Simple Side Hustles to Fund Financial Independence: Home Sharing
This post is the second in a series explaining ways we have made some extra cash on the side. Some have been more lucrative than others. None have had as much impact on our financial lives as downsizing our home and getting serious with saving and investing. However, every little bit helps as you work your way to financial independence (FI). Every extra dollar saved and invested in low cost index funds puts you several dollars closers to financial independence. In this article, we explore home sharing as a side hustle.
Renting Extra Space in Your Home
Home sharing is one of those side hustles that can provide you with great extra income with little effort on your part. I wouldn’t call it passive income, however, it is about as close as you can get. You are simply renting out space that you aren’t using. I made great extra money during my bachelor years through home sharing. Got extra space in your home? Why not use it to make some extra cash?
I started home sharing by renting a bedroom in my first home, which was a small townhouse. I took a bit of a hit on my privacy as we shared just about everything. However, it always worked out fine because I was very selective about my tenants.
Eventually, I went a little crazy and purchased a five bedroom home. I had the idea of renting more space for more money. The extra space in the larger home provided the tenant with the whole second floor, which included three rooms and a full private bath. It made things more pleasant due to us both having more privacy. It also produced more rental income. However, I am more debt averse now than I was back then. I’m not an advocate spending more money on more house than you need just to start home sharing. But hey, if you already have the space then go for it!
Before you take the Leap Consider the Pros and Cons
As with all things in life, there are pros and cons to home sharing. Some are obvious, some not so obvious until you have been through it. You can reduce the cons considerably if you prepare and take the appropriate steps. Lets take a closer look at the pros and cons based on my experience.
Pros for Home Sharing
More Income. I don’t think I need to elaborate any further.
Maximum Benefit for Little Effort. If you you have space you aren’t using anyway, its almost like free money.
Potential for New Friends and Contacts. If you are selective about who you invite into your home, chances are you will get along and want to hang out. This increases your circle of friends, which can have all kinds of benefits. There is also the potential of increased business contacts, as well as references for future tenants.
Less Maintenance and Costs than Separate Rental Properties. With separate rental properties comes increased maintenance, taxes, etc. However, maintenance costs increase minimally when home sharing.
Ease of Communication. It is much easier to maintain communication with tenants who reside on location than those who reside in separate rental properties. Problems get communicated much more quickly, potentially saving time and money. Home sharing with your tenant may also help you keep close tabs on any potential problems and nip them in the bud before they get out of hand.
Built in House Sitter. Do you plan to take some long vacations? Perhaps you would like to dabble in geographic arbitrage? Home sharing provides you with a house sitter who actually pays you to watch your home. This can provide you with some piece of mind when you are away, while also providing an income stream. Win-Win!
Cons for Home Sharing
Reduced Privacy. Obviously, when you have another person residing in your home, your privacy takes a bit of a hit. Only you can decide how much that reduction in privacy is worth to you. The privacy issue is relative to the size and layout of your home. My first home was a small townhouse where I shared everything with my tenant, including the bathroom. My second home was much larger with an ideal layout that provided increased privacy for both of us. As a result, privacy became much less of an issue.
Personality/Lifestyle Conflicts. You need to like whoever is sharing your home. There will be issues if you have significantly different lifestyles and work schedules. These are not factors when you have tenants in separate rental properties because you don’t live with them. As a result, you need to be VERY selective regarding any potential house mate.
Safety. Lets face it, inviting a stranger into your home presents a certain degree of risk. This is why you need to do your homework and take proper precautions. This will be discussed in more detail later in the article.
Tips to Increase Your Success with Home Sharing
Create a Rental Agreement
You need to have the right documents in place when home sharing. Do not skip this. You may be tempted to be less formal due to it being a home sharing situation vs. a separate rental property. However, you need to protect yourself with a rental contract.
Obviously, the rental agreement should contain language that specifies rent, security deposit, and length of the rental term. However, don’t overlook less obvious elements of a rental agreement including personal liability, sharing of utilities, frequent or long term guests, pets, use of shared areas, and parking.
I have always utilized month to month rental agreements instead of a long term lease when home sharing. Using a shorter term agreement makes it easier for you to terminate the agreement for any reason if necessary. It also makes it easy for the tenant to terminate the agreement if their needs change. This can be very attractive to potential renters.
You may not like the idea of providing the tenant with an easy out, however, the pros of a short term agreement have always outweighed the cons for me. Yes, you may lose a few months of rental income here and there. However, keeping the agreement term short to provide an out for yourself is much more important. Besides, do you really want an unhappy tenant living in your home? Remember, this is a side hustle and not a primary form of income. Take the month notice and let it go.
