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Save Money by Renting Out a Room

Written by Nickel - 47 Comments

While reading the newspaper this weekend, I ran across an article about people renting out rooms and/or taking on roommates to make ends meet. Not surprisingly, the current economic climate has resulted in a major uptick in the number of people looking for roommates. And for good reason… Taking on a roommate not only dramatically reduces your rent/mortgage obligation, but can also save you a substantial amount of money when it comes to utilities.

Better still, we’re talking about post-tax dollars here, so your savings will be amplified. Remember back in the 1700s when Benjamin Franklin said that a penny saved is a penny earned? No? Well, it doesn’t really matter, because he was wrong. Rather, as Andrew Tobias has argued, a penny saved is more like two pennies earned. The reason for this is that taxes take a substantial bite out of every dollar that you earn. Thus, while I’ve previously made the case for balancing your budget by earning extra money, the value of trimming your expenses cannot be overstated.

So… This all begs the question of whether (or under what circumstances) you’d be willing to take on a roommate (or housemate, as the case may be). If you’re already doing so, please share your thoughts. If you’re thinking about it, what’s holding you back? If you’re dead set against it, what are your primary objections?

As for us, there’s really no way we could pull it off. We have four kids, so bringing in an outsider is pretty much out of the question even if we had the space. Fortunately, we’re on very solid financial footing, so this is mostly an exercise in hypotheticals for us. Nonetheless, I thought it would be an interesting topic for discussion.

Published on February 17th, 2009 - 47 Comments
Filed under: Frugality

About the author: is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

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47 Responses to “Save Money by Renting Out a Room”

  1. 1
    DDFD at DivorcedDadFrugalDad Says:

    Good post. Taking on a roommate is a viable budget booster. It doesn’t have to be forever either . . . you may have a temporary cashflow issue and someone may have a temporary living space need . . . it can be win, win!

  2. 2
    Mabinogi Says:

    Taking in a roommate is something that I would really like to do. My husband and I are childless and live in a house that’s far too big for just the two of us. We certainly have the space, and a good set-up, for taking in a roommate. DH, though, is dead set against it; he loves his privacy too much. *sigh*

  3. 3
    ObliviousInvestor Says:

    Good thing the actual Ben Franklin quote is “A penny saved is twopence dear.” not “A penny saved is a penny earned.” ;)

    (Granted, he wasn’t talking about income tax at all, as it didn’t exist back then. He was in fact giving a lesson about the power of compound interest.)

  4. 4
    nickel Says:

    Obliviousinvestor: Actually, I believe that the quote you’re looking for is “A penny saved is two pence CLEAR.” (Not dear.) But that doesn’t mean he never said that a penny saved is a penny earned. Do you have a reference to the contrary? The closest I’ve come is a Copyblogger article that states that he never said it, but also mis-states the “two pence dear” phrase. Not trying to be combative, just curious.

  5. 5
    ObliviousInvestor Says:

    Oops. You’re absolutely right.

    I just checked my copy of Poor Richard’s Almanack (from my handy American Lit anthology from high school) and it definitely says “two pence clear.”

    And no, I don’t know of any proof that he never said “a penny saved is a penny earned.” It’s hard to imagine that there’s anything that even could prove that.

    However, in that vein, there’s also no proof that you never said “Jim from Bargaineering is a jerk.” But that doesn’t mean you ever did say it. :)

  6. 6
    nickel Says:

    ObliviousInvestor: Maybe I did say that Jim is a jerk. ;)

  7. 7
    ObliviousInvestor Says:

    Hehe, fair enough.

  8. 8
    Stuart Says:

    While I certainly agree that renting out a room can be advantageous, doing so will not be completely tax free. On the other hand, renting out a room can actually decrease your tax burden, as I found out doing my 2008 taxes.

    First, you have to declare the rent money you receive, because it is technically income, not gift. However, rent is considered business income, and the prorated portion of your house becomes a business. As such, prorated depreciation, mortgage interest, *and* property taxes become business expenses, coming off above the line with its attendant benefits.

    So, if the rent is low enough, you can save a significant amount on your taxes just by collecting rent. If it’s high enough, it is extra money to offset mortgage and utilities. Either way, rent is a nice thing.

  9. 9
    Stuart Says:

    P.S.: I rented out the two extra bedrooms in my house last year and continue to do so this year.

  10. 10
    Wise Money Matters Says:

    I don’t like the idea of renting out a room but it’s more because of personal preference. I like the freedom to run around the house naked with my wife if I want to. I like being able to invite friends over whenever I want and not conflict with a roommate bringing friends over. There’s a lot of hassle in having roommates.

