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5 Things to Consider when Generating Extra Income Through Extra Space

5 Things to Consider when Generating Extra Income Through Extra Space

In higher price point markets, sometimes finding your dream home may come with a larger financial commitment than you want or expect. Take Teri, who works in Cherry Creek and wants to live within a short commuting distance while enjoying a historic single-family home. She can’t afford the mortgage on her own, but found a way to make it work by finding a property with a separate space she can rent out to supplement her mortgage.

Whether you’re using Airbnb, VRBO, HomeAway or other options, there are ways to make your primary residence income-generating. While these present an exciting opportunity, what you don’t know can hurt you later. Below are 5 things to consider before you buy a home with the intention of creating a short-term rental space.

1.      Do you have the right space?

Cities like Denver enforce rules and regulations that specify minimum construction, design, maintenance standards, habitability, health, and safety. Be sure to verify it’s even an option for your property. Your community and coop board or HOA may have their own rules.

Other considerations are whether your town or city requires a Short-Term Rental business license—which they may if you’re renting your primary residence for a certain period of time, plus a Lodger’s Tax ID.  A Lodging Facility business license may also be required if you’re renting out a certain amount of space.

Once you’re compliant, then you have to choose the boundaries of your rental space. A 2012 study from UCLA showed that people spend the vast majority of their time in their kitchens or family rooms, leaving most other rooms practically unused. If your house isn’t being used to it’s full potential, consider what space would make the most sense.  

·        Do you have a basement that you don’t need to use? Even if you do, does it have enough space, light, and for historic homes, a high enough ceiling your guests will be comfortable?

·        Do they have access to parking? Or would you have to sacrifice part of your lawn or garage to create space for guests?

·        Would you like to charge more for sacrificing part of your living room or lounge area or providing entertainment like their own television? Would you consider installing a kitchenette or other conveniences so you don’t have to share your own?

·        Or would they be renting out a room right next to yours, sharing a bathroom? Do you have a water source available if you wanted to add a separate bathroom?  

2.      What type of privacy do you expect?

You may be perfectly comfortable allowing guests into a shared space, and even enjoy the company. But if you work from home, or have children and pets that require their own space, you may need some physical or sound separation from your guests. Try having a friend or relative stay over for a few days in the space as a test to see how much somebody sharing the space would affect your quality of life.

When looking at a new home with the intention of renting out parts of it, consider if it has a private entrance. Adding one subsequently could be costly or not possible based on the structure of the home. Maybe you can lock a certain portion of the house from the inside, and guests can do the same if needed.  

And beyond physical boundaries, set additional boundary expectations upfront when it comes to smoking, pets, noise levels, and additional guests.

3.      How will you maintain the space?

A friend who lives near a university recently posted an exasperated Facebook post. Her second-ever guests trashed her brand new rental space by playing beer pong on a wooden dining room table and jumping on an antique couch. It took her husband 40 hours to repair all of the damage.

While with peer-to-peer ratings and verifiable customer identities this situation is rare, at the least you’ll have to be wiping down counters, taking out the trash, washing linens, and cleaning bathrooms as often as you plan on having new guests. Consider the logistics and costs of a cleaning service if that is something you’d rather outsource. Either way, you’ll have to manage the process as guests will expect a tidy environment at the very least.

4.      How will lodgers access their rental?

If you are home often and enjoy hosting, this could be a great way to meet new people and make them feel welcome. But if you work late hours and have commitments that take up your evenings, you’ll have to consider how they will come and go. You’ll also need to set aside time to manage your bookings and schedule any maintenance services you’ll need to run your rental. So you’ll have to evaluate if you’d like to meet your guests or install a digital key or lockbox so that they can self-serve.

And consider their experience when they make it into your home. One leaves a note with some goodies for his visitors. He has minimal hassle, and gets great ratings for his going the extra mile with the thoughtful gestures he organizes between guests. Provide brochures, maps or information on local attractions, public transportation options, and don’t forget the wifi password. And if there is a pool or quiet hours in your community, be sure to include information so guests can avoid disturbing neighbors unintentionally.

5.      Does it net out in the end?

Once you’ve established what works for you, be sure to consider if what you’re charging is in line with similar spaces in your neighborhood. Once you come up with what you think is reasonable and fair, you’ll have to evaluate the various available services used for booking and what fees they’ll charge you. Regardless of what service you use, create a spreadsheet to include what you’ll need to pay in terms of  taxes, advertising, insurance, cleaning fees, and more, and you’ll need to decide if the final amount you’ll make is enough to justify the work that goes into hosting guests.

Time to List

In the end, short-term rentals do present an opportunity to supplement income. Just remember that they take work, education, and an unlimited supply of guests is not guaranteed. But if it does work out, you’ll be making money off of the extra room you never needed, and enjoy more house and more spending money in the end.