provided is general and educational in nature, and all products or services discussed may not be provided by Western & Southern Financial Group or its member companies (“the Company”). The information is not intended to be, and should not be construed as, legal or tax advice. The Company does not provide legal or tax advice. Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information. Federal and state laws and regulations are complex and are subject to change. The Company makes no warranties with regard to the information or results obtained by its use. The Company disclaims any liability arising out of your use of, or reliance on, the information. Consult an attorney or tax advisor regarding your specific legal or tax situation.