There are plenty of websites out there to assist you with creating documents for home sharing rental agreements. That is how I got it done. Be sure to familiarize yourself with the landlord-tenant laws for your jurisdiction. When in doubt, consult a legal professional regarding your home sharing contract.
It may also be a good idea to create a less formal document to keep things civil when home sharing. Write up an information sheet about the house that includes emergency contacts, location of breakers and shutoff valves, use of tools and amenities, as well as expectations for housekeeping and chores. I wouldn’t be too much of a hard ass about this, but it it’s probably best to set up some ground rules from the start to reduce any misunderstandings.
Screen Your Tenants and be VERY Picky
Compatibility with your home sharing tenant is extremely important. Stick to individuals with similar lifestyles to yours with similar work schedules. Trust me, it avoids a lot of problems and makes sharing your home much more pleasant. No amount of money is worth an unpleasant home environment.
I made the mistake of renting to a smoker who worked in the restaurant industry once… only once. There is nothing wrong with the restaurant industry per se. However, our lifestyles were just too incompatible. Despite promises of not smoking in the house, disposing of his butts properly, and respecting my need to bed down early and get up early, he did the exact opposite. Fortunately for me, he was also late with the rent. As a result, my contract helped me get him out in a hurry. I never made the same mistake again. Learn from my mistake. Only rent to individuals with similar lifestyles and similar work hours.
I also highly recommend you get professional and personal references. You want to be sure that your tenant has a steady income stream to pay the rent. These references will also provide you with a general idea regarding your potential tenant’s lifestyle, character, and social skills. In addition, the references will act as emergency contacts should your tenant ever become ill or injured.
Offer to take your potential home sharing tenant out for a meal, cup of coffee, or a beer. This is a very important step to take before closing the deal. It provides a great way to get to know the tenant on a more personal level, thereby increasing your knowledge of potential compatibility issues. It also provides a starting point for building a good relationship with your potential house mate.
Safety When Home Sharing
You should have no problems regarding safety and theft when home sharing if you thoroughly screen your tenants. At this point, you have their personal information (I always keep a copy of their personal ID), you know where they work, and have a list of personal contacts. Chances are pretty low that they are going to clean you out and leave, steal your identity, or vandalize your home. They wouldn’t be too hard to locate after all.
I do recommend you keep small valuables locked away, such as jewelry and cash. I would also keep important personal information locked up, including passports. However, this is something you should be doing anyway. Get a decent safe. It is worth the piece of mind.
You should also make friends or family members aware of your home sharing situation. They should know who your tenant is. Not only does it increase your safety, but it provides a source of emergency contacts for your tenant if you become ill or injured.
Avoid scams. Always meet potential tenants in person before coming to any agreements. Never accept payments by mail or otherwise until after checking all references. I have always dealt with people locally and never made agreements long distance. As a result, I never had a problem with bounced checks or any other scams. If I can’t meet them personally, its a no go.
Get the Rental Amount Right and Advertise
The amount of rent you request will depend on several variables including location, size, and amenities. You will also need to consider if you will be providing furnished accommodations, which certain renters may find very valuable. Finally, you need to decide if you will include utilities, which can be very attractive to potential renters. Make sure you adjust the rental rate accordingly and leave yourself a cushion.
Take a look through your local classifieds and rental websites to get a good idea of going rental rates in your area. Set your rental rate low enough to be competitive in your area, but not so low that the benefit of renting begins to diminish considerably. Do your homework, set the rate appropriately, and be patient until the right tenant comes along.
As far as advertising is concerned, I’ve always had good success with craigslist.com. It is widely used and free. However, if you don’t mind shelling out some money, you can consider the local classifieds, as well as several rental websites.
Yes, you need to pay taxes on your rental income when home sharing. Keep good financial records regarding rental income, as well as records of your home expenses for write offs. I recommend the assistance of a qualified tax professional unless you love doing your own taxes and are confident in your abilities to identify all tax breaks. I stopped doing my own taxes ever since I left the 1040EZ behind. A good CPA is money well spent in my opinion.
In closing, home sharing can be a simple way to make some extra cash with little effort on your part. It requires a little bit of work up front to develop a rental agreement and to place some advertising. It also requires you give up a certain degree of privacy. However, it is one of the best side hustles out there when considering cost vs. benefit. Just remember to take the proper precautions to avoid potential problems. Screen your potential tenants thoroughly and be picky. Then take all that extra monthly cash and invest it toward your freedom.