A granny flat, a casita, a mother-in-law suite, a guest apartment in the basement. Whatever you call it, some homes come with extra living quarters suitable for renting out. If you're a new home buyer, you might even be tempted to buy a larger home than your original budget with the idea of making up the difference by renting out the extra space.
Since 1975 the size of American homes has almost doubled, from 1,660 square feet to 2,623.¹ Over the same period, households have shrunk. The trend of fewer people living in larger homes stopped—and even slightly reversed—in our current decade, according to the Pew Research Center, when the average number of people in an American household increased from 2.58 in 2010 to 2.63 in 2018 (it was 5.55 people in 1850). Still, many homes have extra living quarters, and homeowners naturally wonder if they can generate rental income with the extra space.
Whether you have additional space on your property today or are considering buying a home with rental potential, here's what you should know about generating rental income.
Your Responsibilities As a Landlord
All tenants have a right to a safe and clean rental regardless of the lease. This right, which is called a warranty of habitability, cannot be waived by any language in the lease itself ("If you're OK with my keeping 20 cats, sign here").
As a landlord you can meet this obligation by keeping up with utilities and maintenance. Examples of what would violate the warranty of habitability include a lack of heat, no hot water, or a bug infestation. A condition that you might be so comfortable living with that you hardly think about it, like a broken stairway, must nonetheless be fixed before you take in a renter.
You are also responsible for following all local, state, and federal rules and regulations. The responsibility of compliance never "transfers" to your tenant, no matter how long they rent from you or what space they occupy.
Check your local planning and zoning requirements before turning extra space on your property into a vacation rental.
Keeping up with safety codes.
Safety regulations can vary by state and even by city. Here are five of the categories that tenant screening service RentPrep advises small-scale landlords to know about.
- Occupancy standards. Your tenants may be willing to cram together, but that doesn't mean you should let them. Check out your state's overcrowding (occupancy) standards to learn how many square feet each person is entitled to. You will usually be exempt from these standards for short-term rentals (i.e., vacation rentals), student housing rentals, and family members.
- Lead paint disclosure. If you're renting a property built before 1978, you need to provide a lead paint disclosure form (templates are online). You should also give your tenant a pamphlet explaining the risks of lead paint.
- Mold remediation. Mold in your rental can't be dismissed as a matter of mere housecleaning or wear-and-tear. Landlords are required by law to remove mold and also to fix whatever problem is causing water to accumulate.
- Smoke and carbon monoxide detectors. Research the laws in your area to learn how many detectors are required in your rental and which kind.
- Safe common areas. Your obligation to provide a safe and clean environment isn't confined to the walls of the rental unit. You must also maintain the laundry room, hallways, garage, deck, and other space you share with your tenant.
Another obligation you'd have as a landlord is obvious, but it's worth stating. You must pay your mortgage! That brings us to another consideration.
Don't Expect Rental Potential to Buy You a Bigger House
When you're shopping for a home, if you keep looking at larger homes than your budget allows, it can be tempting to imagine rental income filling the gap between your budget and your mortgage payments. This would be a risky move.
Your mortgage payments are monthly and unwavering, but renters are not. You aren't guaranteed to have uninterrupted occupancy in your rental unit. What will you do if your tenant moves out and it takes a few months to find a suitable new one? The risk is high. If you're more than 90 days late with a payment, your mortgage is technically in default.
Taking on debt that you can only afford to repay with the steady income from a renter is a recipe for anxiety. You would be risking your financial health, credit score, and even your home itself on someone else's unpredictable actions.
When you're shopping for a new home, stick to your budget. Avoid temptation in the first place by only visiting homes that fit your budget. Only take on a mortgage payment you can comfortably afford on your own, regardless of any rental potential.
If you already have a home with extra space, especially private space like a guesthouse or a basement apartment with its own entrance, definitely consider generating rental income with it. You could make passive income with it today, even if the space is earmarked for an elderly parent in the future. Turning the space into a vacation rental lets you avoid the overcrowding limits of an ordinary landlord, whereas renting it to a long-term (and high-quality) tenant would make your income steadier and predictable.