    If I had a really large house with separate living areas, I’d do it in a flash, but in a 1500 sq ft home, you step on each others toes a little too much IMO.

    I let my sister live with us for a few months while she was trying to find a new place. It was some of the worst few months ever.

    Though I will concede that a lot of things depend on the roommate. I have had roommates in the past, before I was married, that were great and roommates that were horrible. It just depends on the situation.

  11. 11
    Jennifer Says:

    I’ve thought about it, but I enjoy my privacy too much. I had roommates in college, and that was enough for me. It might reduce my expenses, but personally I feel like it would also reduce my quality of life as I wouldn’t enjoy being at home anymore!

  12. 12
    MT Says:

    I would consider it if I had more than one bathroom, for sure.

  13. 13
    nickel Says:

    Stuart: Excellent point. I was (mentally) combining renting out a room with taking on a roommate. In the former case (when you own the property) there are tax implications. In the latter case (where it’s a rental and you split it with someone else) there are not.

  14. 14
    Kev Says:

    I thought about it a lot when I was single b/c I had a four bedroom house. Two of the rooms were totally empty at all times. I could never see myself living with another dude in my house though. I just think the idea of two middle-aged straight guys sharing a house in a family-filled subdivision is kind of weird… The only way I could do it is if I rented to a female. The girl I was dating on and off at the time hated the idea though so it never went anywhere.

  15. 15
    Sarah Says:

    I just purchased a home this past year. I have two friends renting the two extra bedrooms. It works for me, but when one moves out (she is getting married) I won’t search for a replacement. The risk of ending up with someone difficult is just too high. But I know these girls well and the situation thus far as been fantastic.

    My question is this: I was confused doing my taxes this year (with the first time home buying and the renting and whatnot) and sought professional help (TurboTax phone consult). The guy told me that because I was charging them well below market rent (which I am doing on purpose because for other reasons, long story) and because we split utilities, groceries, and other expenses evenly 3 ways, that I don’t need to report the income for taxes. He said he would count it as expense sharing (such as a rooming situation where I didn’t own the property) because I am not really profiting from it. But ultimately, I am profiting right? It is more income than I would have and utilities are cheaper than if I just lived alone? Even if I could be charging more? Thoughts on this? I trusted and went with his advice but after reading this now feel nervous about it. Is the IRS going to agree with the tax guy? If not…I feel like I need to amend my tax return. Any advice???

  16. 16
    Stuart Says:

    The TurboTax guy is right: the money you collected for utilities & grocery expenses is expense sharing in this situation. In addition, if the rent is that low, you could probably include rent as a part of expense sharing and not have to report it.

    However, it is in your best interest to report the rent, because then you can claim depreciation, which you wouldn’t be able to otherwise. Claiming depreciation would reduce your tax burden, giving you a bigger refund or reduce the amount you have to pay.

    At this point, it probably is not worth it to deal with amending your taxes, but you might keep track of the rent you charge your remaining roommate for 2009 and include it in your 2009 taxes.

  17. 17
    Sarah Says:

    Thanks so much! I appreciate the feedback. I will certainly look into it more carefully for next year to see what would be most advantageous. I am all about being honest on my taxes, and the grey areas freak me out!!

  18. 18
    Green Panda Says:

    While in college, I rented a room from family friends. It was a great arrangement as I paid rent (lighten some expenses for them) and had meals included. As a female, in also felt safer than if I go a place by campus.

  19. 19
    Penny Says:

    I would consider it save for the fact that the parking would become and issue–City ordinanaces about parking overnight in the streets here :(

  20. 20
    Craig Says:

    If you are younger and have an extra room I don’t see why not. If you don’t mind sharing the personal space, you can earn some extra money. Better than not having the money.

  21. 21
    Jo Says:

    I have a coverted, non-attached garage which I have rented from time to time. It has it’s own bath, washer/dryer and potential kitchen area. Perfect for someone who travels a lot or just wants some seclusion. Parking is no problem and the house is basically in the woods but convenient to services. My son just moved out so after a thorough cleaning I’m ready for a new tenant.

  22. 22
    Maria@ Residual Income Web Says:

    Coincidentally, my neighbors just rented out their spare bedroom to one of the husband’s friends going through a divorce. The extra $400 will be a big help to them as the wife is retiring from the post office this month and things are already tight.

