Buying a Home with Rental Space? Consider These Tips.

There are many residential homes with unique properties associated with them. Not every homebuyer will see each home as providing the same benefits and risks. Some homes have natural rental units built into them which can provide a homeowner with some supplemental income to cover their expenses or allow them to prepay their mortgage early. However, a rental unit comes with some specific risks and concerns as well. 

Rental Units in Residential Homes

It is not uncommon in some areas to see residential homes for sale that allow the homeowner to rent out a portion of the home to a commercial or residential tenant. On the commercial tenant side, most businesses that rent space in a residential home tend to be local doctors or dentists who serve the nearby community. On the residential side, some stand-alone homes have subdivisions of the home that can accommodate an individual or family who rents out a part of the home. 

If a home has a built-in rental unit in it, a homebuyer will need to determine both if they want to buy a home with this feature, as well as the impact that this rental unit will have when they sell a home. There are a number of considerations that should be kept in mind before buying a home with rental units.

Legality of the Rental Unit

Some homes that have rental units are operating the rental unit illegally and may not be in compliance with local laws. This is particularly likely in homes with basement rental units, which may pose fire risks. Before a homebuyer purchases a rental unit they should be sure that the home complies with local regulations and that the income earning potential is real and that they aren’t exposing themselves to legal risks by purchasing this property and trying to rent it out.

Comparable Rental Rates and Income Earning Potential

A homebuyer should do some research on the demand for the rental property and the potential rental income that can be earned. The best way to do so is to view similar listing and to see the rents that are asked for in these homes and how the space offerings compare to the rental unit that a homebuyer is considering buying. They should examine if there is a significant demand for the rental unit and whether renting it out will be worthwhile financially as a homeowner, particularly if it is a sub-division of a space that the homebuyer is going to occupy.

Additional Traffic to the Residential Home

Individuals who are looking for rental properties that they can rent to several different individuals or businesses may be more inclined to pursue a home with rental units built into it. Individuals who are looking to occupy a portion of the real estate themselves, may find this feature to be unattractive to them, such as in the case of sharing a pool, or renting to a commercial tenant who may attract a significant amount of traffic to the home. 

Additional residents in the home may lead to additional traffic in the home and on the block and limit parking options and cause disturbances to neighbors. A person buying a home that they will rent out will need to be cognizant of the impact that this can have on the larger community and any pushback or complaints that they will need to deal with as a result.

Repairs and Renovations Needed

Rental units may need significant repairs or renovations to get them habitable for tenants. A homebuyer that is looking to rent out residential space, for example, should consider the need to have a functional kitchen with working plumbing in each rentable unit. In addition, they should consider the importance of having an electrical infrastructure that can handle the requirements of the additional burden that will be placed on it. Keep in mind the cost that they will need to be borne to get the space usable and the impact that this will have on the profitability of the home. A certified home inspector can guide you through what is important and what is simply normal maintenance.

Having a home with rental space can be a real boon to a homeowner. It can provide them with supplemental income to manage expenses and repay mortgage debt. However, it does add a layer of additional work and potential risks. Understanding if this is the opportunity that a homebuyer wants to pursue before buying a home with a rental unit is essential and can only be accomplished with significant due diligence.