Hidden Costs For Renting Out A Room?

[questions]

I am curious about the hidden costs associated with renting out a room
(from the perspective of a landlord). While I have managed property
in the past, I was never responsible for the income, I just made sure
there were enough people renting, that they paid rent and utilities on
time, and kept the unit(s) in good condition. As a result, I'm not
sure what to expect on the financial side of renting.

The reason I ask is that I am about to close on a condo purchase, and
the condo I've found is somewhat larger than I need, so I will have
space to rent a room. (I'm confident that purchasing is the right
decision for me at this time, despite the state of the market. My
mortgage will be very comparable to my current rental expenses, and
the associated costs are not high enough to have a drastic impact on
my lifestyle. The location I'm buying in is also one of the few that
actually shows signs of growth in the near future.)

While the condo is within my abilities, I will be draining my savings
significantly in order to make the down payment, and it will take some
time to recover. I'm hoping that a renter can help shorten that
recovery period. However, I'm concerned that the amount I can expect
to get for the room (~$450-550 / month, based on the rental rates of
similar rooms in the area) will be reduced so much for various reasons
that the end contribution will not be worth the inconvenience of
sharing a condo.

What can I expect to actually take home each month from a rental
situation like this? Is this income going to be taxed just as my
standard income, or is that treated as some small business, and taxed
differently? When is it worthwhile to create a personal corporation
and use the rental income to pay expenses pre-tax? (I'm assuming it's
*not* worthwhile for this, but I'm still curious.) Will having a
renter make a significant change in insurance? (Am I liable if they
slip in the shower and become injured, for example?)

[deca]

Huh. Those are all good questions. I rented out a room quite a few years back, but I did not declare the income on my taxes (actually never thought of it) and I didn't do anything different with my homeowner's insurance.

As for additional expenses -- I think the water bill went up a little. There really weren't any other expenses that I recall.

I did have people sign a month-to-month lease agreement -- just a standard form I picked up at the office supplies store. I felt that this made it a more formal arrangement.

[cschin4]

Personally, that is not something I would do. You really don't know who is going to move in. They could eat your food when you are there, steal your money, bring their friends over to party, trash the carpet, etc. Who knows? Are you going to do background checks?

[34saving]

If you have any assets worth suing over, pick up an umbrella liability policy. You can get a $2,000,000ish policy for about $300 a year.

You will have to pay taxes on the income, but they will be offset by (your roommate's portion of the) association dues, taxes, depreciation, mortgage interest, etc.

It's probably not worth incorporating or setting up an LLC or whatever because any of these entities are only as useful as the ability to defend them and that's expensive.

Your roommate will be hard on your stuff, and probably will make some late payments. Are you okay with that? He/she will probably also waste water and electricity and demand the heat and airconditioning be used more than you ever would. (Of course it's possible these things won't happen, but they probably will so you might as well plan on it.)

[deca]

I actually had pretty good experiences with roommates. I found males much easier to live with than females, for what it's worth. Women who moved in seemed to want to make it more of a social experience, wanted to decorate, move things aorund, have friends over, etc. Which I didn't really want (being female myself, lol, I wanted things to stay the way I had them). I had two different male roommates who stayed for a year each, and who I hardly ever saw. They were either at work, out with their friends, or in their bedroom on the computer. They hardly ever even used a dish. It was pretty easy money from my POV.

[cptacek]

I've had good luck with roommates. One was a friend of mine who needed a place to park his stuff and was there for literally 5 nights in the 8 months he rented the room. The other was a cousin that I get along with very well. As a previous poster said, they will want to run the air and heater more than you probably would, and I've bought more than my share of groceries, but otehr than that, no major problems.

I count the rent as regular income, but the bills we split and I don't count that as income. You might encourage them to get renter's insurance, because I don't know that your home owners insurance would cover their stuff if your house suffered damage (not sure on this).

Be sure to have a rental agreement, including a clause that says what you can do with their stuff if they stop paying rent. If they don't pay the rent, I can throw their stuff to the curb within 3 weeks. Worth it if you guys have a falling out and never want to speak to each other again.

I'd say go for it. I would not live with my best friend, nor would I live with a stranger. I'd pick someone I was friendly with that had their own social network, so you don't hang out with them all the time and then live with them too. I lost a best friend like that in college...just too much time together to get on each other's nerves.