    We would only rent a room to family, but we are living in a small home as we pay off our debt so there’s no room right now anyway.

  23. 23
    Danielle Says:

    If we had a finished basement I would consider it, but as it stands now all areas except their bedroom would be shared with us and our friends who come visit and that would not be ok.

    My husband is also very “my space, my stuff” type of person so he would almost never agree to it. If I had a close friend or family member in need of a temporary place to stay I would probably be ok with that.

  24. 24
    Kristy @ Master Your Card Says:

    Personally I’m dead set against having a roommate. I have my reasons and all of them stem from really CRAPPY experiences in my late teens, early twenties. In a nutshell, one of my ex-roommates stole checks, my credit card, and various other items. When I moved out and pressed charges, she was arrested on fraud and the apartment signed me off the lease. But, because she was in jail and couldn’t be reached, the apt complexes collection agency came after me and pretty much ruined my credit. I spent a lot of years fighting that, and to this day it’s still on my credit. I swore absolutely never again.

  25. 25
    Adam @ Checkbook Diaries Says:

    We tried renting out a room to a close relative and it turned into an absolute nightmare. Not only did they NOT pay the agreed upon rent, they ran the electric bill up and extra $400 in one month and wouldn’t pay any of that either. You really never know what a person is like until you try living with them. Never again.

  26. 26
    Sean Says:

    I live in NYC and everyone knows what the rent is like here. When first moved through I took a bed room in a one bedroom in the bronx, the owner of the place took the living room and used a curtain for privacy. It was a bit of tight quarters but for $550 a month all inclusive it was hard to beat when most of my friends were pay $1000+ to live with roommates in the city or even in Brooklyn. Since then my income has almost tippled so when my roommate was looking to move out I decided to take the whole place for myself, including utilities its about $1,100. It works out to just under a third of my take home pay which I’m comfortable with, however I sometimes worry that since I don’t have a big rainy day fund, that if I were laid off I would barely be able to cover rent with unemployment checks. Then I realized I could get a roommate. I haven’t done it, and I won’t unless I were to get laid off, but having that as a plan B does give me a great deal of peace of mind.

  27. 27
    Trav Says:

    My wife and I have each lived with roommates for our entire adult lives, by choice. There were financial reasons, but we also liked the extra sociability. We’ve continued this even after having our first child last year. By now we’re only lukewarm on the idea.

    Roommates are definitely a hassle; they’re another complication in your life, so if you crave simplicity (as we’re starting to), they come at a cost. But in high-rent areas, the cost is usually worth it. A good roommate is only a hassle every once in a while.

    The real problem is that you never know what you’re getting. A *bad* roommate is never worth the extra income. I’ve been picking roommates for over ten years and I still get bad ones occasionally. If you get into the roommate game, you have to be willing to lose this bet.

  28. 28
    LAL Says:

    In the summer of 2007, our roomie moved in. Financially we don’t need the money, but it was/is nice. Problem? We are ready for him to move out, though he’s a fantastic roomie. Have I mentioned it’s 2-18 and we haven’t seen him in person since 2-1-09? He was out of town for 10 days, then we were out of town this long weekend so we have yet to run into him. We might go the whole month without seeing him. It’s happened before.

    Problem to his moving out? He’s my DH’s best friend and has been for years. So tossing him out isn’t easy. Plus he’s been ditched when he thought he was moving out with people who ended up moving in with their new BF/GFs. So then we were excited last year he was going to move out and then he couldn’t.

    So it’s a delicate situation. We can’t toss him out because he’s already been ditched. And making him feel unwanted would hurt their friendship, much like how he rarely sees the “friends” who ditched him to move in with their new significant others.

  29. 29
    Brooke Says:

    I understand (for the tax-conscious person above) that it is tax-smarter to have the roomie pay for utilities instead of rent. Rent is income, while utilities are cost-sharing. I’m not sure, it’s just what I’ve been told.

  30. 30
    Jolien Says:

    I have often shared space with others, and when buying a house nearly 3 years ago looked for one with room rental potential (extra bathroom, good layout, good location). I started out renting one room, then two, then put up some walls to create a third rental room. Now, my renters pay my entire mortgage for me, which helps as a single mom.

    I didn’t actually realize I was supposed to report the income until this tax year, so I have been dreading what the numbers would end up being. However, I found that because I’m renting so much of my home, that’s all the more of my property tax, mortgage interest, utilities, cleaning expenses, pest control costs, and even appliance purchases that I was able to deduct! Looks like in addition to the help paying my mortgage, I’ll get a nice big tax refund out of it. I’m looking into amending my last two returns, both to see if there’s any money to be refunded and because now that I know better, I really should.

