Insurance is a means of protection from financial loss. It is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss.
An entity which provides insurance is known as an insurer, insurance company, or insurance carrier. A person or entity who buys insurance is known as an insured or policyholder. The insurance transaction involves the insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer in exchange for the insurer's promise to compensate the insured in the event of a covered loss. The loss may or may not be financial, but it must be reducible to financial terms, and must involve something in which the insured has an insurable interest established by ownership, possession, or preexisting relationship.
The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insured will be financially compensated. The amount of money charged by the insurer to the insured for the coverage set forth in the insurance policy is called the premium. If the insured experiences a loss which is potentially covered by the insurance policy, the insured submits a claim to the insurer for processing by a claims adjuster.
Are you interested in paying off the mortgage faster, adding some breathing room to the monthly budget, having some company or even avoiding losing the house? If you're thinking of becoming a live-in landlord by renting out one or more rooms in your home while continuing to occupy the home as your primary residence, you should first learn about the numerous tasks involved and the essential legal procedures you'll need to follow. (For related reading, also see Tips For The Prospective Landlord.)
Decide What's For Rent and Prepare the Space
Which parts of your home will the tenant be allowed to use? Is it practical to restrict parts of the property? Where will the tenant park? Which bedroom and bathroom will they use? Will you include any furnishings? Keep in mind that you'll have to make the tenant's accommodations at least as nice as other rental options in the area, if you want to charge market rent.
Ensure the Safety and Soundness of Your Property
As a landlord, you become responsible for your tenant's health and safety as it relates to your home. Nuisance problems and other repairs that might not have seemed like a big deal when living alone must become a priority when you have a tenant. You want to keep that person happy so they'll keep paying the rent, and you don't want to cause yourself any legal problems by failing to maintain the property.
Address Additional Liability Issues
Having more people at the property can increase the odds of something going wrong, such as a personal injury occurring on the property, illegal acts by the tenant, noise and parking violations. You may want to protect yourself by increasing your homeowners insurance coverage and/or purchasing an umbrella policy. These changes will cut into your rental profits, but the extra coverage will be indispensable in a worst-case scenario. Also, if your property was built before 1978, you'll need to follow regulations regarding lead paint disclosure.
Comply With Local Laws
Local laws can be troublesome. You might be required to have a rental permit or meet certain building codes. Some cities restrict the number of unrelated people who can live in a property. (For more, also see Tax Deductions For Rental Property Owners.)
Keep Yourself and Your Family Safe
Handing over a house key to a stranger can be daunting. Furthermore, if you live with other people, you must consider how a renter will affect them. The safety of your family has to be more important than the extra income, and renting to someone you know can ease this concern.
Locate and Screen Prospective Tenants
Think about what type of tenant you want to attract when deciding where to advertise. If you're looking for a college student, put up fliers at the local college campus. If you want someone older and possibly more responsible, consider a small local newspaper or rental magazine. An online ad should return a wide array of applicants. Word of mouth advertising is free, and may turn up a potential tenant who comes recommended.
Include the rent amount, size, location, lease term, pet policy and number of tenants you're seeking in your ad. Once you've narrowed down the responses to your best bet, run a credit check and background check. If local laws and customs allow it, charge a small application fee to offset these costs. Also check the applicant's references and verify his or her employment and income.
Sign a Lease Agreement
The lease should lay out all the terms of the arrangement, including but not limited to the tenant's name; rent amount and payment procedures; rental term; security deposit amount and refund conditions; and whether pets are allowed. Make sure the lease is legal. If your tenant becomes a problem, you will want to have the option to enforce your lease in court. The Nolo website, a reputable source of free legal information, has do-it-yourself legal forms you might consider using if you can't afford a visit to a real estate attorney.
Hold Up Your End of the Bargain
The tenant is not the only one who has terms and conditions to meet. As a landlord, you have ongoing responsibilities such as maintenance. You also must be certain to respect your tenant's privacy - your home is now their home as well.
Understand How to End a Renter's Tenancy
If your tenant violates the lease to the point where you want to terminate the agreement, you must follow specific legal procedures that vary by state. If the tenant doesn't leave, you'll have to file a lawsuit and go through the eviction process.
The Bottom Line
Renting out part of your home is a major decision. It's not as cut and dry as a traditional landlord-lessee situation, and comes with increased responsibilities. But it can also be a very wise financial move, whether you're trying to get ahead or just trying to stay afloat.
For further reading, see Becoming A Landlord: More Trouble Than It's Worth? and Tips For The Prospective Landlord.