    One comment about finding good roommates is that I have perfected two things: finding peaceful ways to get rid of a bad one without losing money or pissing them off, and how to get better roomies to begin with. The biggest factor in weeding out the baddies before they even move in is actually to charge slightly above the typical rate (though I include a lot more than the average room rental). Baddies in my experience are always looking for the cheapest deal possible, and if I don’t offer it, I don’t get the baddies and have no trouble collecting my rent.

  31. 31
    Mara Rogers Says:

    I am so glad you brought this subject up–I too had researched it, and published a post at my blog early February on how folks could leverage their home by renting out a room, a garage and much more–I’d love to share it with the community at your site: here is the article “Turn Your Home Into a Boardinghouse and Other Ways to Leverage Your Home”
    http://www.secretsformoney.inf.....your-home/

  32. 32
    Ingrid Williams Says:

    I have been renting out a room in my 3 bedroom house for over 2 years now. It seems to work. However, I have some really weird folks shareing my home. For example: I had a roommate that smelled really bad. Very bad case of B/O. But how do you tell a person they stink. I gave her a 30 day notice to move. She did. Currently, I have a college rommie, that loves to hang out with her college freinds~~ all under the age 21. I’m 40. So I’m a little annoyed by the hanging out all the time and loud noise~~ when I’m in my bed trying to get some sleep for the next work day. I need the extra dollars to help with bills, but I would love to just have my house back and not have to deal with the b/s. Yeah! I know…LIFE

  33. 33
    yvette Says:

    Im a single mom of four kiddos… we were doing quite well renting a house for 1350 a month until the recession took a big bite out of my income. I am in the process of packing up and moving in with another single mom who is having difficulties paying her own mortgage.. and both of us are thrilled. I wouldnt typically agree to a roommate situation but we are both quite a bit alike, and I believe it will be a win/win for us both.

    In the past, however, one roommate took to partying all night and inviting in strange men over night, and when confronted, she moved out and took all my furniture AND left me with her pet boa constrictor and a lease I couldnt afford to pay… eeks.

  34. 34
    Steve Says:

    Hi,

    I’m in the process of buying a 3 bedroom home now. I’m a self employed contractor and my work has been slow during this economy.
    I thought I’d never consider renting out a room, but have come to realize my great need and desire for privacy comes 2nd to my survival and being able to make my mortgage if business get’s worse.
    I have a lot of expensive musical equipment and business supplies and have concerns. I also am extremely picky and will accept nothing less than a high standard of cleanliness, reasonable levels of quietness, and do not like the idea of too many people in my home, so I don’t want more than one of their guests at a time (and I prefer to meet them 1st) and no sleep overs.
    Reading this and several other sites on the subject of renting rooms out, I see I’ll have to make my house rules in no uncertain terms… Having a high standard I may actually scare a lot of people off. In consideration for the contract I make, I’ll try to be reasonably fair but at the same time I need to protect myself.
    One of my biggest concerns, after security is whether I should charge rent + utilities or include them…thing is I have no idea what the utilities will be. Plus, if I include them, where is their incentive to conserve? Though including them would be much more simple. I’m thinking of starting with rent + utilities, then may include it when I know what to expect.
    I’ll have a garage, but I need most or all that space for my business supplies and tools, so I’m wondering if I should tell them they need to find a storage facility, or give the option to provide a shed on the side of the house and factor that into the rent.

    Steve

  35. 35
    Gayle Says:

    I am needing to rent a room in my home. I would like some ideas and advice on what to do, and what not to do. I live alone, the room to rent is nice and large, however, we would share a bathroom. I would like advice on rental agreements, sharing what expenses, deposits, etc.

  36. 36
    Armani Says:

    Yeah,
    Great Post! Only problem is what about the person who is renting the room? We are working hard to insure your mortgage is paid, so what do we get out of it besides a thousand rules and obligations?

    Where am I going with this you may ask? I am renting a room, where I pay rent, half of all utilities, damn near all the groceries every week (she wants to just take money off the utilities SOMETIMES in payment for groceries) But that is NOTHING!! I cook all the time, I clean all the time. And what do I get in return? Loud music and gatherings all the time with the speaker under my bed which vibrates it when music is being played. I get sucked dry out of all of my finances because I have to pay for all the movies, due to her not wanting them on cable bill, but you are DVRing movies???? and now that I want to go from a lease to rent to rent I get to pay even more than I was…..

    So yeah the recession has hit us all hard and all, but don’t take folks for granted, don’t use them up until you can’t use them anymore.

  37. 37
    CONNIE Says:

    I came here looking for advice on how to charge someone, and how much to rent a room in a private home. I invited a co-worker to stay in my home when her marriage broke up and she had no place to go. that was three years ago. I figured it would only be for a short while til they sold the house, etc. and she had her feet on the ground. I told her she didnt have to pay anything. Well, 3 very long years later, I cant get rid of her!!!! She has given me maybe $500 and that is stretching it, over the years. I cant afford her here!!! I have asked, told, pleaded with her to find other accomadations. She is still here! I am being taken advantage of. I want to start charging her for the new year, but not so much that she wont be able to get out on her own. What do I do? How much should I charge? She has her own large 18×18 foot room with a wood stove that she burns all the fire wood I have, without helping get it!! She eats dinner with my family every night which I buy and prepare. She used to clean up, but lately has stopped doing that as well. Help!!! I need ideas!

  38. 38
    Lisa Says:

    I read Jolien’s and Stuart’s posts and am looking for a bit of help! So, I live in MN and rent out three rooms in my house. This is the first year I’ve done it. Jolien had mentioned something about taking deductions and Stuart mentioned something about business income. Can either of you or anyone else give me some advice on this as I get ready to do my 2009 taxes? Thanks so much!

  39. 39
    Judy Says:

    I live part time at my house that I share with My Daughter. I am there so little that I allowed her at times to have friends move in and share the utilities. I pay the house payment and my daughter pays the utilities. Now the girl only needs to pay 235.00 per month for all utilities including cable, internet, use of the washer dryer etc. In the 7 months that she lived there she paid a total of 500.00. My daughter got way behind in bills and than I had to bail her out. Her mother said she would pay it back, now the mother is asking for a certificate of rent paid. How does that work. She didn’t pay rent she was suppose to pay 235.00 to help cover the utilities. Do you need to give a CRP for something like this? The utilities alone are obviously more than what she paid even if she paid it every month. I am just so fed up with the nutty mom and daughter that I am ready to just right it off and chalk it up to experience. Told my daughter never again. Does anyone know about the CRP. any ideas on this?

  40. 40
    TJ Says:

    “Claiming depreciation would reduce your tax burden, giving you a bigger refund or reduce the amount you have to pay. ”

    I thought it was only limited to offset the amount of your rental income?

  41. 41
    sky Says:

    I have a house with a detached garage that was converted into a house. Every thing is hooked up. For almost a year I have been renting it out to help with bills. The rent covers almost all of my note and brings my house hold expenses down to very little. The place has a nice size bedroom, living room, kitchen and eating area and a large bathroom that was added on. I originally lived in it before my grandmother died and we needed income. Its a great setup for some one that wants the privacy of there own home but the cost of renting a room.

  42. 42
    adrienne Says:

    I own a 2 bedroom condo & rent out the 2nd bedroom to a college student who is getting her master’s degree. In other words, a graduate student who is serious about studying! :)
    Years ago when I spoke with a tax accountant, I was told that there were only TWO (2) reasons that you had to declare rental income.
    1.) if your roommate has a separate entrance AND a separate bathroom (ie: an in-law apt. in the basement)
    OR
    2.)if your home is paid off.
    I don’t think that I will ever get busted by the IRS, but if I do I’m a lesbian & she is my lover/girlfriend/life partner.
    If a home is in a husband’s name & his wife kicks in a few bucks each month to help with expenses, does he have to declare that money as income?
    I don’t think so.
    And, neither do I.

  43. 43
    V Crawford Says:

    I’m going to rent a detached garage to help w/ the bills. In 2008, I received a tax credit for first time homebuyer’s. Is this going to be a problem? Can I also rent out a bedroom?

  44. 44
    groovy811 Says:

    I was wondering if anyone who has rented a room out to someone ever felt they needed to draw up a renters or lease agreement or some other legal document?

  45. 45
    Char Says:

    I’m still not sure If I should have a renter/border agreement and if so should I have it noterized?

  46. 46
    Ali Says:

    Please make suggestions/comments…I am planning on renting a home together with my sister and our children, 3 mine, 1 hers. She will get the larger room because she wants to share with her daughter (we had originally planned on having our girls share rooms but she switched it up on me today. What would be a fair way to split the rent? Pleae help!

  47. 47
    V Says:

    50/50 would be expense sharing

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